Total Amount of Borrowings COVER SHEET p w0 0 G L 0 B E T E L E C 0 0 1 1 7 7 I N C 0M (Company'sFullName) 2 7 / F T H E N D S T R E 3 2 B 0 N I F AC I 0 G L E T 0 B E T 0 W C 0 R N E R G L 0 BA L E R 7 T C I TY H A V E N U E TAG U I G (Business Address: No. Street City / Town / Province) 797-4889 ALBERTO M. DE LARRAZABAL Company Telephone Number Contact Person 1 2 1 7 Q 3 1 0 4 0 8 Month Day Annual Meeting FORM TYPE Month Day Fiscal Year Secondary License Type, if Applicable Amended Articles Number/Section Dept. Requiring this Doc. Domesti Total No. Of Stockholders To be accomplished by SEC Personnel concerned LC File Document .D. Cashie @ ! STAMPS I I . ' I Remarks = pis. Use black ink for scanning purposes Foreig SEC Number File Number 1177 ____ GLOBE TELECOM, INC. (Company‟s Full Name) 27th Floor The Globe Tower 32nd Street corner 7th Avenue, Bonifacio Global City, Taguig (Company‟s Address) (632) 797-2000 (Telephone Numbers) 31 March 2014 (Quarter Ending) SEC FORM 17-Q (Form Type) SECURITIES AND EXCHANGE COMMISSION SEC FORM 17-Q QUARTERLY REPORT PURSUANT TO SECTION 17 OF THE SECURITIES REGULATION CODE AND SRC RULE 17(2)(b) THEREUNDER 1. For the three months ended 31 March 2014 2. Commission identification number: 1177 3. BIR Tax Identification No. 000-768-480-000 4. Exact name of registrant as specified in its charter: GLOBE TELECOM, INC. 5. Province, country or other jurisdiction of incorporation or organization: PHILIPPINES 6. Industry Classification Code: (SEC Use Only) 7. Address of registrant‟s principal office: 27th Floor, The Globe Tower 32nd Street corner 7th Avenue, Bonifacio Global City, Taguig 8. Registrant‟s telephone number, including area code: (632) 797-2000 9. Former name, former address and former fiscal year, if changed since last report: N / A 10. Securities registered pursuant to Sections in Securities Regulation Code Title of each class Common Stock, P50.00 par value Preferred Stock, P5.00 par value Number of shares of stock outstanding 132,676,628 158,515,021 11. Are any or all of the Securities listed on the Philippine Stock Exchange? Yes 12. Indicate whether the registrant: a) Has filed all reports required to be filed by Section 17 of the Code and SRC Rule 17 thereunder or Sections 11 of the SRC and SRC Rule 11(a)-1 thereunder, and Sections 26 and 141 of the Corporation Code of the Philippines, during the preceding 12 months (or for such shorter period the registrant was required to file such reports). Yes b) Has been subject to such filing requirements for the past 90 days. Yes SEC Form 17Q – 1Q 2014 2 GLOBE TELECOM, INC. AND SUBSIDIARIES MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED 31 March 2014 SEC Form 17Q – 1Q 2014 3 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Our unaudited condensed consolidated financial statements include the accounts of Globe Telecom, Inc. and its wholly owned subsidiaries, Innove Communications, Inc.(Innove), GXchange, Inc. (GXI), Entertainment Gateway Group (EGG Group), GTI Business Holdings, Inc. (GTI BH), and Kickstart Ventures, Inc. (Kickstart), collectively referred to as the “Globe Group” in this report. The unaudited condensed consolidated financial statements for the three months ended 31 March 2014 (filed as Annex 1 of this report) have been prepared in accordance with Philippine Accounting Standard 34, Interim Financial Reporting and hence do not include all of the information required in the December 31, 2014 annual audited financial statements. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS (MD&A) OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion and analysis of Globe Group’s financial performance for the three months ended 31 March 2014. The prime objective of this MD&A is to help the readers understand the dynamics of the Company’s business and the key factors underlying its financial results. Hence, Globe’s MD&A is comprised of a discussion of its core business, and analysis of the results of operations for each business segment. This section also focuses on key statistics from the unaudited consolidated financial statements and pertains to known risks and uncertainties relating to the telecommunications industry in the Philippines where we operate up to the stated reporting period. However, Globe’s MD&A should not be considered all inclusive, as it excludes unknown risks, uncertainties and changes that may occur in the general economic, political and environmental condition after the stated reporting period. The Globe Group has adopted an expanded corporate governance approach in managing its business risks. An Enterprise Risk Management Policy was developed to systematically view the risks and to manage these risks in the context of the normal business processes such as strategic planning, business planning, operational and support processes. The Company’s MD&A should be read in conjunction with its unaudited consolidated financial statements and the accompanying notes. All financial information is reported in Philippine Pesos (Php) unless otherwise stated. Any references in this MD&A to “we”, “us”, “our”, “Company” means the Globe Group and references to “Globe” mean Globe Telecom, Inc., not including its wholly-owned subsidiaries. Additional information about the Company, including annual and quarterly reports, can be found on our corporate website www.globe.com.ph. SEC Form 17Q – 1Q 2014 4 The following is a summary of the key sections of this MD&A: OVERVIEW OF OUR BUSINESS ................................................................................... 6 FINANCIAL AND OPERATIONAL RESULTS ........................................................... 15 GROUP FINANCIAL SUMMARY ....................................................................................... 15 GROUP OPERATING REVENUES ..................................................................................... 17 GROUP OPERATING EXPENSES ...................................................................................... 32 LIQUIDITY AND CAPITAL RESOURCES ........................................................................ 37 FINANCIAL RISK MANAGEMENT ................................................................................... 42 LEGAL, REGULATORY AND CORPORATE DEVELOPMENTS ............................. 45 OTHER RELEVANT INFORMATION ......................................................................... 49 ANNEX TO THE MD&A SECTION.............................................................................. 51 SEC Form 17Q – 1Q 2014 5 OVERVIEW OF OUR BUSINESS Globe Telecom, Inc. is a major provider of telecommunications services in the Philippines, supported by over 6,300 employees and over 890,000 retailers, distributors, suppliers, and business partners nationwide. The Company operates one of the largest and most technologicallyadvanced mobile, fixed line and broadband networks in the country, providing reliable, superior communications services to individual customers, small and medium-sized businesses, and corporate and enterprise clients. Globe currently has about 40.7 million mobile subscribers, close to 2.2 million broadband customers, and over 611,000 landline subscribers. Globe is one of the largest and most profitable companies in the country, and has been consistently recognized both locally and internationally for its corporate governance practices. It is listed on the Philippine Stock Exchange under the ticker symbol GLO and had a market capitalization of US$4.9 billion as of the end of March 2014. The Company‟s principal shareholders are Ayala Corporation and Singapore Telecom, both industry leaders in their respective countries. Aside from providing financial support, this partnership has created various synergies and has enabled the sharing of best practices in the areas of purchasing, technical operations, and marketing, among others. Globe is committed to being a responsible corporate citizen. Globe BridgeCom, the company‟s umbrella corporate social responsibility program, leads and supports various initiatives that (1) promote education and raise the level of computer literacy in the country, (2) support entrepreneurship and micro-enterprise development particularly in the countryside, and (3) ensures sustainable development through protection of the environment and excellence in operations. Since its inception in 2003, Globe BridgeCom has made a positive impact on the lives of thousands of public elementary and high school students, teachers, community leaders, and microentrepreneurs throughout the country. For its efforts, Globe BridgeCom has been recognized and conferred several awards and citations by various Philippine and international organizations. The Globe Group is composed of the following companies: Globe Telecom, Inc. (Globe) provides mobile telecommunications services; Innove Communications Inc. (Innove), a wholly-owned subsidiary, provides fixed line telecommunications and broadband services, high-speed internet and private data networks for enterprise clients, services for internal applications, internet protocolbased solutions and multimedia content delivery; G-Xchange, Inc. (GXI), a wholly-owned subsidiary, provides mobile commerce services under the GCash brand; Entertainment Gateway Group Corp. (EGG), is engaged in the development and creation of wireless products and services accessible through telephones and other forms of communication devices. It also provides internet and mobile value-added services, information technology and technical services including software development and related services; SEC Form 17Q – 1Q 2014 6 GTI Business Holdings, Inc. (GTI) is a wholly-owned subsidiary with authority to provide VOIP services. Its wholly-owned subsidiaries are: GTI Corporation (GTIC US), a company organized under the General Corporation Law of the State of Delaware for the purpose of engaging in any lawful act or activity, Globe Telecom HK Limited (GTHK), a limited company organized under the Companies Ordinance of Hong Kong, Globetel European Limited and UK Globetel Limited, a private limited company under the Companies Act of 2006, wherein the registered address is in England and Wales; and Kickstart Ventures, Inc. (Kickstart), a wholly-owned subsidiary, is a pioneering business incubator designed to provide aspiring technopreneurs with funds and facilities, mentorship and market access needed to build new businesses. UK GlobeTel Limited (UKGT), a wholly-owned subsidiary, which market and sell mobile telecommunications, as a mobile virtual network operator, to Filipino individuals and businesses located within the United Kingdom and to Filipino visitors in the United Kingdom. GlobeTel European Limited (GTEU), a wholly-owned subsidiary, which acts as a holding company for the operating companies of Globe Telecom, (which proposed to establish operations in Europe, marketing and selling mobile telecommunications services, as a mobile network operator, or through any other appropriate vehicle, to Filipino individuals and businesses located within, and to Filipino visitors in, initially, the United Kingdom, Spain and Italy. Globe Mobile Italy s.r.l (GMI), a wholly-owned subsidiary, to perform, directly and/or through its subsidiaries services such as voice calling, SMS, MMS, load top-up, and mobile data to Filipinos based in Italy or Filipinos visiting Italy. The Company is a grantee of various authorizations and licenses from the National Telecommunications Commission (NTC) as follows: (1) license to offer and operate facsimile, other traditional voice and data services and domestic line service using Very Small Aperture Terminal (VSAT) technology; (2) license for inter-exchange services; and (3) Certificate of Public Convenience and Necessity (CPCN) for: (a) international digital gateway facility (IGF) in Metro Manila, (b) nationwide digital cellular mobile telephone system under the GSM standard (CMTSGSM), (c) nationwide local exchange carrier (LEC) services after being granted a provisional authority in June 2005, and (d) international cable landing stations located in Nasugbu, Batangas and Ballesteros, Cagayan. Globe is organized along three key customer facing units (CFUs) tasked to focus on the integrated mobile and fixed line needs of specific market segments. The Company has a Consumer CFU with dedicated marketing and sales groups to address the needs of retail customers, and a Business CFU (Globe Business) focused on the needs of big and small businesses. Globe Business provides endto-end mobile and fixed line solutions and is equipped with its own technical and customer relationship teams to serve the requirements of its client base. In early 2011, Globe organized an International Business Group to serve the voice and roaming needs of overseas Filipinos, whether transient or permanent. It is tasked to grow the Company‟s international revenues by leveraging on Globe‟s product portfolio and developing and capitalizing on regional and global opportunities. SEC Form 17Q – 1Q 2014 7 Business Segments Mobile Business Globe provides digital mobile communication services nationwide using a fully digital network based on the Global System for Mobile Communication (GSM) technology. It provides voice, data and value-added services to its mobile subscribers through three major brands: Globe Postpaid, Globe Prepaid and TM. Globe Postpaid includes all postpaid plans such as regular G-Plans and consumable G-Flex Plans, Load Allowance Plans, Load Tipid Plans and Platinum Plans (for the high-end market). In 2010, the Company introduced the MY SUPERPLAN and MY FULLY LOADED PLAN which allow subscribers to personalize their plans, choose and combine various unlimited call, text and web browsing service options. In addition, Globe has made available various add-on roaming and mobile browsing plans to cater to the needs of its subscribers. In 2011, Globe further improved postpaid offerings with the All New My Super Plan where subscribers are given the flexibility to create their own plans by either subscribing to an All-Unlimited Plan or an All-Consumable Plan. Subscribers also get to choose their freebies and add-ons which they can change on a monthly basis. A fully-customizable unlimited data plan (Unli Surf Combo Plan) was also made available to its subscribers in mid-2011 which provides uninterrupted unlimited mobile surfing without the need for a WIFI connection. The data plan comes with consumable amounts which the subscriber may use to either local and international calls and text messages. Taking the product customization to the next level, the company launched in the second quarter of 2013 the BESTEVER MY SUPERPLAN with fully-customizable plan components, bigger plan value and more contract periods to choose from (6, 12, 18, and 30 months). Each plan has a corresponding “peso value” that can be converted to avail of a combination of call, text, or surf services, free or discounted gadgets, and a monthly consumable amount for more calls, texts and surf. In November 2013, Globe Postpaid launched the iPhone Forever program bannering the latest phone from Apple (iPhone 5s and iPhone 5c). Under the iPhone Forever program, new and existing Globe subscribers who are loyal iPhone users may swap their current devices to get a new iPhone every year for free or with minimal one-time cash out. Globe Prepaid and TM are the prepaid brands of Globe. Globe Prepaid is focused on the mainstream market while TM caters to the value-conscious segment of the market. Each brand is positioned at different market segments to address the needs of the subscribers by offering affordable innovative products and services. In February 2012, the Company introduced a selfservice menu that provides Globe prepaid subscribers an easy access to avail of the latest promos and services of Globe by simply dialing *143#. In early 2013, this menu was further developed with Globe Prepaid’s GO SAKTO which allows the subscribers to build their own promos (call, text and surf promos) that is best suited for their needs and lifestyle. Globe also provides its subscribers with mobile payment and remittance services under the GCash brand. GCash transforms a mobile phone into a virtual wallet, enabling secure, fast, and convenient way to transfer money at a cost of a text message. This service enables our subscribers to perform international and domestic remittance transactions, pay fees, utility bills, income taxes, avail of micro-finance transactions, donate to charitable institutions, and buy Globe prepaid reloads. A wide network of local and international partnerships has been established over the years including government agencies, utility companies, cooperatives, insurance companies, remittance companies and commercial establishments, in order to make GCash an accepted mode of payment for various products and services. SEC Form 17Q – 1Q 2014 8 Globe Prepaid and TM subscribers can reload airtime value or credits using various reloading channels including prepaid call and text cards, bank channels such as ATMs, credit cards, and through internet banking. Subscribers can also top-up via AutoLoad Max retailers nationwide, all at affordable denominations and increments. A consumer-to-consumer top-up facility, Share-ALoad, is also available to enable subscribers to share prepaid load credits via SMS. Globe has a loyalty and rewards program called My Rewards, My Globe for Globe Prepaid subscribers, TM Astig Rewards for TM subscribers and Tattoo+ Rewards for Tattoo Broadband subscribers. Globe Postpaid subscribers can earn points based on their monthly billed amounts in excess of their Monthly Subscription Fee. Subscribers have the option to redeem rewards instantly, or accumulate points to avail of higher value rewards. Redeemed points in the form of telecom services is netted out against revenues whereas points redeemed in the form of non-telco services such as gift certificates and other products are reflected as marketing expense. At the end of each period, Globe estimates and records the amount of probable future liability for unredeemed points. In 2014, Globe Postpaid recently launched the Globe Blue or Platinum Rewards Cards. The new cards can also work as a GCash Mastercard which can be used to shop anywhere within the Philippines and even abroad. Membership to Globe Blue is given to postpaid customers who spend an average of P2,000- P3,499 per month over a 12-month period. Meanwhile membership to the Globe Platinum is given to postpaid customers who subscribe to plan P3,799 or spend an average of P3,500-P4,999 over a 12-month period; and membership to Platinum Elite Rewards card is given to postpaid customer who subscribe to All Net P5,000 or P10,000; roaming P5,000 or P10,000 or spend an average of P5,000 and above over a 12-month period. Special perks may vary depending on the plan subscription. Mobile Voice Globe‟s voice services include local, national and international long distance call services. It has one of the most extensive local calling options designed for multiple calling profiles. In addition to its standard, pay-per-use rates, subscribers can choose from bulk and unlimited voice offerings for all-day or off-peak use, and in several denominations to suit different budgets. Globe keeps Filipinos connected wherever they may be in the world, made possible by its tieup with over 700 roaming partners in more than 200 calling destinations worldwide. Globe also offers roaming coverage on-board selected shipping lines and airlines, via satellite. Through its Globe Kababayan program, Globe provides an extensive range of international call and text services to allow OFWs (Overseas Filipino Workers) to stay connected with their friends and families in the Philippines. This includes prepaid and reloadable call cards and electronic PINs available in popular OFW destinations worldwide. Mobile SMS, Mobile Browsing and Value-Added Services Globe‟s Mobile SMS service includes local and international SMS offerings. Globe also offers various bucket and unlimited SMS packages to cater to the different needs and lifestyles of its postpaid and prepaid subscribers. SEC Form 17Q – 1Q 2014 9 Globe‟s Mobile Browsing services allow subscribers to access the internet using their internetcapable handsets, devices or laptops with USB modems. Data access can be made using various technologies including LTE, HSPA+, 3G with HSDPA, EDGE and GPRS. Browsing subscribers also have multiple charging options available with Globe‟s Flexible Mobile Internet Browsing rates which allow subscribers to choose between time or usage-based rates. They can also choose between hourly, daily or monthly browsing plans. Globe‟s Value-Added Services offers a full range of downloadable content covering multiple topics including news, information, and entertainment through its web portal. Subscribers can purchase or download music, movie pictures and wallpapers, games, mobile advertising, applications or watch clips of popular TV shows and documentaries as well as participate in interactive TV, do mobile chat, and play games, among others. Additionally, Globe subscribers can send and receive Multimedia Messaging Service (MMS) pictures and video, or do local and international 3G video calling. Through Globe‟s partnership with major banks and remittance companies, and using Globe‟s pioneering GCash platform, subscribers can perform mobile banking and mobile commerce transactions. Globe subscribers can complete international and domestic remittance transactions, pay fees, utility bills and income taxes, avail of micro-finance transactions, donate to charitable institutions, and buy Globe prepaid load credits using its GCash-activated SIM. Fixed Line and Broadband Business Globe offers a full range of fixed line communications services, wired and wireless broadband access, and end-to-end connectivity solutions customized for consumers, SMEs (Small & Medium Enterprises), large corporations and businesses. Fixed Line Voice Globe‟s fixed line voice services include local, national and international long distance calling services in postpaid and prepaid packages through its Globelines brand. Subscribers get to enjoy toll-free rates for national long distance calls with other Globelines subscribers nationwide. Additionally, postpaid fixed line voice consumers enjoy free unlimited dial-up internet from their Globelines subscriptions. Low-MSF (monthly service fee) fixed line voice services bundled with internet plans are available nationwide and can be customized with value-added services including multi-calling, call waiting and forwarding, special numbers and voice mail. For corporate and enterprise customers, Globe offers voice solutions that include regular and premium conferencing, enhanced voice mail, IP-PBX solutions and domestic or international toll free services. Fixed Line Data Fixed line data services include end-to-end data solutions customized according to the needs of businesses. Globe‟s product offerings include international and domestic leased line services, wholesale and corporate internet access, data center services and other connectivity solutions tailored to the needs of specific industries. Globe‟s international data services provide corporate and enterprise customers with the most diverse international connectivity solutions. Globe‟s extensive data network allow customers SEC Form 17Q – 1Q 2014 10 to manage their own virtual private networks, subscribe to wholesale internet access via managed international private leased lines, run various applications, and access other networks with integrated voice services over high-speed, redundant and reliable connections. In addition to bandwidth access from multiple international submarine cable operators, Globe also has two international cable landing stations situated in different locales to ensure redundancy and network resiliency. The Company‟s domestic data services include data center solutions such as business continuity and data recovery services, 24x7 monitoring and management, dedicated server hosting, maintenance for application-hosting, managed space and carrier-class facilities for colocation requirements and dedicated hardware from leading partner vendors for off-site deployment. Other fixed line data services include premium-grade access solutions combining voice, broadband and video offerings designed to address specific connectivity requirements. These include Broadband Internet Zones (BIZ) for broadband-to-room internet access for hotels, and Internet Exchange (GiX) services for bandwidth-on-demand access packages based on average usage. Globe Business also launched in 2013 new cloud capabilities featuring the first large-scale, private and public-ready, next generation cloud in Asia - the PayrollCloud application, an innovative Software-as-a-Service or SaaS providing on-time and accurate payroll accounting system – from automatic calculation of salaries, standard time and attendance reports, biometric integration, online application and customizable approval hierarchy and online payslip access. Another is its Backup-as-a-Service platform which is the most advanced backup and restoration software, that enables continuous data protection, local off-site storage and managed services to industries, enterprises as well as small and medium businesses. Broadband Globe offers wired, fixed wireless, and fully mobile internet-on-the-go services across various technologies and connectivity speeds for its residential and business customers. Tattoo@Home consists of wired or DSL broadband packages bundled with voice, or broadband data-only services which are available at download speeds ranging from 1 mbps up to 15 mbps. In selected areas where DSL is not yet available, Globe offers Tattoo WiMAX, a fixed wireless broadband service using its WiMAX network. Meanwhile, for consumers who require a fully mobile, internet-on-the-go broadband connection, Tattoo On-the-Go allows subscribers to access the internet using HSPA+, 3G with HSDPA, EDGE, GPRS or Wi-Fi at various hotspots nationwide using a plug-and-play USB modem. This service is available in both postpaid and prepaid packages. In addition, consumers in selected urban areas who require faster connections have the option to subscribe to Tattoo Torque broadband plans using leading edge GPON (Gigabit Passive Optical Network) technology with speeds of up to 100 mbps. In September 2012, the Company officially launched its Long-Term Evolution (LTE) broadband service with the Tattoo Black Postpaid Plans. The nomadic broadband plans are equipped with an LTE dongle and LTE superstick that deliver browsing speeds of up to 42 Mbps and come with personalized customer handling services such as a dedicated hotline, a relationship manager, and many other perks. SEC Form 17Q – 1Q 2014 11 In 2013, Tattoo introduced its 4G product suite with the launch of Tattoo 4G Flash for only P995 with surfing speeds of up to 7.2 Mbps. Tattoo At-Home on the other hand, offered free unlimited calls to Globe/TM in every Tattoo@Home Broadband Bundle (landline + internet service). Meanwhile, Tattoo Postpaid strengthens its lifestyle positioning with the unveiling of Tattoo-Enjoy Card which allows new Tattoo Postpaid subscribers access to perks and discounts to over 240 brand partners nationwide. Likewise, Tattoo Prepaid Lifestyle sticks with surfing speed of up to 12 Mbps was made available to consumers for only P1,295. With the increasing demand for mobile Wi-Fi and faster internet connectivity, Tattoo Prepaid relaunched its 4G SuperStick during the third period of 2013 with a more affordable price of P1,995. Tattoo Postpaid also launched its new and improved postpaid personalized and consumable plans with increased surfing speed now up to 42 Mbps. LTE plans starting at P1,299 was made available with FREE LTE dongle or pay a one-time fee of P2,000 for an upgrade to a mobile Wi-Fi device. Tattoo consumable plans was further improved with more browsing hours (from 30 hours to 50 hours) for Plan 299 and for Plan 499 (from 50 hours to 85 hours) also with an option to upgrade to a mobile Wi-Fi device for only P150 per month. Another Tattoo revolutionary promo offer during 2013 was the most affordable tablet bundles, wherein its subscribers can get FREE three devices (Skyworth S73 tablet or a Cloudpad 705W, a Blackberry Curve 9220 and the fastest broadband Wi-Fi stick) with unlimited internet browsing and mobile text and call starting at Plan 1,298. SEC Form 17Q – 1Q 2014 12 KEY PERFORMANCE INDICATORS Globe is committed to efficiently managing the Company‟s resources and enhancing shareholder value. The Company regularly reviews its performance against its operating and financial plans and strategies, and use key performance indicators to monitor its progress. Some of its key performance indicators are set out below. Except for Net Income, these key performance indicators are not measurements in accordance with Philippine Financial Reporting Standards (PFRS) and should not be considered as an alternative to net income or any other measure of performance which are in accordance with PFRS. AVERAGE REVENUE PER UNIT (ARPU) ARPU measures the average monthly gross revenue generated for each subscriber. This is computed by dividing recurring gross service revenues (gross of interconnect charges) for a business segment for the period by the average number of the segment‟s subscribers and then dividing the quotient by the number of months in the period. SUBSCRIBER ACQUISITION COST (SAC) SAC is computed by totaling marketing costs (including commissions and handset/SIM subsidies1) related to the acquisition programs for the segment for the period divided by the gross incremental subscribers. AVERAGE MONTHLY CHURN RATE The average monthly churn rate is computed by dividing total disconnections (net of reconnections) for the segment by the average number of the segment‟s subscribers, and then divided by the number of months in the period. This is a measure of the average number of customers who leave/switch/change to another type of service or to another service provider and is usually stated as a percentage. EBITDA EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) is calculated as service revenues less subsidy1, operating expenses and other income and expenses2. This measure provides useful information regarding a company‟s ability to generate cash flows, incur and service debt, finance capital expenditures and working capital changes. As the Company‟s method of calculating EBITDA may differ from other companies, it may not be comparable to similarly titled measures presented by other companies. 1 2 Computed as non-service revenues less cost of sales, mostly on sale of handsets/SIM packs, accessories & gadgets Operating expenses do not include any property and equipment-related gains and losses and financing costs SEC Form 17Q – 1Q 2014 13 EBITDA MARGIN EBITDA margin is calculated as EBITDA divided by total service revenues. Total service revenue is equal to total gross operating revenue less non-service revenue. This is useful in measuring the extent to which subsidies and operating expenses (excluding property and equipment-related gains and losses and financing costs), use up revenue. EBIT and EBIT MARGIN EBIT is defined as earnings before interest, property and equipment-related gains and losses and income taxes. This measure is calculated by deducting depreciation and amortization from EBITDA. Globe Group‟s method of calculating EBIT may differ from other companies, hence, may not be comparable to similar measures presented by other companies. EBIT margin is calculated as EBIT divided by total service revenues. CORE NET INCOME Core net income is defined as net income after tax (NIAT) but excluding foreign exchange and mark-to-market gains (losses), and non-recurring items such as the Company‟s accelerated depreciation charges resulting from the network modernization and IT transformation program implemented in 2012. Starting with the 2012 payout, dividends will be computed against prior year‟s core net income instead of reported net income to ensure that dividends remain sustainable and yields competitive, despite the expected decline in near-term profits arising from accelerated depreciation charges related to the transformation efforts. NET INCOME As presented in the unaudited condensed consolidated financial statements for applicable periods, net income provides an indication of how well the Company performed after all costs of the business have been factored in. SEC Form 17Q – 1Q 2014 14 FINANCIAL AND OPERATIONAL RESULTS GROUP FINANCIAL SUMMARY Globe Group Quarter on Quarter Results of Operations (Php Mn) 1Q 2014 Net Operating Revenues ………………. Service Revenues ...…………………… Non-Service Revenues……………....... Costs and Expenses ……………………. Cost of Sales………………………....... Operating Expenses ………………....... EBITDA…………………………………. EBITDA Margin………………………... Depreciation…………………………...... Affected by network modernization…... Others…................................................. EBIT……………………………………... EBIT Margin……………………………. Non-Operating Charges……………….. Net Income After Tax (NIAT)…………. Core Net Income.……………………….. 24,360 23,230 1,130 15,564 2,867 12,697 8,796 38% 4,068 512 3,556 4,728 20% (422) 2,949 3,357 4Q 2013 24,816 23,243 1,573 16,595 2,946 13,649 8,221 35% 5,607 733 4,874 2,614 11% (616) 1,431 2,091 Year on Year QoQ Change (%) -2% -28% -6% -3% -7% 7% -27% -30% -27% 81% -31% 106% 61% 31 Mar 2014 24,360 23,230 1,130 15,564 2,867 12,697 8,796 38% 4,068 512 3,556 4,728 20% (422) 2,949 3,357 31 Mar 2013 YoY Change 22,470 21,368 1,102 13,694 2,707 10,987 8,776 41% 7,407 3,062 4,345 1,369 6% (503) 656 3,086 Globe Group's consolidated service revenues for the first quarter improved by 9% to P23.2 billion from P21.4 billion last year. Revenue growth remained broad-based with the continued strong performance from all business segments. Mobile revenues grew by 8% from the same period last year due to sustained growth of Globe Postpaid and TM, which improved by 18% and 9%, respectively, and was supported by the strong overall subscriber growth. Total mobile subscribers reached 40.7 million as of end-March 2014, up 16% year-on-year. Globe‟s broadband and fixed line data segments remained robust, with year-on-year increases of 12% and 19% respectively, due to expanded customer bases and the sustained demand for data connectivity, while fixed line voice improved by 3% from same period last year. On a sequential basis, consolidated service revenues declined by P13 million against the record-high revenues reported in the fourth quarter of last year, despite the growth in broadband, fixed line voice and fixed line data revenues partially mitigating the 1% decline in the mobile segment. Operating expenses and subsidy increased 15% year-on-year from P12.6 billion to P14.4 billion, as Globe re-invested its revenue gains in its subscribers, through subsidy and recontracting expenses, and its expanded network, through increases in network costs. Subsidy and re-contracting costs were higher by 8% and 23%, respectively, with more new and existing subscribers signing up for mid- to high-end plans vis-à-vis last year. To further support the growing subscriber base, Globe likewise incurred higher trade provisions, advertising and promotions, staff-related expenses and services charges in the first quarter of 2014. Mitigating these increases in costs, depreciation charges declined year-on-year, on account of lower accelerated depreciation charges in the first quarter of 2014 as the bulk of SEC Form 17Q – 1Q 2014 15 (%) 8% 9% 3% 14% 6% 16% -45% -83% -18% 245% -16% 350% 9% such accelerated depreciation charges were incurred in 2013. Interconnect costs were also lower against last year. In aggregate, total cost and expenses, including depreciation, for the first quarter of 2014 declined by 7% year-on-year from P20.0 billion to P18.5 billion. On a sequential basis, cost and expenses including depreciation, decreased by 10% quarter-onquarter, from P20.6 billion in the fourth quarter of 2014. Consolidated EBITDA for the first three months of the year stood at P8.8 billion, up by P20.0 million against the same period last year, as the top line growth coupled by lower interconnection fees slightly outpaced the increases operating expenses and subsidy. EBITDA margin declined from 41% in the first period of 2013 to 38% in the first quarter of the year. On a quarterly basis, consolidated EBITDA improved by P575 million or 7%, driven by costs improvements quarter-on-quarter and resulting in EBITDA margin improvement from 35% in the fourth quarter of the year. Total depreciation expenses dropped year-on-year and quarter-on-quarter by 45% and 27%, respectively as bulk of the accelerated depreciation charges related to network and IT transformation projects was already incurred in 2013. Non-operating charges declined year-on-year and quarter-on-quarter by 16% and 31%, respectively, driven by lower net foreign exchange and mark-to-market losses coupled with lower interest expenses recognized during the period. The Company ended the three-month period with consolidated net income after tax of P2.9 billion, 350% higher against the P656 million reported net income in the first quarter of 2013. This was driven by slightly higher EBITDA, lower depreciation charges, and less foreign exchange and mark-to-market losses and softer interest expenses recognized during the period. Excluding the non-recurring accelerated depreciation expenses and foreign exchange and mark-to-market gains and losses, core net income after tax reached P3.4 billion as of end March of 2014, representing a 9% increase from than the same period last year. On a sequential basis, net income after tax likewise improved by 106% from P1.4 billion last quarter due mainly to lower depreciation charges. Core net income after tax, likewise increased by 61% from last quarter's P2.1 billion. As of March 2014, total cash capital expenditures stood at about P4.7 billion, 32% lower than last year's level of P6.9 billion. Globe continues to embark on its network and IT modernization programs, building more sites to adapt to the changing landscape in the country‟s key business districts, boosting capacity and enhancing the overall network performance. To date, over 90% of the network is already on 4G HSPA+ providing faster mobile browsing experience for Globe‟s subscribers. To support the requirements of its subscribers for 2G, 3G and 4G services, Globe has a total of 22,813 base stations, including over 8,400 4G base stations. SEC Form 17Q – 1Q 2014 16 GROUP OPERATING REVENUES Globe Group Quarter on Quarter Operating Revenues By Businesses (Php Mn) 1Q 2014 4Q 2013 Year on Year QoQ Change (%) 31 Mar 2014 31 Mar YoY Change 2013 (%) Mobile Service Revenues .……………. Non-Service Revenues………... 19,333 18,456 877 19,785 18,691 1,094 -2% -1% -20% 19,333 18,456 877 18,053 17,124 929 7% 8% -6% Fixed Line and Broadband Service Revenues …………….. Non-Service Revenues………... 5,027 4,774 253 5,031 4,552 479 5% -47% 5,027 4,774 253 4,417 4,244 173 14% 12% 46% Total Operating Revenues……… 24,360 24,816 -2% 24,360 22,470 8% The Globe Group closed the first quarter with total operating revenues of P24.4 billion, up 8% from last year. Compared to last quarter‟s result, operating revenues were slightly down by 2% from P24.8 billion. Mobile revenues, which accounted for 79% of consolidated service revenues as of end-March, increased to P18.5 billion, up by 8% from last year‟s level of P17.1 billion due higher revenue contributions from mobile data and domestic voice. This was likewise complemented by the continued subscriber growth across all brands. Broadband and fixed line businesses which comprise 21% of consolidated service revenues likewise sustained its growth momentum across all segment with both broadband and fixed line data growing in double digits at 12% and 19%, respectively. Traditional fixed voice revenues likewise rebounded this period bringing year-on-year growth to 3%. Year-on-year increase in broadband to P2.8 billion from P2.5 billion last year and the 5% quarter-on-quarter growth was fueled by aggressive and competitive wireless and wired broadband offers. Globe ended the first three months with 2.2 million broadband subscribers, up by 26% from same period last year. Compared to the previous quarter, total broadband, fixed line data and fixed line voice improved by 5%, 6% and 3%, respectively. Mobile non-service revenues declined year-on-year and quarter-on-quarter by 6% and 20%, respectively. Fixed line and broadband non-service revenues, on the other hand, increased compared to the previous year by 46% mainly on sales on the back of strong broadband acquisitions, but compared to previous quarter, it declined by 47%. SEC Form 17Q – 1Q 2014 17 MOBILE BUSINESS Quarter on Quarter Mobile Service Revenues (Php Mn) 1Q 4Q 2014 2013 Year on Year QoQ Change (%) 31 Mar 31 Mar 2014 2013 YoY Change (%) Service Revenues * Voice1..…………………………......... SMS2 …………………………........... 8,658 7,008 8,377 7,387 3% -5% 8,658 7,008 7,670 6,961 13% 1% Mobile Browsing and Other Data3....... 2,790 2,927 -5% 2,790 2,493 12% Mobile Service Revenues……….......... 18,456 18,691 -1% 18,456 17,124 8% * 2011 service revenues have been restated to reflect the change in the presentation of outbound revenues to be at gross of interconnect expenses (from net previously). 1 Mobile voice service revenues include the following: a) b) c) d) e) Prorated monthly service fees on consumable minutes of postpaid plans; Subscription fees on unlimited and bucket voice promotions including the expiration of the unused value of denomination loaded; Charges for intra-network and outbound calls in excess of the consumable minutes for various Globe Postpaid plans, including currency exchange rate adjustments, or CERA, net of loyalty discounts credited to subscriber billings; and Airtime fees for intra network and outbound calls recognized upon the earlier of actual usage of the airtime value or expiration of the unused value of the prepaid reload denomination (for Globe Prepaid and TM) which occurs between 3 and 120 days after activation depending on the prepaid value reloaded by the subscriber net of (i) bonus credits and (ii) prepaid reload discounts; and revenues generated from inbound international and national long distance calls and international roaming calls; and Mobile service revenues of GTI. Revenues from (a) to (e) are reduced by any payouts to content providers. 2 Mobile SMS revenues consist of local and international revenues from value-added services such as inbound and outbound SMS and MMS, infotext, and subscription fees on unlimited and bucket prepaid SMS services, net of any interconnection or settlement payouts to international and local carriers and content providers. 3 Mobile browsing and other data service revenues consist of local and international revenues from value-added services such as mobile internet browsing and content downloading, mobile commerce services, other add-on VAS, and service revenues of GXI and EGG, net of any interconnection or settlement payouts to international and local carriers and content providers. Mobile Voice Mobile voice revenues, which accounted for 47% of total mobile service revenues, grew by 13% compared to the same period last year due to the increase in unlimited and bulk domestic voice subscriptions. Against the fourth quarter mobile voice registered a 3% growth. Globe remains the only operator in the country that offers per-second voice charging with Globe‟s Super Sakto Calls and TM‟s Sulit Segundo which allow subscribers to make a local call for only P0.15 per second. The Company continues to provide attractive and affordable bulk voice offers such as Tawag 236 for 20-minute consumable calls for only P20 for Globe Postpaid and Globe Prepaid subscribers and TM’s TodoTawag 15/15 service for 15-minute on-net call for only P15. TM subscribers may also subscribe to SuliTawag for only P5 for 3-minute Globe and TM network calls and TM Dagdag Call worth P5 which is an add-on service to subscribers registered to TM‟s text promotions that provides 3-minute on-net calls. Likewise, GoCall100 was made available via GoSakto which provide Globe Prepaid subscribers 500 minutes of on-net calls to Globe/TM for only P100 for 7 days. SEC Form 17Q – 1Q 2014 18 In addition, for Filipinos who wish to stay connected with their loved ones abroad, Globe continues to offer its pioneering per-second charging for international voice calls, IDD Sakto Calls for both Globe Postpaid and Globe Prepaid subscribers. Globe Prepaid’s GoTipIDD service remains to be the lowest per-minute IDD rates in the market. In addition, Globe also provides a bucket IDD service to popular and selected overseas destinations with its IDD Tingi promotion, while offering its TipIDD card at various Globe distribution channels. The Company‟s international voice services also include Super IDD, an unlimited call service for 24 hours to select destinations worldwide, and Globe Duo International, which provides registered Globe Postpaid and Globe Prepaid subscribers with virtual US landline numbers which they can use to communicate with their loved ones in the USA. Families and friends in the USA in turn may call their loved ones back in the Philippines and be charged at domestic US rates. This service was further expanded to cover Korea, Canada and UK with the launch of Globe DUO Korea, Globe DUO Canada and Globe DUO UK where it assigns a Korean, Canadian or UK number to a Globe/TM mobile number in the Philippines which subscribers may use to call friends and loved ones in Korea, Canada and UK directly while enjoying local (Korea/Canada/UK) domestic calling rates. In the same manner, incoming calls from Korea, Canada and UK to Duo numbers registered in the Philippines are also charged at local Korean, Canadian and UK rates. Globe Duo Korea, Globe Duo Canada and Globe Duo UK are available to Globe Postpaid, Globe Prepaid, and TM subscribers. In addition during the last quarter of 2013, TM launched TipIDD30 which offer four (4) minutes of international calls to Saudi, UAE, Kuwait, Bahrain, Italy, UK, Australia and Japan for only P30 a day. The Company also provides its subscribers with the best possible mix of voice, SMS, and mobile browsing services through its combo packages. For Globe Prepaid, subscribers have the choice to avail of All-Unli Trio60, SuperUnliAllTxt 25, SuperAll Txt 20, Super Combo 20 and All Net Combo. Another option that Globe Prepaid subscribers may choose to avail of is GoUnli, which provides unlimited SMS to all networks as well as unlimited on-net calls, and unlimited use of Facebook. The Company likewise offers Immortal Trio to Globe Prepaid subscribers to allow 50 on-net SMS, 5 all-network texts and 5 minutes of on-net calls for only P25 per subscription. Globe Prepaid subscribers also have the option to subscribe to UnliTingi to get unlimited allnetwork texts, unlimited on-net calls, and unlimited mobile browsing valid for 1 hour for only P5. SuperUnli, which allows unlimited calls and SMS within the Globe and TM networks, is also available for one day subscription for Globe Prepaid subscribers for only P25. Another industryshaking innovation from Globe Prepaid is the launch of GoSakto in 2013 which empowers the subscribers and gives them the flexibility to tailor-fit their prepaid promo based on their calling, texting and surfing needs for the day, week or month. On top of this, subscribers can even name the offer they created and share it among their friends on Facebook to allow their friends to register to the same promo. Additionally, Globe, in partnership with Viber, launched several value-for-money service offerings in order to give its Globe Prepaid subscribers a richer mobile experience. GoUnli25, which offers the all-time favorite unlimited on-net voice and texts was made even better with FREE unlimited Viber Chat offered at the same price of P25. Likewise, Globe Prepaid’s GoUnli30 which allows unlimited all-network SMS, unlimited on-net call and unlimited Facebook valid for a day was further improved during the third quarter of 2013 to include the best Chat Apps for the same price of P30. Globe Prepaid subscribers can call their friends abroad using Viber, enjoy real-time IM conversations via FB Messenger, send cute, animated stickers using Kakao, and even leave personalized walkie-talkie voice messages using WeChat! Other chat apps like Whatsapp, Line and GMessage can also be used for free with NO WIFI needed. SEC Form 17Q – 1Q 2014 19 For TM on the other hand, subscribers can choose from a wide array of unlimited and bucket offers which will best fit their budget and lifestyle. Among the Unlimited Promo, TM subscribers can avail of UnliCombo for as low as P15 for 1 day if they want to get unlimited on-net calls from 11PM to 6AM the following day and unlimited on-net SMS for 24 hours. Alternatively, they can subscribe to UnliCombo20 if they want to get unlimited on-net calls from 10 PM to 5 PM the following day and unlimited on-net SMS for 24 hours. Subscribers may also opt to choose a 2-day unlimited on-net SMS with Astigtxt15. Bucket text and call services are likewise available for as low as P10 for an unlimited on-net SMS and bulk on-net voice calls with AstigCombo10. Astigcombo15 is also available which gives unlimited on-net texts and 30 minutes on-net calls for P15 a day. TM subscribers may avail of Combo15 to get unlimited on-net SMS, 50 all-network text service, and 10 consumable minutes within the TM and Globe networks for 2 days as well as Combo20 which offer unlimited on-net texts to Globe/TM plus 50 All-net texts and 20 minutes calls to Globe/TM for only P20. On top of this, TM subscribers can now extend for another 24 hours their favorite TM promo for only P5. Mobile SMS Mobile SMS which accounted for 38% of total mobile service revenues, closed the first quarter at P7 billion, slightly higher by 1% from same period last year. However, on a sequential basis, mobile SMS revenues declined by 5% coming off from highs in the seasonal fourth quarter of last year. Globe showcases a comprehensive line up of mobile SMS services ranging from unlimited and bucket text services to combo voice, SMS and surf promotions. Globe continues to provide its prepaid subscribers with all-day unlimited on-net SMS with UnliTxt and AstigTxt, respectively. Globe Postpaid and Globe Prepaid subscribers may get 30 days of unlimited on-net text service by subscribing to SuperTxt. TM subscribers can likewise subscribe to other variants of the AstigTxt offering for unlimited on-net SMS valid for 2 days, 3 days, or 5 days. For on-net bucket SMS offers, Globe continues to provide SuliTxt which allows 100 and 25 text messages for a single day subscription. The Company also offers all-network text services such as My SuperTxt All, an unlimited text service for 30 days available for postpaid subscribers and UnliTxtAll20 for a 1-day unlimited SMS to all networks for TM subscribers. All network bucket text services are likewise available with Globe Prepaid’s SuperAllTxt for 250 SMS and TM‟s AstigTxtAll for 150 SMS, both valid for a day. Meanwhile, in response to the market‟s clamor for prepaid offers with longer validity periods, Globe Prepaid likewise introduced via GoSakto GoUnlitxt49 which offer its subscribers unlimited on-net texts to Globe/TM for only P49. TM subscribers may avail of Combo10 and Combo15 to get unlimited on-net SMS, 50 all-network text, and 10 consumable minutes to TM and Globe subscribers. Likewise, AstigItxt20 was introduced in the market during the last quarter of 2013 which gives TM subscribers 30 international and all-network texts for only P20 valid for 1 day. Mobile Browsing and Other Data Mobile browsing & other data revenues which accounted for 15% of total mobile service revenues increased to P2.8 billion as of end-March 2014, up 12% from P2.5 billion in March 2013, driven by the continuous demand for data services and the popularity of data-driven products and applications, the increased pervasiveness of Globe‟s 3G, HSPA+ and LTE networks and the proliferation of data-enabled smartphones. On a sequential basis, mobile browsing & other data revenues declined by 5%, given the full quarter impact of the Free Facebook promo launched last November 2013. However, the Free Facebook campaign showed promising result as it helped SEC Form 17Q – 1Q 2014 20 seed the habit of internet access on our wireless data networks, with registered mobile data services doubling during the promo period. Globe‟s mobile browsing services includes unlimited chatting, downloading, emailing, and surfing offers to its Globe Postpaid and Globe Prepaid subscribers with its add-on data plan SuperSurf for as low as P50 for 1 day. The Company also offers consumable mobile browsing for as low as P15 for 1 hour with Prepaid Power Surf for its Globe Prepaid and TM subscribers. Prepaid and Postpaid subscribers can avail of different Power Surf variants: 50MB for only P99, 300 MB for only P299 and 1GB for only P499. All Power Surf plans are automatically bundled with the Globe No Bill Shock Guarantee, so subscribes who exceed their monthly MB allocations will never pay more than P999. For unlimited access to Facebook, Super Facebook and TM Astig Facebook are available for only P10 a day for its Globe Prepaid and TM subscribers. Meanwhile, Globe and TM Prepaid subscribers who want a full Viber experience with unlimited high-definition voice calls and unlimited chat can avail of Viber20 for P20 a day and those who want unlimited Viber chat only can either avail of Viber10, a one day variant for only P10 or Viber30 for five days unlimited Viber chat for P30. Prepaid subscribers who just want unlimited access to messaging applications (Viber, Whatsapp, Line, FB Messenger, Kakao etc.) may opt to register to Unlichat25 for only P25. For BlackBerry® users, the Company continues to offer Super Surf for BlackBerry® Max for allin unlimited BlackBerry® services for as low as P50 a day. Globe also provides unlimited use of push email applications such as Yahoo! Mail, GMAIL, MSN and any POP3 or IPOP email account with its add-on data service BlackBerry® Messaging. The Company also provides unlimited access to social networking applications with its BlackBerry® Social offering of P299 valid for 30 days. For unlimited use of BlackBerry® Messenger and free on-net SMS, Globe Postpaid and Globe Prepaid subscribers may register to BlackBerry® Chat. Setting another milestone in Philippine telecommunications, the Company gave its over 40.7 million subscribers (Postpaid/Prepaid/TM) free mobile phone access to Facebook beginning October 31, 2013 and was extended until April 30, 2014. Globe worked closely with Facebook to enable customer experience innovations for the best free Facebook offer (users can post, like, comment, chat, add friends, upload photos, share posts, and more on Facebook) without the need for Wi-Fi. This campaign is in line with Globe‟s strategy to bring more people online and overcome the fear of using mobile internet, and increase the habit of mobile browsing and surfing over Globe‟s improved 3G, HSPA+ and LTE networks. SEC Form 17Q – 1Q 2014 21 The key drivers for the mobile business are as follows: Quarter on Quarter 4Q QoQ Change 2014 2013 (%) 1Q 31 Mar Year on Year 31 Mar 2014 2013 YoY Change (%) Cumulative Subscribers (or SIMs) – Net Globe Postpaid 1………………………………. 40,749,094 2.088,413 38,475,130 2,025,538 6% 3% 40,749,094 2.088,413 35,141,918 1,857,342 16% 12% Prepaid.……………………………………. Globe Prepaid…………………………….. TM.…………………………………………. 38,660,681 18,699,346 19,961,335 36,449,592 17,836,441 18,613,151 6% 5% 7% 38,660,681 18,699,346 19,961,335 33,284,576 16,946,327 16,338,249 16% 10% 22% Net Subscriber (or SIM) Additions Globe Postpaid..…………………………...….. 2,273,964 62,875 1,958,419 45,980 16% 37% 2,273,964 62,875 2,022,883 122,874 12% -49% Prepaid.……………………………………. Globe Prepaid…………………………….. TM.…………………………………………. 2,211,089 862,905 1,348,184 1,912,439 872,502 1,039,937 16% -1% 30% 2,211,089 862,905 1,348,184 1,900,009 506,185 1,393,824 16% 70% -3% ARPU 2 Globe Postpaid………………………………... 1,140 1,178 -3% 1,140 1,105 3% Prepaid Globe Prepaid…………………………..... TM………………………………………….. 128 77 140 81 -9% -5% 128 77 141 86 -9% -10% Subscriber Acquisition Cost (SAC) Globe Postpaid………………………………... 9,074 7,607 19% 9,074 7,972 14% Prepaid Globe Prepaid…………………………….. TM.…………………………………………. 23 15 28 35 -18% -57% 23 15 20 21 15% -29% Average Monthly Churn Rate (%) Globe Postpaid....……………………………... 2.2% 2.2% 2.2% 1.6% Prepaid Globe Prepaid…………………………….. 5.4% 5.7% 5.4% 5.1% TM.………………………………………..... 6.5% 7.0% 6.5% 5.6% Average Revenue Per Subscriber (ARPU) 1 As of 1Q 2014, Globe had a total of 2.50 million wireless postpaid subscribers which include 2.09 million mobile telephony and 0.41 million wireless broadband customers. This is higher compared to the 2.42 million wireless postpaid subscribers as of 4Q 2013. Mobile telephony revenues are reflected under “Mobile Service Revenues” while wireless broadband revenues are included under “Broadband.” 2 ARPU is computed by dividing recurring gross service revenues (gross of interconnect expenses) segment by the average number of the segment’s subscribers and then dividing the quotient by the number of months in the period. Globe ended the first quarter with a total mobile subscriber base of 40.7 million, up 16% from 35.1 million subscribers versus same period last year. First quarter‟s gross subscriber acquisitions once again registered a record-high of 9.1 million subscribers, 3% higher than the strong fourth quarter additions. This was mainly contributed by the record acquisitions of the Company‟s mass market brand (TM) as well as increased Postpaid subscriptions. The Free Facebook campaign helped drive subscriber uptake particularly on the prepaid side of the business. Despite the elevated SEC Form 17Q – 1Q 2014 22 blended churn rate as of end-March of 2014 of 5.77% from 5.14% of same period last year, full year net incremental subscribers leapt to 2,273,964, 12% higher than 2013 level of 2,022,883 net additions. The succeeding sections cover the key segments and brands of the mobile business – Globe Postpaid, Globe Prepaid and TM. Globe Postpaid Globe remained to be the leader in the postpaid segment with the continued growth in acquisitions as of first quarter of 2014 registering over 2.0 million subscribers from 1.9 million in the same period last year. The continued success of the fully-customizable and best-in-class postpaid plans together with the exclusive device offers and innovative deals helped boost gross additions to reach 199,691 as end of first quarter. Year-to-date net incremental postpaid subscribers stood at 62,875, 49% lower than 2013 level of 122,874. In order to sustain the growth momentum for mobile postpaid and maintain its leadership on this segment of the market, the Company boosted its offerings during the first quarter of 2014. Globe Postpaid ARPU of P1,140 was above than last year‟s P1,105 as a result of a higher mix of mid to high-end MSF plans. Globe Postpaid subscriber acquisition cost (SAC) significantly increased year-on-year and quarter-on-quarter by 14% and 19%, respectively, driven by Globe‟s second-highest quarterly gross activations coupled with the shift in mix to high and mid-end plans. However, Globe Postpaid SAC remained recoverable within the 24-month contract period. Prepaid Globe‟s prepaid segment, which includes the Globe Prepaid and TM brands, accounts for 95% of its total mobile subscriber base. As of the first quarter of 2014, cumulative prepaid subscribers stood at about 38.7 million, 16% better than last year‟s level of 33.3 million. A prepaid subscriber is recognized upon the activation and use of a new SIM card. The subscriber is provided with 60 days (first expiry) to utilize the preloaded SMS value. If the subscriber does not reload prepaid credits within the first expiry period, the subscriber retains the use of the mobile number but is only entitled to receive incoming voice calls and text messages for another 120 days (second expiry). The second expiry is 120 days from the date of the first expiry. However, if the subscriber does not reload prepaid credits within the second expiry period, the account is permanently disconnected and considered part of churn. The first expiry periods of reloads vary depending on the denominations, ranging from 1 day for P10 to 60 days for P300 to P500 reloads. The first expiry is reset based on the longest expiry period among current and previous reloads. Under this policy, subscribers are included in the subscriber count until churned. In 2009, the National Telecommunications Commission (NTC) published Memorandum Circular 03-07-2009 which promulgates the extension of the validity periods of prepaid reloads effective July 19, 2009. Under the new pronouncement, the first expiry periods now range from 3 days for P10 or below to 120 days for reloads amounting to P300 and above. The second expiry remains at 120 days from the date of the new first expiry periods. SEC Form 17Q – 1Q 2014 23 The succeeding sections discuss the performance of the Globe Prepaid and TM brands in more detail. a. Globe Prepaid Globe Prepaid gross acquisitions slightly improved in the first quarter versus the preceding quarter‟s record highs, bringing gross additions to 3.8 million or 25% higher than same period last year‟s level of 3.1 million. First quarter‟s net incremental subscribers also improved by 70% to 862,905 from 506,185 in 2013, despite the elevated churn rates of 5.45% this period from 5.12% in same period last year. During the first quarter of 2014, Globe Prepaid further intensified its customizable service offerings with the launch of the new GoUnli25 via the “GO SAKTO” mobile app (which can now be downloaded on the Apple App Store or Google Play) or by dialing *143#. The new GoUnli25 now offers unlimited texts and calls to Globe/TM, unlimited Facebook, plus a choice of one FREE app (from the following: twitter, instagram, google, yahoo, viber, foursquare) still at P25/day. Globe Prepaid ARPU declined by 9% year-on-year resulting from the revenue dilution from unlimited and bucket service offerings. Globe Prepaid SAC increased by 15% versus same period last year due to higher ads and promo, but declined by 18% compared to last quarter due to lower marketing spend on ads during the period. b. TM TM on the other hand, generated the highest gross acquisitions during the quarter, 5,087,842 new SIMs or 6% better than previous quarter level of 4,818,252. The extension of the free Facebook promo boosted this quarter‟s acquisition coupled by TM‟s continued aggressive acquisition efforts. Due to the increased churn rate as of end March 2014, net incremental subscribers declined by 3% from about 1.4 million in 2013 to only 1.3 million this period. During the period, TM introduced a new affordable and cheap promo offer with UNLICALL15 giving its subscribers with Unlimited call to all Globe and TM subscribers for as low as P15 valid for 1 day and also the new UNLIALLNET10 which provides its subscribers with unlimited texts to all networks for P10 a day. TM ARPU was down by 10% year-on-year with the continued shift from regular pay-as-you-use service to unlimited and value offers. TM SAC, however, declined from same period a year ago and from last quarter by 29% and 57%, respectively due to increased ads and promo. SEC Form 17Q – 1Q 2014 24 GCash GCash continues to establish its presence in the mobile commerce industry. GCash‟s initial thrust towards money-transfers, purchase of goods and services from retail outlets, and sending and receiving domestic and international remittances has spurred alliances in the field of mobile commerce. Today, GCash allows Globe and TM subscribers to pay or transact for the following using their mobile phone: domestic and international remittances utility bills interest and amortization of loans insurance premiums donations to various institutions and organizations sales commissions and payroll disbursements school tuition fees micro tax payments and business registration electronic loads and pins online purchases airline tickets In addition to the above transactions, GCash is also used as a wholesale payment facility. In 2011, Globe increased the number of establishments that offer GCash as an alternative and efficient payment mode. Quick Delivery tapped GCash to be its newest payment mode to make it easier, safer and more convenient to order food from Metro Manila‟s top restaurants, specialty stores, and even wine merchants. The largest local chain of movie theaters, SM Cinema, was able to launch the first mobile ticketing service in the country through GCash, allowing moviegoers to purchase tickets online, pay via GCash, and redeem movie tickets at the cinemas using their mobile phones. In October 2010, Globe launched the GCash Card, the country‟s first customizable ATM card linked to a mobile wallet. This gives subscribers 24/7 access to GCash and allows them to withdraw funds via any of the 9,000 Bancnet, Megalink, ExpressNet or Encash Automated Teller Machines (ATMs) nationwide. In addition, the GCash Card is the only customizable ATM Card in the country where subscribers can make their own personalized ATM card design or choose from a variety of design templates. In 2011, GCash further strengthened its presence in the mobile money transfer business by establishing partnerships with various institutions. Globe partnered with Ericsson to integrate GCash into the new Ericsson Money Services making GCash one of the first partners for this innovative end-to-end mobile money solution. The Company also inked a partnership with USbased IDT Corporation which will enable GXI to strengthen its GCash Remit‟s international remittance service by facilitating connectivity between traditional money transfer operators and GCash utilizing IDT‟s economical corridor routing, transaction settlement and foreign currency exchange services. Globe, through GXI, also partnered with Japan‟s SOFTBANK Corp. through its subsidiary SBPS for an affordable, convenient, and secure remittance service that will allow Filipinos living and working in Japan to remit money to the Philippines via the GCash platform. The Company likewise set up a partnership with Xpress Money, a leading global instant money transfer brand, to further extend the latter‟s strong payout network in the Philippines. With this SEC Form 17Q – 1Q 2014 25 tie-up, beneficiaries of Xpress Money Cash Pick Up remittances can now claim their money from the network of GCash Remit outlets nationwide. In 2012, Globe launched GCash PowerPay+ to provide an additional channel to facilitate mobile transactions. GCash PowerPay+ is a funds disbursement service linked to a Globe or TM SIM and comes with an optional insurance coverage. With GCash PowerPay+,users enjoy mobile money services like sending money, buying Globe or TM airtime load with a 10% rebate, and paying bills at the speed of a text message without the need to cash-in to one‟s GCash account. It also allows 24/7 withdrawal from any of the 9,000 Automated Teller Machines (ATMs) nationwide, cashless shopping through Megalink, BancNet and ExpressNet point of sale and financial assistance for accidental death and burial assistance, life cover, residential fire, and ATM theft. Globe has also launched GCash Remit Service to provide mobile subscribers a quick, affordable and convenient way to send and receive domestic and international remittances. With the approval of the Bangko Sentral ng Pilipinas (BSP) to use its sub-distributors as cash-in and cash-out outlets, GCash now has the largest remittance network in the country with more than 9,000 active GCash outlets nationwide. Meanwhile, for electronic banking services, GCash secured a partnership with Philippine Savings Bank (PSBank), the thrift banking arm of the Metrobank Group, to enhance its electronic banking channels. Through GCash, PSBank accountholders can do various financial transactions such as payments, account inquiries and reloading from their PSBank account to their enrolled GCash wallet and vice-versa. In the same manner, Globe partnered with UnionBank of the Philippines (UnionBank) for its eMoneyXchange service that will allow customers to link their UnionBank accounts to their GCash mobile wallets enabling UnionBank clients with EON, E-Wallet, ePayCard and UnionBank regular savings and checking accounts to transfer funds to and from their GCash wallets through their UnionBank account via SMS. To further complement its mobile wallet functions, Globe partnered with American Express® to launch the GCash American Express® Virtual Card. The prepaid virtual card is linked to a subscriber‟s GCash mobile wallet and allows users to shop conveniently online from both local and international sites. Further, it gives the user a personalized US Address to allow delivery of purchases from international online sites which may not be directly shipping goods to the Philippines. To reach out to a wider audience and complement the increased smartphone penetration, Globe launched a GCash mobile application for BlackBerry® devices in 2011. The mobile application can be downloaded for free via the BlackBerry® App World. Beginning third quarter of 2012, however, the Company has made the GCash mobile wallet available and accessible to a wider subscriber base who may download the application for free from the App Store and Google Play. The efficiency of GCash’s mobile cash transfer system was recognized by various government agencies and socially-oriented organizations such as DSWD (Department of Social Welfare and Development), Simbahang Lingkod ng Bayan (SLB), and the United Nations World Food Programme (WFP). In 2011, GCash Remit was tapped by DSWD and Land Bank of the Philippines for the distribution of the government‟s Conditional Cash Transfers (CCT). A total of about P4.5 billion worth of CCT were distributed to beneficiary families in over 9,000 barangays nationwide via its domestic cash pick-up service. The GCash platform was also utilized by SLB, a church-based, Jesuit-led organization, as a donation channel for its relief operations for typhoon SEC Form 17Q – 1Q 2014 26 victims. The WFP meanwhile named GCash as a benchmark for their operations worldwide. WFP is the world‟s largest humanitarian agency fighting hunger worldwide. WFP is currently involved in the disaster relief operations for typhoon Sendong victims in Mindanao. To improve its efficiency in delivering assistance, WFP has tapped Globe through its GCash mobile technology platform for the fast, secure and low-cost delivery of financial assistance to families who were severely affected by calamities. The partnership flourished with Globe providing the necessary platform to facilitate the Cash-for-Work program and other relief and recovery operations by the WFP. Through GCash, WFP discovered a new and efficient way of providing financial assistance to help families restore and rebuild their lives. On June 19, 2013, Globe achieved another milestone with its partnership with Home Development Mutual Fund (HDMF) or the PAG-IBIG Fund to allow their over 12.6 million members to transact with Pag-ibig via GCash, making it easy and more convenient for them to facilitate their Pag-Ibig transactions. Pag-Ibig members can now easily pay their monthly mandatory savings and housing loans anytime, anywhere using their GCash wallets linked to their Globe or TM phones, eliminating the need to go to a Pag-Ibig office or an accredited payment center. Also, GCash can now be used to purchase load even for other mobile networks via *143#. In addition, CitiExpress and Unilink, as new GCash express partners, started offering GCash express cards to their customers. Moreover, GCash, is set to expand its network service in the country by growing its user base with the recent partnership with TORCHe Global Marketing, Inc. (TGMI), a marketing consultancy firm focused on helping companies reach out to the widest possible consumer base through the latest technologies in mobile commerce and advertising. GCash services that will be made available for use of TGMI affiliates include PowerPay+ Card, Buy Load service and Gcash outlets. During the last quarter of 2013, several initiatives on GCash were launched in order to expand its portfolio of services including real property tax payments via GCash available in Quezon City and Valenzuela; buy through blink coupon codes for subscribers to experience unlimited Movie and TV show streaming; or convert Gcash to rewards points. In addition, subscribers can now also apply for BanKO loan via GCash with low interest rate, fast approval and hassle-free loan payments. Loan credit and collection will be through their GCashPowerPay+ wallet. In 2014, GCash may now be used at Puregold to pay for groceries, bills and for cash remittances. Also, Globe Charge Mobile Card Reader was likewise introduced to the market last March 27, 2014 which turns the subscriber‟s smartphone into a credit card terminal. BPI Globe BanKo On October 9, 2009, the Company announced that the BSP has approved the sale and transfer by Bank of the Philippine Islands (BPI) of its shares of stock in Pilipinas Savings Bank, Inc. (PSBI) that will result in the ownership of PSBI as follows: 40% each for BPI and Globe Telecom and 20% for Ayala Corporation (AC). On October 23, 2009 the official name of PSBI was changed to BPI Globe BanKo, Inc. after getting the approval of both the BSP and the Securities and Exchange Commission (SEC). BPI Globe BanKo, Inc. is the country‟s first mobile microfinance bank. BPI Globe BanKo, Inc. opened its first branch last February 2010, and added 5 provincial branches located in Dipolog, Dumaguete, Lucena, Naga and Tacloban. While the bank‟s initial SEC Form 17Q – 1Q 2014 27 focus is on wholesale lending to other microfinance institutions, it is now expanding into retail banking products and services to include micro-savings, micro-lending, and insurance. In 2011, BPI Globe BanKO, Inc. launched an innovative product that does not only generate healthy financial returns, but also gives depositors an opportunity to help those in the low-income segment by helping create a solid base for their savings and investments. Called the BanKO Social Initiative (BSI) Deposit, the product is a passbook-based, regular savings account which pays 4.5% interest per annum on a quarterly basis. The minimum deposit requirement is P100,000 with a hold-out period of at least 6 months. The BSI Deposit account, which does not charge depositors with documentary stamp taxes, is also insured with the PDIC for amounts up to P500,000 per depositor. In 2013, BPI-Globe Banko, the first mobile-based, microfinance-focused savings bank in the Philippines, have joined hands with US Agency for International Development, in helping rural communities gain access to formal financial services (i.e. cash in and cash out transactions, bills payment, airtime loading, money remittance, and micro-insurance purchase) using their mobile phones. This partnership was announced during the launch of the mobile money financial service for the llijan Multi-Purpose Cooperative. In 2014, Globe BanKO launched BanKO Interoperability (Phase 1), which allows all BanKO customers to make Cash-in and Cash-out transactions in almost all GCash outlets nationwide. SEC Form 17Q – 1Q 2014 28 FIXED LINE AND BROADBAND BUSINESS Quarter on Quarter Service Revenues (Php Mn) Year on Year 1Q 4Q QoQ 31 Mar 31 Mar YoY 2014 2013 Change 2014 2013 Change Service Broadband 1……………………… Fixed line Data 2..………………... Fixed line Voice 3 ….……………. Fixed line & Broadband Service Revenues……...………………………. 1 b) c) d) 5% 6% 2,790 1,319 2,486 1,111 12% 19% 665 647 3% 665 647 3% 4,774 4,552 5% 4,774 4,244 12% Monthly service fees of wired, fixed wireless, and fully mobile broadband data only and bundled voice and data subscriptions; Browsing revenues from all postpaid and prepaid wired, fixed mobile and fully mobile broadband packages in excess of allocated free browsing minutes and expiration of unused value of prepaid load credits; Value-added services such as games; and Installation charges and other one-time fees associated with the service. Fixed line data service revenues consist of the following: a) b) c) d) 3 2,663 1,242 Broadband service revenues consist of the following: a) 2 2,790 1,319 Monthly service fees from international and domestic leased lines; Other wholesale transport services; Revenues from value-added services; and One-time connection charges associated with the establishment of service. Fixed line voice service revenues consist of the following: a) b) c) d) e) f) Monthly service fees; Revenues from local, international and national long distance calls made by postpaid, prepaid fixed line voice subscribers and payphone customers, as well as broadband customers who have subscribed to data packages bundled with a voice service. Revenues are net of prepaid and payphone call card discounts; Revenues from inbound local, international and national long distance calls from other carriers terminating on Globe‟s network; Revenues from additional landline features such as caller ID, call waiting, call forwarding, multi-calling, voice mail, duplex and hotline numbers and other value-added features; Installation charges and other one-time fees associated with the establishment of the service; and Revenues from DUO and SUPERDUO (Fixed line portion) service consisting of monthly service fees for postpaid and subscription fees for prepaid. SEC Form 17Q – 1Q 2014 29 Broadband Quarter on Quarter Year on Year 1Q 4Q QoQ 31 Mar 31 Mar YoY Change 2014 2013 Change 2014 2013 Cumulative Broadband Subscribers Wireless 1…………………………... Wired……………………………….. 1,798,378 392,000 1,653,647 378,255 9% 4% 1,798,378 392,000 1,388,649 352,302 30% 11% Total (end of period)………………….. 2,190,378 2,031,902 8% 2,190,378 1,740,951 26% 1 Includes fixed wireless and fully mobile broadband subscribers. Globe Tattoo Broadband keeps positive momentum going with 12% growth in revenues for the first three months from P4.2 billion to P4.8 billion as a result of the 26% growth in its subscriber base. Strong growth in the broadband business resulted from aggressive acquisitions campaigns, attractive pricing offers and product bundles. Quarter-on-quarter, revenues likewise grew by 5% from P4.6 billion last quarter. Tattoo Broadband‟s sustained growth was mainly due to the improved ARPUs across all product segments and higher subscriber base for both Tattoo-At-Home and Tattoo-On-The-Go, rising to 2,190,378 subscribers from 2,031,902 last quarter. The Company continued its commitment to offer broadband differentiated and value priced products. The widest range of Tattoo Prepaid mobile Wi-Fi devices was made available during the period including 4G mobile Wi-Fi with speed up to 12mbps, connects up to 10 devices for only P1,995; 4G mobile Wi-Fi + Powerbank which full charge the phone up to 3x for only P3,795 and LTE mobile Wi-Fi with speed up to 42mbps, connects up to 10 devices + Powerbank, which full charge the phone, for only P4,995. Tattoo Postpaid likewise introduced the best value tablet bundle with no upfront cash out – Samsung Galaxy Tab 3 + FREE mobile Wi-Fi for P899 per month and Postpaid Tattoo Plan with free LTE stick (Plan999) or LTE Mobile WiFi (Plan1299). Meanwhile, Tattoo Home Broadband banners its Plan1599 internet service + landline bundle, now with speed up to 5mbps. Fixed line Data Service Revenues (Php Mn) Fixed line Data International …..……………………….... Domestic….… ………………….............. Others 1..………………………………… Total Fixed line Data Service Revenues….. 1 Quarter on Quarter 1Q 4Q QoQ 2014 2013 Change 258 629 432 1,319 241 594 407 1,242 7% 6% 6% 6% 31 Mar 2014 258 629 432 1,319 Year on Year 31 Mar YoY 2013 Change 224 521 366 1,111 15% 21% 18% 19% Includes revenues from value-added services such as internet, access, data centers and bundled services. The fixed line data segment continued its revenue growth with P1.3 billion, 19% higher year-onyear while compared to previous quarter, the increase was 6%. The sustained growth of fixed line data was a product of the Company‟s continued dedication to expand its portfolio focusing on Globe‟s corporate clients‟ increasing demand for solutions to address its critical business needs such as sales and marketing, intercompany communications, database management and data storage. Likewise, the expansion of the local IT Enabled Service (ITES) industry which includes call centers and Business Process Outsourcing (BPO) companies has also helped drive the growth of the corporate data business. SEC Form 17Q – 1Q 2014 30 Fixed line Voice Quarter on Quarter 1Q 2014 Year on Year 4Q QoQ 2013 Change (%) 31 Mar 31 Mar YoY 2014 2013 Change (%) Cumulative Voice Subscribers Net (End of period)1…………………………… Average Revenue Per Subscriber (ARPU) … ARPU 2……………………………………… Average Monthly Churn Rate ..…………….... 611,743 594,527 3% 611,743 687,775 -11% 367 2.38% 357 3.57% 3% 367 2.38% 309 4.22% 19% 1 Includes DUO and SuperDUO subscribers ARPU is computed by dividing recurring gross service revenues (gross of interconnect expenses) segment by the average number of the segment’s subscribers and then dividing the quotient by the number of months in the period. 2 Total fixed line voice revenues improved year-on-year due to higher ARPU by 19%. Meanwhile the quarterly increase was due mainly to increase in subscriber base. SEC Form 17Q – 1Q 2014 31 OTHER GLOBE GROUP REVENUES International Long Distance (ILD) Services Globe Group Quarter on Quarter 1Q 2014 Year on Year 4Q QoQ 2013 Change (%) 31 Mar 2014 31 Mar YoY 2013 Change (%) Total ILD Revenues (Php Mn) ……………………... 2,805 3,004 -7% 2,805 2,839 -1% Average collection rates for the period (Php to US$1) 44.643 43.520 3% 44.643 40.803 9% 610 562 48 643 567 76 -5% -1% -37% 610 562 48 505 428 77 21% 31% -38% 11.63 7.43 11.63 5.56 Total ILD Minutes (in million minutes) …………… Inbound………………………………………………… Outbound.……………………………………………… ILD Inbound / Outbound Ratio (x) ……………………. Both Globe and Innove offer ILD voice services which cover international call services between the Philippines to more than 200 destinations with over 700 roaming partners. This service generates revenues from both inbound and outbound international call traffic, with pricing based on agreed international termination rates for inbound traffic revenues and NTC-approved ILD rates for outbound traffic revenues. On a consolidated basis, ILD voice revenues from the mobile and fixed line businesses slightly declined year on year by 1% and down by 7% quarter-on-quarter to P2,805 million from P3,004 million. The decline versus last quarter was mainly due to decline in ILD traffic. Meanwhile, Globe sustained its promotion on OFW SIM packs and the discounted call rate offers such as IDD Sakto Calls (per-second IDD), TipIDD card, and IDD Tingi – the first bulk IDD service which can be purchased via registration and through AMAX retailers nationwide. This is available in two denominations: P20 for 5-minute calls to US, Canada, Hong Kong Singapore and Taiwan, and P30 for 3-minute calls to Saudi Arabia, UAE and Kuwait. In addition, The Filipino Seafarer SIM enables Filipino seafarers around the world to keep in touch with their loved ones back home at cheaper rates for as low as US$0.20 per minute while sending SMS for only US$0.10 per sms. Subscribers who will avail of the SIM will get two numbers in one SIM – an international mobile number and a Philippine Globe mobile number. Globe and TM subscribers calling the Globe Seafarer SIM are only charged at local rates. The Globe Local UK SIM card alternatively gives Filipinos one affordable rate of only 10 pence for each call or text sent to Globe or TM number in the Philippines as well as calls and text to all UK networks. Subscribers also pay only 10 pence for every MB of mobile internet. Moreover, Globe once again expanded its international footprint with the launch of Globe local Italy SIM last November 24, 2013. Filipino communities in Italy can now enjoy calls to Globe in the Philippines for just five Euro cents per minute, the lowest among all Italian mobile operators. This 2014, Globe recently announced the partnership with Ingenium Outsourcing Services, S.L.U to be able to launch soon the Local Spain SIM card, which will be the 8th country where Globe would have an international retail presence. Globe Duo International was further expanded to include Japan with the launch of Duo Japan during the period, which allows calls from Japan to the Philippines, via a Japanese number assigned to a Globe or TM mobile number, to be charged on local rates. SEC Form 17Q – 1Q 2014 32 GROUP OPERATING EXPENSES For the three months ended, Globe‟s total costs and expenses, including depreciation, amounted to =18,502 million, down by 7% from last year‟s P P =19,999 million driven by lower depreciation charges and decline in interconnect costs which fully offset the increases from all other expense line items. Higher depreciation in 2013 is mainly due to the accelerated depreciation related to the network modernization projects. On a sequential basis, total spending declined by 10% primarily across all expense line items except for subsidy, repairs and maintenance and utilities. Globe Group Quarter on Quarter (PhpMn) 1Q 2014 4Q QoQ 2013 Change (%) Year on Year 31 Mar 2014 31 Mar YoY 2013 Change (%) Cost of sales………………………………………….. Less: Non-service revenues………………..……….. Subsidy………………………………..................... 2,867 1,130 1,737 2,946 1,573 1,373 -3% -28% 27% 2,867 1,130 1,737 2,707 1,102 1,605 6% 3% 8% Interconnect…………………………………………... Selling, Advertising and Promotions………………… Re-contracting……………………………………….. Staff Costs …………………………………………… Utilities, Supplies & Other Administrative Expenses... Rent…………………………………………………... Repairs and Maintenance…………………………….. Provisions ……………………………………………….. Services and Others…………………………………... Operating Expenses………………………………… 2,057 1,131 600 1,950 1,145 916 1,089 790 3,019 12,697 2,304 1,490 718 2,130 1,127 935 911 771 3,263 13,649 -11% -24% -16% -8% 2% -2% 20% 2% -7% -7% 2,057 1,131 600 1,950 1,145 916 1,089 790 3,019 12,697 2,195 808 489 1,666 1,001 840 966 487 2,535 10,987 -6% 40% 23% 17% 14% 9% 13% 62% 19% 16% Depreciation and Amortization……………….…… Affected by network modernization………………. Others……………………………………………… 4,068 512 3,556 5,607 733 4,874 -27% -30% -27% 4,068 512 3,556 7,407 3.062 4,345 -45% -83% -18% Costs and Expenses…………………………………. 18,502 20,629 -10% 18,502 19,999 -7% Interconnect Interconnect charges declined year-on-year and quarter-on-quarter by 6% and 11% respectively due to lower inter-network traffic on domestic services mainly on Mobile Telephony‟s local voice. Subsidy Total subsidy increased by 8% year-on-year to P =1,737 million from P =1,605 million in same period last year mainly for Postpaid on account of higher mix of mid to high-end plan subscription (from 51% in 1Q‟13 to 53% in 1Q‟14), strong postpaid mobile gross activations, and the increase in broadband acquisitions. On a sequential basis, subsidy likewise increased by 27% on the back of increased gross acquisitions during the period as partly offset by volume rebates pertaining to 2013 handset purchases. SEC Form 17Q – 1Q 2014 33 Marketing Selling, advertising and promotions, which account for 8% of total operating expenses grew yearon-year by 40% to P =1,131 million this period from P =808 million as of March 2013 driven by increased advertising spend on all business segments and higher commissions following growth in @Home acquisitions. However, on a sequential basis, costs declined by 24% mainly across all brands as partly offset by higher commissions. Higher fourth quarter marketing expenses was due to catch up accruals booked in December on various marketing programs. Re-contracting Total re-contracting costs as of first quarter, increased by 23% to P =600 million from P =489 million in the same period last year. The increase in re-contracting costs is mainly due to the increasing base of re-contracting subs who availed of handset upgrade. On a sequential basis, re-contracting cost declined by 16% from P =718 million in the fourth quarter. Higher re-contracting cost in the fourth quarter was mainly due to the launch of various apple products (iPhone 5s and 5c; iPad mini with Retina display; iPad Air) during the fourth quarter. Staff Costs Staff costs which accounted for 14% of total operating expenses, increased by 17% to P =1,950 million from P =1,666 in 2013 due to average headcount increase (from 5,902 in 2013 to 6,381 in 2014), higher corporate incentives as well as the exercise of employee stock options. Compared to last quarter, staff costs declined by 8%. Utilities, Supplies and Other Administrative Expenses Utilities, supplies and other administrative expenses showed a year-on-year increase of 14% or =144 million and quarter-on-quarter growth of 2% or P P =18 million mainly to support Globe‟s growing network, as well as on-off costs to support recovery efforts on Yolanda affected areas. Rent Rent expenses which account for 6% of operating expenses and subsidy increased to P =916 million representing 9% year-on-year growth from P =840 million in the first three months of 2013, largely on higher service vehicle leased and increasing IP port requirements, local tielines and co-location fees. However, first quarter lease expenses registered a 2% decline from P =935 million last quarter. Provisions This account includes provisions related to trade, non-trade and traffic receivables and inventory. Overall, total provisions increased by 62% or P =303 million higher than same period last year mainly from trade provisions due to the continued growth in postpaid revenues year-on-year and higher traffic provisions as cushioned by lower inventory-related provisions. However, compared to the preceding quarter, total provisions increased by 2%. Repairs and Maintenance Repairs and maintenance, which accounted for 8% of total operating expenses and subsidy stood at P =1,089 million, 13% higher against same period last year‟s P =966 million and 20% higher SEC Form 17Q – 1Q 2014 34 quarter-on-quarter, given costs related to maintenance agreements for Globe‟s IT system, support facilities and outside plant equipment. Services and Others Services and other expenses which accounted for 21% of total operating expenses and subsidy grew by 19% from P =2,535 million in the same period of 2013 to P =3,019 million as of first quarter this year. This was mainly attributed to higher professional fees, higher cost per hour of contracted services and customer contact services largely due to high volume of postpaid calls both regular and high-end accounts. Costs likewise were driven by higher freight charges and subscriber line installations as partly countered by lower payments for taxes and licenses. However, on a sequential basis, services and other expenses declined by 7% from P =3,263 million last quarter, given that fourth quarter spend was higher due to catch-up accruals. Depreciation and Amortization Depreciation and amortization expenses dropped year-on-year and quarter-on-quarter by 45% and 27%, respectively as bulk of the accelerated depreciation charges related to network and IT transformation projects was booked in 2013. Normal course depreciation charges were likewise lower as some assets were determined at end-of-useful life at the end of 2013. SEC Form 17Q – 1Q 2014 35 OTHER INCOME STATEMENT ITEMS Other income statement items include net financing costs, net foreign exchange gain (loss), interest income and net property and equipment related income (charges) as shown below: Globe Group Quarter on Quarter (PhpMn) 1Q 2014 Financing Costs – net Interest Expense…………………………....... Gain / (Loss) on derivative instruments – net Swap costs and other financing costs……...... Foreign Exchange (loss).…..……………….. Year on Year 4Q QoQ 2013 Change (%) 31 Mar 2014 31 Mar YoY 2013 Change (%) (488) 61 (67) (73) (523) (40) (67) (155) -7% -254% 1% -53% (488) 61 (67) (73) (507) (68) (65) (49) -4% -190% 3% 48%- (567) (785) -28% (567) (690) Foreign Exchange gain ……………………..... Interest Income ……………………………..... Others – net………………………………….... 164 (19) 160 9 2% -313% 164 (19) 180 6 -18% -9% -377% Total Other (Expenses) Income…………….... (422) (616) -31% (422) (503) -16% Globe Group‟s non-operating charges for the first quarter posted a 16% or P81 million year-onyear decline to close the period at P422 million following net forex/MTM loss of ₱12M vs. last year‟s loss of ₱117M coupled with lower interest expense due to17% lower interest bearing loan and lower interest rate on dollar loans by 1.7%. Likewise, this quarter showed a decline of 31% in non-operating charges from P616 million last quarter, due mainly to lower forex losses/MTM following 1Q 2014 peso depreciation against the US$ by ₱1.14 or 3% vs. 4Q 2013 coupled with lower interest expense. (See related discussion on derivative instruments and swap costs in the Foreign Exchange and Interest Rate Exposure section). SEC Form 17Q – 1Q 2014 36 LIQUIDITY AND CAPITAL RESOURCES Globe Group Balance Sheet Data (PhpMn) Total Assets …………………………………………………… Total Debt …………………………………………………….. Total Stockholders‟ Equity …………………………………… Financial Ratios (x) Total Debt to EBITDA ………………………………………... Debt Service Coverage………………………………………… Interest Cover (Gross) ………………………………………… Debt to Equity (Gross) ………………………………………... Debt to Equity (Net) 1…………………………………………. Total Debt to Total Capitalization (Book) ……………………. Total Debt to Total Capitalization (Market) ...………………... 1 31 Mar 2014 31 Dec 2013 YoY change (%) 160,029 69,884 39,667 159,079 69,301 41,639 1% 1% -5% 1.91 2.23 12.92 1.76 1.60 0.64 1.90 2.83 12.54 1.66 1.49 0.62 0.24 0.24 Net debt is calculated by subtracting cash, cash equivalents and short term investments from total debt. Globe‟s balance sheet and cash flows remain strong with ample liquidity and gearing comfortably within bank covenants albeit higher year-on-year with the additional debt raised as a result of Globe‟s transformation and modernization program. Globe Group‟s consolidated assets as of 31 March 2014 amounted to P160,029 million compared to P159,079 million as of end 2013. Consolidated cash, cash equivalents and short term investments (including investments in assets available for sale and held to maturity investments) was at P6,503 million at the end of first quarter this year compared to P7,421 million as of endDecember 2013. The Company‟s gearing levels have been increasingly optimized over the past few years with the raised dividend payouts and higher proportion of debt to total capitalization. Globe ended the first three months of the year with gross debt to equity ratio on a consolidated basis at 1.76:1 and is well within the 2:1 debt to equity limit dictated by Globe‟s debt covenants. Meanwhile net debt to equity ratio was at 1.60:1 as of end-March 2014 and 1.49:1 as of end December 2013. The financial tests under Globe‟s loan agreements include compliance with the following ratios: Total debt to equity not exceeding 2:1; Total debt to EBITDA not exceeding 3:1; Debt service coverage 1 exceeding 1.3 times; and Secured debt ratio 2 not exceeding 0.2 times. As of 31 March 2014, Globe is well within the ratios prescribed under its loan agreements. 1 Debt service coverage ratio is defined as the ratio of EBITDA to required debt service, where debt service includes subordinated debt but excludes shareholder loans. 2 Secured debt ratio is defined as the ratio of the total amount for the period of all present consolidated obligations for payment, whether actual or contingent which are secured by Permitted Security Interest as defined in the loan agreement to the total amount of consolidated debt. Globe has no secured debt as of 31 March 2014. SEC Form 17Q – 1Q 2014 37 Consolidated Net Cash Flows Globe Group (PhpMn) 31 Mar 2014 31 Mar 2013 YoY change (%) Net Cash from Operating Activities…………………………….. Net Cash from Investing Activities……………………………... 8,546 (4,288) 9,153 (6,637) -7% -35% Net Cash from Financing Activities…………………………….. (5,223) (2,582) 102% Net cash flows provided by operating activities as of end-March this year stood at P8,546 million, down by 7% year on year. Meanwhile, net cash used in investing activities amounting to P4,288 million was lower by 35%. Consolidated cash capital expenditures as of end of first quarter this year amounted to P =4,688 million, down by 32% from last year‟s P =6,917 million. Globe Group (PhpMn) Capital Expenditures (Cash) …………………………………….. Increase (Decrease) in Liabilities related to Acquisition of PPE & capitalized Asset Retirement Obligations……………………... Total Capital Expenditures1 …………………………………… Total Capital Expenditures / Service Revenues(%)...…………… 31 Mar 2014 4,688 31 Mar 2013 6,917 YoY change (%) 1,188 974 22% 5,876 7,891 -26% 25% 37% -32% 1 Consolidated capital expenditures include property and equipment, intangibles and capitalized borrowing costs acquired as of report date regardless of whether payment has been made or not. Consolidated net cash from financing activities increased by 102% year on year, driven by higher repayments of borrowings, dividends and interest payments. Consolidated total debt, likewise, slightly increased by 1% from P =69,301 million in year-end 2013 to P =69,884 million this period. 44% of US$ consolidated loans have been effectively converted to PHP via US$165Mn in currency hedges. After swaps, effectively 13% of total debt are denominated in US$ as of endMarch 2014. SEC Form 17Q – 1Q 2014 38 Below is the schedule of debt maturities for Globe for the years stated below based on total outstanding debt as of 31 March 2014: Year Due 2014………….…………………………………………………………………………... 2015.……………………………………………………………………………………... 2016……………………………………………………………………………………… 2017 through 2023 ……………………………………………………………………… Total Principal * (US$ Mn) 171 137 169 1,091 1,568 * Principal amount before debt issuance costs. On March 6, 2013, Globe Telecom signed a USD 75 million 3-year term loan with floating interest rate with Bank of Tokyo - Mitsubishi UFJ, Ltd., Singapore Branch as lender. The purpose of the loan is to fund Globe Telecom‟s capital expenditures. On March 22, 2013, Globe Telecom signed a USD 120 million 7-year term loan with floating interest rate with Metrobank as lender to finance Globe Telecom‟s capital expenditures. On July 17, 2013, the Globe Group issued P =7,000.00 million fixed rate bond. The amount comprises P =4,000.00 million and P =3,000.00 million bonds due in 2020 and 2023, with interest rate of 4.8875% and 5.2792%, respectively. The net proceeds of the issue shall be used to partially finance the Globe Group‟s capital expenditure requirements in 2013. On July 29, 2013, Globe Telecom signed a USD 40 million 3-year term loan with floating interest rate with Mizuho Bank Ltd. as lender to prepay and refinance certain debts. On December 4, 2013, Globe Telecom signed a P =7,000.00 million 7-year term loan credit facility with fixed interest rate with Land Bank of the Philippines as lender. The proceeds of the loan shall be used to partially finance Globe Telecom‟s general financing and corporate requirements for capital expenditures. On April 8, 2014, further to the approval of BOD dated February 10, 2014 on the amendment of Articles of Incorporation to reclassify unissued common and voting preferred shares into nonvoting preferred shares, the BOD approved the issuance, offer and listing of up to 20 million non-voting preferred shares, with an issue volume of P =10.00 Billion. The non-voting preferred shares shall be redeemable, non-convertible, non-voting, cumulative and may be issued in series. The key features of the Non-Voting Preferred Shares include: Dividends – To be determined by the Board of Directors at the time of issue Liquidation Preference - The Non-Voting Preferred Shares shall rank ahead of the Common Shares and equally with the Voting Preferred Shares. Redemption - The Non-Voting Preferred Shares shall be redeemable at the Corporation‟s option at such times and price(s) as may be determined by the Board of Directors at the time of issue, which price may not be less than the par value thereof plus accrued dividends. Pre-emptive Rights - The Non-Voting Preferred Shares shall not have any pre-emptive rights over any sale or issuance of any share in the Corporation‟s capital stock. SEC Form 17Q – 1Q 2014 39 Stockholders‟ equity as of end-March 2014 was down by 5% from P41,639 million to P39,667 million. Globe‟s capital stock consists of the following: Preferred Shares Preferred stock at a par value of P5 per share of which 158 million shares are outstanding out of a total authorized of 250 million shares. Preferred stock has the following features: a. Issued at P5 par; b. Dividend rate to be determined by the BOD at the time of Issue; c. One preferred share is convertible to one common share starting at the end of the 10 th year of the issue date at a price to be determined by the Globe Telecom‟s BOD at the time of issue which shall not be less than the market price of the common share less the par value of the preferred share; d. Call option – Exercisable any time by Globe Telecom starting at the end of the 5th year from issue date at a price to be determined by the BOD at the time of the issue; e. Eligibility of Investors – Only Filipino citizens or corporations or partnerships wherein 60% of the voting stock of voting power is owned by Filipino; f. With voting rights; g. Cumulative and non-participating; h. Preference as to dividends and in the event of liquidation; and i. No preemptive right to any share issue of Globe Telecom, and subject to yield protection in case of change in tax laws. The dividends for preferred shares are declared upon the sole discretion of the Globe Telecom‟s BOD. To date, none of the preferred shares have been converted to common shares. Common Shares Common shares at par value of P50 per share of which 132 million are issued and outstanding out of a total authorized of 180 million shares. Cash Dividends The dividend policy of Globe Telecom as approved by the Board of Directors is to declare cash dividends to its common stockholders on a regular basis as may be determined by the Board. The dividend payout rate starting 2006 is approximately 75% of prior year‟s net income payable semiannually in March and September of each year. This is reviewed annually, taking into account Globe Telecom‟s operating results, cash flows, debt covenants, capital expenditure levels and liquidity. On November 6, 2009, the Board of Directors amended the dividend payment rate from 75% to a range of 75% - 90% of prior year‟s net income. On November 8, 2011, the Board of Directors amended the Company‟s dividend policy to be based on core instead of reported net income. Pay-out range remains at 75% to 90%. This is to ensure that dividends will remain sustainable and yields competitive despite the expected nearterm decline in net income that would result from the accelerated depreciation charges related to assets that will be decommissioned as part of the Company‟s network and IT transformation SEC Form 17Q – 1Q 2014 40 programs. As currently defined, core net income excludes all foreign exchange, mark-to-market gains and losses, as well as non-recurring items. On 10 February 2014, the Board of Directors approved the declaration of the 1st semi-annual cash dividend of P37.50 per common share, payable to shareholders on record as of 26 February 2014. Total dividends of about P4.97 billion were paid on 20 March 2014. Consolidated Return on Average Equity (ROE) registered at 29% as of end-March 2014, compared to 6% in the same period in 2013 using net income and based on average equity balances for the year ended. Using annualized core net income excluding the effects of accelerated depreciation on net income, return on average equity for the first quarter this year was at 33% compared to 28% of 2013. Accordingly, consolidated basic earnings per common share were P22.15 and P4.88, while consolidated diluted earnings per common share were P22.13 and P4.88 as of end-March 2014 and 2013, respectively. SEC Form 17Q – 1Q 2014 41 FINANCIAL RISK MANAGEMENT FOREIGN EXCHANGE EXPOSURE Foreign exchange risks are managed such that USD inflows from operations (transaction exposures) are balanced or offset by the net USD liability position of the company (translation exposures). Globe Group‟s objective is to maintain a position which results in, as close as possible, a neutral effect to the P&L relative to movements in the foreign exchange market. Transaction exposures Globe has natural net US$ inflows arising from its operations. Consolidated foreign currencylinked revenues1 was at 17% of total gross service revenues for the periods ended 31 March 2014 and 2013. In contrast, Globe‟s foreign-currency linked expenses were at 9% and 11% of total operating expenses for the same periods ended, respectively. The US$ flows are as follows: US$ and US$ Linked Revenues US$ Operating Expenses US$ Net Interest Expense March 2014 P3.84 billion P0.93 billion P0.06 billion Due to these net US$ inflows, an appreciation of the Peso has a negative impact on Globe‟s Peso EBITDA. Globe occasionally enters into forward contracts to hedge against a peso appreciation. A total of US$4.5 million of contracts remain outstanding as of end-March 2014. The mark-tomarket of the outstanding forwards stood at a gain of P1.4 million as of end-March 2014. There were no realized gains or losses from forward contracts for the 1st quarter of 2014. 1 Includes the following revenues: (1) billed in foreign currency and settled in foreign currency, and (2) billed in Pesos at rates linked to a foreign currency tariff and settled in Pesos SEC Form 17Q – 1Q 2014 42 Translation Exposures Globe also has US$ assets and liabilities which are revalued at market rates every period. These are as follows: US$ Assets US$ Liabilities Net US$ Liability Position March 2014 US$189 million US$576 million US$387 million For accounting purposes, the foreign currency assets and liabilities are revalued at the exchange rate at the end of each reporting period. Given the net US$ liability position, a depreciation of the peso results in a revaluation or forex loss in our P&L. As of March 2014, the Philippine Peso stood at P44.809 to the US dollar, a weakening versus the 2013 year-end rate of P44.398. Due to the weakening peso, the Globe Group charged a total of P73 million in net foreign exchange losses to current operations for the first quarter of 2014. In April 2013, Globe entered into cross currency swaps amounting to US$125 million in April 2013 and US$40 million in February 2014 to hedge the FX and interest rate risk on some of its USD loans. The MTM of the swap contracts stood at a gain of P595 million as of end-March 2014. Globe also entered into a short-term US$30 million swap contract (sell USD spot, buy USD forward), to manage its USD and PHP cash flow requirements. INTEREST RATE EXPOSURE Interest rate exposures are managed via targeted levels of fixed versus floating rate debt that are meant to achieve a balance between cost and volatility. Globe‟s policy is to maintain between 4488% of its peso debt in fixed rate, and between 31-62% of its US$ debt in fixed rate. As of end-March 2014, Globe has a total of US$26 million in US$ interest swaps, P3.8 billion in PHP interest rate swaps and $165 million in cross currency swaps that were entered into contracts to achieve these targets. The US$ and Peso swaps fixed some of the Company‟s outstanding floating rate debts with quarterly or semi-annual payment intervals up to April 2020. As of end-March 2014, 66% (excluding short-term debt) of peso debt is fixed, while 59% of USD debt is fixed after swaps. The MTM of the interest swap contracts (not including the currency swap contracts) stood at a loss of P88 million as of end-March 2014. SEC Form 17Q – 1Q 2014 43 CREDIT EXPOSURES FROM FINANCIAL INSTRUMENTS Outstanding credit exposures from financial instruments are monitored daily and allowable exposures are reviewed quarterly. For investments, the Globe Group does not have investments in foreign securities (bonds, collateralized debt obligations (CDO), collateralized mortgage obligations (CMO), or any instruments linked to the mortgage market in the US). Globe‟s excess cash is invested in short term bank and SDA deposits. The Globe Group also does not have any investments or hedging transactions with investment banks. Derivative transactions as of the end of the period are with large foreign and local banks. Furthermore, the Globe Group does not have instruments in its portfolio which became inactive in the market nor does the company have any structured notes which require use of judgment for valuation purposes. VALUATION OF DERIVATIVE TRANSACTIONS The company uses valuation techniques that are commonly used by market participants and that have been demonstrated to provide reliable estimates of prices obtained in actual market transactions. The company uses readily observable market yield curves to discount future receipts and payments on the transactions. The net present value of receipts and payments are translated into Peso using the foreign exchange rate at time of valuation to arrive at the mark to market value. For derivative instruments with optionality, the company relies on valuation reports of its counterparty banks, which are the company‟s best estimates of the close-out value of the transactions. Gains (losses) on derivative instruments represent the net mark-to-market (MTM) gains (losses) on derivative instruments. As of 31 March 2014, the MTM value of the derivatives of the Globe Group amounted to a gain of P520 million while net gain on derivative instruments arising from changes in MTM reflected in the consolidated income statements amounted to P61 million. To measure riskiness, the Company provides a sensitivity analysis of its profit and loss from financial instruments resulting from movements in foreign exchange and interest rates. The interest rate sensitivity estimates the changes to the following P&L items, given an indicated movement in interest rates: (1) interest income, (2) interest expense, (3) mark-to-market of derivative instruments. The foreign exchange sensitivity estimates the P&L impact of a change in the USD/PHP rate as it specifically pertains to the revaluation of the net unhedged liability position of the company, and foreign exchange derivatives. SEC Form 17Q – 1Q 2014 44 LEGAL, REGULATORY AND CORPORATE DEVELOPMENTS A. On 23 July 2009, the NTC issued NTC Memorandum Circular (MC) No. 05-07-2009 (Guidelines on Unit of Billing of Mobile Voice Service). The MC provides that the maximum unit of billing for the cellular mobile telephone service (CMTS) whether postpaid or prepaid shall be six (6) seconds per pulse. The rate for the first two (2) pulses, or equivalent if lower period per pulse is used, may be higher than the succeeding pulses to recover the cost of the call set-up. Subscribers may still opt to be billed on a one (1) minute per pulse basis or to subscribe to unlimited service offerings or any service offerings if they actively and knowingly enroll in the scheme. In compliance with NTC MC 05-07-2009, Globe refreshed and offered to the general public its existing per-second rates that, it bears emphasizing, comply with the NTC Memorandum Circular. Globe made per second charging for Globe-Globe/TM-TM/Globe available for Globe Subscribers dialing prefix 232 (GLOBE) OR 803 plus 10-digit TM or Globe number for TM subscribers. The NTC, however, contends that Globe‟s offering does not comply with the circular and with the NTC‟s Order of 7 December 2009 which imposed a three-tiered rate structure with a mandated flag-down of P3.00, a rate of P0.4375 for the 13th to the 160th second of the first minute and P0.65 for every 6-second pulse thereafter. On 9 December 2009, the NTC issued a Cease and Desist Order requiring the carriers to refrain from charging under the previous billing system or regime and refund consumers. Globe maintains that the Order of the NTC of 7 December 2009 and the Cease and Desist Order are void as being without basis in fact and law and in violation of Globe‟s rights to due process. Globe, Smart, Sun and CURE all filed petitions before the Court of Appeals seeking the nullification of the questioned orders of the NTC. On 18 February 2010, the Court of Appeals issued a Temporary Restraining Order preventing the NTC from enforcing the disputed Order. On 25 May 2010, the CA issued a writ of preliminary injunction directing the NTC to cease and desist from enforcing their assailed Order/s. On 28 December 2010, the CA rendered a Decision declaring the questioned decisions invalid for being violative of the Petitioners‟ right to due process, among others. The Petitioners and the NTC filed their respective Motions for Partial Reconsideration. The motions were DENIED by the CA in an Order dated 19 January 2012. Due to lack of material time, the NTC and the Petitioners seasonably filed their respective Motions for Extension of Time to File Petition for Review with the Supreme Court. The Movants are expected to file their respective petitions within the month of March 2012. Globe believes that its legal position is strong and that its offering is compliant with the NTC‟s Memorandum Circular 05-07-2009, and therefore believes that it would not be obligated to make a refund to its subscribers. If, however, Globe would be held as not being in compliance with the circular, Globe may be contingently liable to refund to any complaining subscribers any charges it may have collected in excess of what it could have charged under the NTC‟s disputed Order of 7 December 2009, if indeed it is proven by any complaining party that Globe charged more with its per second scheme than it could have under the NTC‟s 6-second pulse billing scheme stated in the disputed Order. Management has no estimate of what amount this could be at this time. B. On 22 May 2006, Innove received a copy of the Complaint of Subic Telecom Company (“Subictel”), Inc., a subsidiary of PLDT, seeking an injunction to stop the Subic Bay SEC Form 17Q – 1Q 2014 45 Metropolitan Authority and Innove from taking any actions to implement the Certificate of Public Convenience and Necessity granted by SBMA to Innove. Subictel claimed that the grant of a CPCN allowing Innove to offer certain telecommunications services within the Subic Bay Freeport Zone would violate the Joint Venture Agreement (“JVA”) between PLDT and SBMA. The Supreme Court ordered the reinstatement of the case and has forwarded it to the NTC-Olongapo for trial. C. PLDT and its affiliate, Bonifacio Communications Corporation (BCC) and Innove and Globe are in litigation over the right of Innove to render services and build telecommunications infrastructure in the Bonifacio Global City. In the case filed by Innove before the NTC against BCC, PLDT and the Fort Bonifacio Development Corporation (FBDC), the NTC has issued a Cease and Desist Order preventing BCC from performing further acts to interfere with Innove‟s installations in the Bonifacio Global City. In the case filed by PLDT against the NTC in Branch 96 of the Regional Trial Court (RTC) of Quezon City, where PLDT sought to obtain an injunction to prevent the NTC from hearing the case filed by Innove, the RTC denied the prayer for a preliminary injunction and the case has been set for further hearings. PLDT has filed a Motion for Reconsideration and Globe has intervened in this case. In a resolution dated 28 October 2008, the RTC QC denied BCC‟s motion for the issuance of a temporary restraining order (TRO). The case is still pending with the QC RTC. In the case filed by BCC against FBDC, Globe Telecom and Innove, Bonifacio Communications Corp. before the Regional Trial Court of Pasig, which case sought to enjoin Innove from making any further installations in the BGC and claimed damages from all the parties for the breach of the exclusivity of BCC in the area, the court did not issue a Temporary Restraining Order and has instead scheduled several hearings on the case. In a resolution dated 28 October 2008, the RTC QC denied BCC‟s motion for the issuance of a temporary restraining order (TRO). The case is still pending with the RTC Pasig. On 11 November 2008, Bonifacio Communications Corp. (BCC) filed a criminal complaint against the officers of Innove Communications Inc., the Fort Bonifacio Development Corporation (FBDC) and Innove contractor Avecs Corporation for malicious mischief and theft arising out of Innove‟s disconnection of BCC‟s duct at the Net Square buildings. The accused officers filed their counter-affidavits and are currently pending before the Prosecutor‟s Office of Pasig. The case is still pending resolution with the Office of the City Prosecutor. On 21 January 2011, BCC and PLDT filed with the Court of Appeals a Petition for Certiorari and Prohibition against NTC, et al. seeking to annul the Orders of the NTC dated 28 October 2008 directing BCC, PLDT and FBDC to comply with the provisions of NTC MC 05-05-02 and the CEASE AND DESIST from performing further acts that will prevent Innove from implementing and providing telecommunications services in the Fort Bonifacio Global City pursuant to the authorization granted by the NTC. BCC and PLDT anchor their petition on the grounds that: 1) the NTC has no jurisdiction over BCC it being a non telecommunications entity; 2) the NTC violated BCC and PLDT‟s right to due process; and 3) there was no urgency or emergency for the issuance of the cease and desist order. The case is pending with the court of appeals. SEC Form 17Q – 1Q 2014 46 On April 25, 2011, Innove Communications, filed its comment on the case filed by PLDT that seeks to ban all Globe services from the Bonifacio Global City before the CA‟s Tenth Division. In its comment, Globe argued that it is in the public‟s best interest that open access and free competition among telecom operators be allowed at the Bonifacio Global City. On August 16, 2011, the Ninth Division of the CA ruled that PLDT‟s case against Innove and the National Telecommunications Commission (NTC) lacked merit, and thus denied the petition and DISMISSED the case. PLDT and its co-petitioner, BCC file their motion for reconsideration. The same is still pending resolution. Other Developments In November 2004, Globe and seven other leading Asia Pacific mobile operators („JV partners‟) signed an agreement („JV agreement‟) to form Bridge Alliance. The joint venture company operates through a Singapore-incorporated company, Bridge Mobile Pte. Limited (BMPL) which serves as a commercial vehicle for the JV partners to build and establish a regional mobile infrastructure and common service platform to deliver different regional mobile services to their subscribers. The Bridge Alliance currently has a combined customer base of over 250 million subscribers among its partners in India, Thailand, Hong Kong, South Korea, Macau, Philippines, Malaysia, Singapore, Australia, Taiwan and Indonesia. Globe Group has a ten percent (10%) stake in BMPL. The other joint venture partners each with equal stake in the alliance include SK Telecom, Co. Ltd., Advanced Info Service Public Company Limited, Bharti Airtel Limited, Maxis Communications Berhad, Optus Mobile Pty. Limited, Singapore Telecom Mobile Pte, Ltd., Taiwan Mobile Co. Ltd., PT Telekomunikasi Selular and CSL Ltd. Under the JV Agreement, each partner shall contribute USD4.00 million based on an agreed schedule of contribution. Globe Telecom may be called upon to contribute on dates to be determined by the JV. As of December 31, 2013 and 2012, Globe Telecom has invested a total of USD2.20 million (₱111.28 million), in the joint venture In February 2013, Globe obtained approval from its Board of Directors to invest in a Philippine entity to be named as Taodharma, Inc. to explore growth opportunities in the mobile market. Bayantel Update On September 2013, Globe received a Resolution issued by Branch 158 of the Regional Trial Court in Pasig City. This is the court having jurisdiction over the debts of Bayan Telecommunications, Inc. (Bayantel) and its corporate rehabilitation proceedings. The Resolution granted the joint motion filed by Globe and Bayantel to amend current debt restructuring plan and implement a new Master Restructuring Agreement for all Bayantel‟s creditors. The Amendments principally involve a conversion of up to 69% of the debt into Bayantel shares comprising up to 56.6% of Bayantel‟s capital stock, on a fully diluted basis. Assuming that debt to equity conversion occur to their fullest extent, the Amendments will reduce Bayantel‟s outstanding principal debt by 69% from the equivalent of approximately US$423.3 to approximatedly US$131.3 million. The Amendments also facilitate the entry of Globe into Bayantel as a shareholder and are SEC Form 17Q – 1Q 2014 47 expected to assure Bayantel‟s successful rehabilitation. In addition to Globe, the debt to equity conversion of the new debt restructuring terms will apply to all Bayantel‟s creditors. On October 1, 2013, Globe acquired 38% interest in BTI following the conversion of its unsustainable debt (Tranche B) into 45 million common shares equity based on the confirmation of the Court dated August 27, 2013 on the Amended Rehabilitation Plan. Globe Telecom intends to further convert portion of Tranche A debt, which together with the converted Tranche B debt would represent more than 50% of BTI‟s outstanding shares upon certain regulatory approvals. Details on these transactions have been extensively discussed in the disclosures filed with the SEC and PSE and may be accessed from the PSE and Company websites. SEC Form 17Q – 1Q 2014 48 OTHER RELEVANT INFORMATION MAJOR STOCKHOLDERS The following are the major stockholders of Globe Telecom as of 31 March 2014: % of Common % of Preferred Stockholders Preferred Shares Common Shares Shares Ayala Corp. 40,328,090 30.4% SingTel 62,646,487 47.2% Asiacom 158,515,021 100% Public 29,702,051 22.4% Total 132,676,628 100% 158,515,021 100% Total % of Total 40,328,090 62,646,487 158,515,021 29,702,051 291,191,649 13.9% 21.5% 54.4% 10.2% 100% BOARD OF DIRECTORS (BOD) As of 31 March 2014, the members of the Board of Directors of the Globe Group are: Name Position Jaime Augusto Zobel de Ayala Chairman Gerardo C. Ablaza, Jr. Co-Vice Chairman Mark Chong Chin Kok Co-Vice Chairman Romeo L. Bernardo Director Ernest L. Cu Director, President and CEO Delfin L Lazaro Director Xavier P. Loinaz* Director Guillermo D. Luchangco* Director Manuel A. Pacis* Director Tay Soo Meng Director Fernando Zobel de Ayala Director * Independent Director Key Officers - Globe Name Ernest L. Cu Alberto M. de Larrazabal Henry Rhoel R. Aguda Vicente Froilan M. Castelo Marisalve Ciocson-Co Rebecca V. Eclipse Gil B. Genio Carmina J. Herbosa Renato M. Jiao Bernard P. Llamzon Solomon M. Hermosura Position President and Chief Executive Officer Chief Finance Officer Chief Information Officer and SVP, Information Systems Group General Legal Counsel and SVP, Corporate and Legal Services Group Compliance Officer and Assistant Corporate Secretary and VP, Legal Services Chief Customer Experience Officer and EVP, Office of Strategy Management Chief Operating Officer for Business and International Markets and Chief Strategy Officer Chief Audit Executive and SVP, Internal Controls Group Chief Human Resources Officer EVP, Consumer Sales Corporate Secretary Consultants Name Peter Bithos Chee Loo Fun Rodolfo A. Salalima Robert Tan SEC Form 17Q – 1Q 2014 Position Chief Operating Advisor Senior Adviser for Consumer Marketing Chief Legal Counsel and Senior Advisor Chief Technical Advisor 49 Pursuant to the requirement ofthe Securities Regulation Code, the registrant has duly caused tnis report to be signed on its behalfby the undersigned thereunto duly authorized. P^ct^nt PTT ORF TF.T .RCOM. INC. CARMELI PAULINE M. BRIONES Hp.ad - Financial Control ZABAL 12 May 2014 12 May 2014 ChiefFinancial Officer SEC Form 17Q-1Q 2014 50 ANNEX TO THE MD&A SECTION 1) Any events that will trigger direct or contingent financial obligation that is material to the company, including any default or acceleration of an obligation: Changes in Accounting Policies The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Globe Group‟s consolidated financial statements as of and for the year ended December 31, 2013, except for the adoption of the following new and amended standards effective as of January 1, 2014. The nature and impact of each new standard and amendments is described below: Amendments to PFRS 10, PFRS 12 and PAS 27, Investment Entities They provide an exception to the consolidation requirement for entities that meet the definition of an investment entity under PFRS 10. The exception to consolidation requires investment entities to account for subsidiaries at fair value through profit or loss. It is not expected that this amendment would be relevant to Globe Group since none of the entities in the Group would qualify to be an investment entity under PFRS 10. Amendments to PAS 36, Impairment of Assets - Recoverable Amount Disclosures for Non-Financial Assets These amendments remove the unintended consequences of PFRS 13, Fair Value Measurement, on the disclosures required under PAS 36. In addition, these amendments require disclosure of the recoverable amounts for the assets or cashgenerating units (CGUs) for which impairment loss has been recognized or reversed during the period. The amendments have no impact on the Globe Group‟s financial position or performance. Philippine Interpretation IFRIC 21, Levies IFRIC 21 clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached. The adoption of the standard has no impact to the Globe Group. Amendments to PAS 39, Financial Instruments: Recognition and Measurement Novation of Derivatives and Continuation of Hedge Accounting These amendments provide relief from discontinuing hedge accounting when novation of a derivative designated as a hedging instrument meets certain criteria. The Globe Group has not novated its derivatives during the current period. However, these amendments would be considered for future novations. Amendments to PAS 32, Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities SEC Form 17Q – 1Q 2014 51 The amendments clarify the meaning of “currently has a legally enforceable right to set-off” and the criteria for simultaneous settlement mechanisms of clearing houses to qualify for offsetting. The amendments affect presentation only and have no impact on the Globe Group‟s financial position or performance. 2) Description of material commitments and general purpose of such commitments. Material off-balance sheet transactions, arrangements, obligations and other relationships with unconsolidated entities or other persons created during the period: For details on material commitments and arrangements, see Notes 7 and 11 in the attached Notes to the Financial Statements. Globe Telecom and Innove, in their regular conduct of business, enter into transactions with their major stockholders, AC and STI, joint ventures and certain related parties. Globe Telecom also has investments in the following: Investment in BTI On October 1, 2013, Globe Telecom acquired 38% interest in BTI following the conversion of its unsustainable debt (Tranche B) into 45 million common shares based on the confirmation of the court dated August 27, 2013 of the Amended Rehabilitation Plan. Globe Telecom will further convert its share of the Tranche A debt upon certain regulatory approvals. Globe Telecom‟s acquisition of BTI is intended to increase its current data and DSL businesses using BTI‟s existing platform. As of March 31, 2014, the equity in BTI was recognized as investment in an associate carried at acquisition cost valued at nil. BTI remains in a capital deficiency after Tranche B conversion with a negative book value of common shares at P =47.45 per share. The accumulated unrecognized share in net loss and other comprehensive income as of March 31, 2014 amounted to P =488.68 million and P =31.88 million, respectively. As of March 31, 2014, the National Telecommunications Commission (NTC) approval for the change in control of BTI is still pending. Investment in Automatic Fare Collection System Inc. (AFCS) On January 30, 2014, following a competitive bidding process, the Department of Transportation and Communication (DOTC) awarded to AF consortium, composed of AC Infrastructure Holdings Corp., BPI Card Finance Corp., Globe Telecom, Inc., Meralco Financial Services, Inc., Metro Pacific Investments Corp., and Smart Communications, Inc. the rights to design, build and operate the P =1.72 billion automated fare collection system (AFCS). This is a public-private partnership project intended to upgrade and consolidate the fare collection systems of the three urban rail transit systems which presently serve Metro Manila. On February 10, 2014, AF Consortium incorporated a special purpose company, Automated Fare Collection Services, Inc., which will assume the rights and obligations of the concessionaire. These rights and obligations include the construction and establishment of systems, infrastructure including implementation, test, acceptance and maintenance plans, and operate the urban transit system for a period of 10 years. SEC Form 17Q – 1Q 2014 52 Globe Telecom‟s investment in the consortium amounts to P =300 million or 20% interest. Investment in FPSI On December 19, 2013, Kickstart entered into a Memorandum of Agreement with FPSI and FPSI‟s stockholders to subscribe for 5.07 million common shares of FPSI for a total subscription price of P =18.88 million to obtain 65% cumulative ownership. FPSI is engaged in acquiring, publishing rights to produce, publish, market and sell printed and electronic books and other electronic documents and content for international and domestic sales. On February 4, 2014, Kickstart entered into a subscription agreement with FPSI for the acquisition of 2.08 million common shares for a total subscription price of P =8.22 million which constitutes 40% ownership. The purchase price consideration had been allocated to the identifiable assets and liabilities of FPSI on the basis of its book values. As permitted by the revised PFRS 3, Kickstart will recognize any adjustment to those provisional values as an adjustment to goodwill upon determining the final fair values of identifiable assets and liabilities within 12 months from acquisition date. From the date of acquisition, FPSI has contributed P =0.11 million of revenue and a loss before income tax of P =1.10 million. Net cash outflow from the acquisition is as follows (in thousand pesos): Total cash paid on acquisition Cash and cash equivalents acquired from Flipside Net cash outflow on acquisition =3,580 P (198) =3,382 P 3) Any significant elements of income or loss that did not arise from the registrant's continuing operations: Not applicable. 4) Any seasonal aspects that had a material effect on the financial condition or results of operations: There are no seasonal aspects that have material effects in the financial statements. SEC Form 17Q – 1Q 2014 53 Globe Telecom, Inc. and Subsidiaries Interim Condensed Consolidated Financial Statements March 31, 2014 and 2013 GLOBE TELECOM, INC. AND SUBSIDIARIES INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION Notes ASSETS Current Assets Cash and cash equivalents Receivables Inventories and supplies Derivative assets Prepayments and other current assets 13 5 Assets classified as held for sale Noncurrent Assets Property and equipment Intangible assets and goodwill Investments in an associate and joint ventures Deferred income tax assets - net Derivative assets Other noncurrent assets 3 4 6 13 5 Total Assets LIABILITIES AND EQUITY Current Liabilities Accounts payable and accrued expenses Notes payable Provisions Derivative liabilities Income tax payable Unearned revenues Current portion of long-term debt 7 13 7 Liabilities directly associated with the assets classified as held for sale Noncurrent Liabilities Long-term debt - net of current portion Deferred income tax liabilities - net Derivative liabilities Other long-term liabilities - net of current portion Total Liabilities Equity Attributable to equity holders of the Parent Paid-up capital Cost of share-based payments Other reserves Retained earnings Noncontrolling interest Total Equity Total Liabilities and Equity 7 13 8 8 December 31 March 31 2013 2013 2014 (Unaudited) (Audited) (Unaudited) (In Thousand Pesos) P =6,503,207 14,166,010 3,437,406 18,556 10,716,456 34,841,635 – 34,841,635 P6,662,470 = 11,660,109 3,225,355 6,424 10,157,546 31,711,904 778,321 32,490,225 P7,420,735 = 15,200,923 3,544,887 1,834 9,462,823 35,631,202 – 35,631,202 111,493,335 4,453,616 199,852 2,005,244 669,950 6,365,518 125,187,515 P =160,029,150 100,096,684 5,587,227 208,238 726,021 – 7,464,767 114,082,937 =146,573,162 P 110,424,072 3,840,660 162,754 1,916,878 553,562 6,549,805 123,447,731 =159,078,933 P P =40,681,792 2,240,450 331,136 168,603 2,319,940 2,451,491 6,116,941 54,310,353 =29,573,630 P 2,045,900 307,433 261,575 2,270,765 2,454,721 10,269,612 47,183,636 =39,486,830 P 5,219,900 294,700 219,694 1,028,263 2,759,644 5,980,300 54,989,331 – 54,310,353 427,942 47,611,578 – 54,989,331 61,527,092 – – 52,108,352 974,351 4,104 58,100,749 – – 4,524,949 66,052,041 120,362,394 3,906,875 56,993,682 104,605,260 4,349,602 62,450,351 117,439,682 34,473,266 204,236 (699,168) 5,689,580 39,667,914 (1,158) 39,666,756 P =160,029,150 34,119,694 452,237 (479,886) 7,875,857 41,967,902 – 41,967,902 =146,573,162 P 34,402,396 261,144 (739,575) 7,715,286 41,639,251 – 41,639,251 =159,078,933 P See accompanying Notes to Interim Condensed Consolidated Financial Statements. GLOBE TELECOM, INC. AND SUBSIDIARIES INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three-Month Period Ended March 31 2013 2014 Notes (Unaudited) (Unaudited) (In Thousand Pesos) REVENUES Service revenues Nonservice revenues P =23,230,138 1,129,991 24,360,129 =21,368,505 P 1,102,188 22,470,693 5 163,705 24,981 – 119,694 308,380 179,990 12,340 10,794 93,739 296,863 9 9,880,974 8,406,376 3, 4 3, 4 512,268 3,555,211 2,867,478 2,057,295 833,683 628,723 26,936 20,362,568 3,061,824 4,345,021 2,707,425 2,195,423 496,171 689,414 – 21,901,654 4,305,941 865,902 1,464,892 (107,943) 1,356,949 1,229,751 (1,019,891) 209,860 2,948,992 656,042 64,832 11,485 (16,461) (19,449) 40,407 45,790 784 13,816 (13,737) 46,653 TOTAL COMPREHENSIVE INCOME P =2,989,399 =702,695 P Total comprehensive income (loss) attributable to: Equity holders of the Parent Noncontrolling interest P =2,990,052 (653) =702,695 P – P =2,989,399 =702,695 P INCOME Interest income Gains on disposals of property and equipment - net Equity in net income of joint ventures Other income - net COSTS AND EXPENSES General, selling and administrative Depreciation and amortization Incremental effect of network modernization Others Cost of sales Interconnect costs Impairment losses and others Financing costs Equity in net losses of joint ventures 9 9 INCOME BEFORE INCOME TAX PROVISION FOR (BENEFIT FROM) INCOME TAX Current Deferred NET INCOME OTHER COMPREHENSIVE INCOME (LOSS) Items to be reclassified to profit or loss in subsequent periods: Transactions on cash flow hedges - net Exchange differences arising from translations of foreign investments Changes in fair value of available-for-sale investment in equity securities Income tax effect (Forward) 8 -2Three-Month Period Ended March 31 2013 2014 Notes (Unaudited) (Unaudited) Earnings Per Share Basic Diluted Cash dividends declared per common share See accompanying Notes to Interim Condensed Consolidated Financial Statements. 12 P =22.15 P =22.13 8 P =37.50 P4.88 = =4.88 P =33.50 P GLOBE TELECOM, INC. AND SUBSIDIARIES INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY As of January 1, 2014 Total comprehensive income for the period Dividends on common stock Exercise of stock options Noncontrolling interest arising from a business combination As of March 31, 2014 For the Three-Month Period Ended March 31, 2014 (Unaudited) Attributable to Equity Holders of the Parent Additional Cost of NonCapital Paid-in Share-Based Other Retained controlling Notes Stock Capital Payments Reserves Earnings Total Interest Total (In Thousand Pesos) P =7,422,360 P =26,980,036 P =261,144 (P =739,575) P =7,715,286 P =41,639,251 P =– P =41,639,251 8 – – – 40,407 2,949,645 2,990,052 (653) 2,989,399 8 – – – – (4,975,351) (4,975,351) – (4,975,351) 4,046 66,824 (56,908) – – 13,962 – 13,962 6 – – P =7,426,406 P =27,046,860 Notes As of January 1, 2013 Total comprehensive income for the period Dividends on common stock Exercise of stock options As of March 31, 2013 (Forward) 8 8 – P =204,236 – – – (P =699,168) P =5,689,580 P =39,667,914 (505) (505) (P =1,158) P =39,666,756 For the Three-Month Period Ended March 31, 2013 (Unaudited) Additional Cost of Capital Paid-in Share-Based Other Retained Stock Capital Payments Reserves Earnings Total (In Thousand Pesos) =7,412,866 P P =26,683,110 =472,911 P (P =526,539) P =11,655,643 P =45,697,991 – – – 46,653 656,042 702,695 – – – – (4,435,828) (4,435,828) 602 23,116 (20,674) – – 3,044 =7,413,468 P P =26,706,226 =452,237 P (P =479,886) P =7,875,857 P =41,967,902 -2- Notes As of January 1, 2013 Total comprehensive income for the year Dividends on: Common stock Preferred stock Cost of share-based payments Exercise of stock options As of December 31, 2013 See accompanying Notes to Interim Condensed Consolidated Financial Statements. 8 8 Capital Stock For the Year Ended December 31, 2013 (Audited) Additional Cost of Paid-in Share-Based Other Retained Capital Payments Reserves Earnings =7,412,866 P – =26,683,110 P – (In Thousand Pesos) =472,911 (P P =526,539) – (213,036) – – – 9,494 =7,422,360 P – – – 296,926 =26,980,036 P – – 50,000 (261,767) =261,144 P – – – – (P =739,575) Total =11,655,643 = P P45,697,991 4,960,245 4,747,209 (8,876,764) (8,876,764) (23,838) (23,838) – 50,000 – 44,653 =7,715,286 = P P41,639,251 GLOBE TELECOM, INC. AND SUBSIDIARIES INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS Notes CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax Adjustments for: Depreciation and amortization Interest expense Interest income Foreign exchange losses - net Loss (gain) on derivative instruments - net Impairment losses on property and equipment and intangible assets Provisions for claims and assessments Equity in net losses (income) of joint ventures Gains on disposals of property and equipment - net Operating income before working capital changes Changes in operating assets and liabilities: Decrease (increase) in: Receivables Inventories and supplies Prepayments and other current assets Increase (decrease) in: Accounts payable and accrued expenses Unearned revenues Other long-term liabilities Net cash generated from operations Income taxes paid Net cash flows provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Additions to: Property and equipment Intangible assets Investments in an associate and joint ventures Decrease in other noncurrent assets Proceeds from sale of property and equipment Interest received Acquisition of subsidiary, net of cash acquired Net cash flows used in investing activities (Forward) Three-Month Period Ended March 31 2013 2014 (Unaudited) (Unaudited) (In Thousand Pesos) =4,305,941 P =865,902 P 3, 4 9 4,067,479 488,007 (163,705) 73,316 (59,512) 7,406,845 506,775 (179,990) 49,192 64,812 9 9 43,530 36,436 26,936 (24,981) 8,793,447 9,373 104,242 (10,794) (12,340) 8,804,017 875,377 107,482 (1,258,820) 431,840 (1,149,179) 2,087,497 398,365 (308,153) 110,840 8,718,538 (172,460) 8,546,078 (679,716) (48,182) (48,659) 9,397,618 (244,658) 9,152,960 (4,687,916) (26,727) (60,000) 438,348 26,792 24,646 (3,382) (4,288,239) (6,917,020) (11,834) 3 3, 15 4 – 241,523 14,434 36,083 – (6,636,814) -2- Notes CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings: Long-term Repayments of borrowings: Long-term Short-term Payments of dividends to stockholders: Common Preferred Exercise of stock options Interest paid Net cash flows used in financing activities Three Months Ended March 31 2013 2014 (Unaudited) (Unaudited) (In Thousand Pesos) 7 =4,000,000 P =3,052,875 P (597,500) (3,000,000) (415,057) (4,975,351) 13,962 (664,453) (5,223,342) (4,435,828) (33,145) 3,044 (753,511) (2,581,622) (965,503) (65,476) 47,975 (31,809) 7 – 8 NET DECREASE IN CASH AND CASH EQUIVALENTS NET FOREIGN EXCHANGE DIFFERENCE CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD CASH AND CASH EQUIVALENTS AT END OF THE PERIOD See accompanying Notes to Interim Condensed Consolidated Financial Statements. – 7,420,735 =6,503,207 P 6,759,755 =6,662,470 P GLOBE TELECOM, INC. AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Financial Statement Preparation The interim condensed consolidated financial statements of Globe Telecom, Inc. and Subsidiaries (the “Globe Group”) as of and for the quarter ended March 31, 2014 and 2013 were authorized for issue in accordance with a resolution of the Board of Directors (BOD) on May 12, 2014. Globe Telecom, Inc. (herein referred to as “Globe Telecom” or “Globe”) is a company incorporated and domiciled in the Philippines whose shares are publicly traded. The principal activities of Globe and its subsidiaries are described in Note 14. The accompanying interim condensed consolidated financial statements have been prepared in accordance with Philippine Accounting Standard (PAS) 34, Interim Financial Reporting. Accordingly, the interim condensed consolidated financial statements do not include all of the information required in the annual audited financial statements, and should be read in conjunction with the Globe Group‟s annual financial statements as at December 31, 2013. The preparation of the financial statements in compliance with Philippine Financial Reporting Standards (PFRS) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The estimates and assumptions used in the accompanying interim condensed consolidated financial statements are based upon management‟s evaluation of relevant facts and circumstances as of the date of the interim condensed consolidated financial statements. Actual results could differ from such estimates. The interim condensed consolidated financial statements include the accounts of Globe Telecom and its wholly owned subsidiaries, Innove Communications, Inc. (herein referred to as “Innove”), G-Xchange, Inc. (herein referred to as “GXI”), Entertainment Gateway Group Corp. (EGGC), GTI Business Holdings, Inc. (herein referred to as “GTI”) and its subsidiaries and Kickstart Ventures, Inc. (herein referred to as “Kickstart”) and its subsidiary, collectively referred to as “Globe Group”. Kickstart subsidiary was consolidated starting February 2014. GTI wholly-owned subsidiaries are: GTI Corporation (GTIC US), Globe Telecom HK Limited (GTHK) and Globetel European Limited (GTEU). GTEU wholly owned subsidiaries are UK Globetel Limited (UKGT), Globe Mobile‟ Italy S.r.l. (GMI) and Globetel Internacional European España, S.L. In February 2014, Kickstart acquired 40% equity interest in Flipside Publishing Services, Inc. (FPSI) which is classified as a subsidiary based on its assessment of relevant facts and circumstances. The interim condensed consolidated financial statements are presented in Philippine Peso (P =), the Globe‟s functional currency, and rounded to the nearest thousands except when otherwise indicated. -2- 2. Accounting Policies 2.1 Changes in Accounting Policies The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Globe Group‟s consolidated financial statements as of and for the year ended December 31, 2013, except for the adoption of the following new and amended standards effective as of January 1, 2014. The nature and impact of each new standard and amendment is described below: Amendments to PFRS 10, PFRS 12 and PAS 27, Investment Entities They provide an exception to the consolidation requirement for entities that meet the definition of an investment entity under PFRS 10. The exception to consolidation requires investment entities to account for subsidiaries at fair value through profit or loss. It is not expected that this amendment would be relevant to Globe Group since none of the entities in the Group would qualify to be an investment entity under PFRS 10. Amendments to PAS 36, Impairment of Assets - Recoverable Amount Disclosures for Non-Financial Assets These amendments remove the unintended consequences of PFRS 13, Fair Value Measurement, on the disclosures required under PAS 36. In addition, these amendments require disclosure of the recoverable amounts for the assets or cash-generating units (CGUs) for which impairment loss has been recognized or reversed during the period. The amendments have no impact on the Globe Group‟s financial position or performance. Philippine Interpretation IFRIC 21, Levies IFRIC 21 clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached. The adoption of the standard has no impact to the Globe Group. Amendments to PAS 39, Financial Instruments: Recognition and Measurement - Novation of Derivatives and Continuation of Hedge Accounting These amendments provide relief from discontinuing hedge accounting when novation of a derivative designated as a hedging instrument meets certain criteria. The Globe Group has not novated its derivatives during the current period. However, these amendments would be considered for future novations. Amendments to PAS 32, Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities The amendments clarify the meaning of “currently has a legally enforceable right to setoff” and the criteria for simultaneous settlement mechanisms of clearing houses to qualify for offsetting. The amendments have no impact on the Globe Group‟s financial position or performance. -3- 3. Property and Equipment The rollforward analysis of property and equipment follows: March 31, 2014 Buildings and Telecommunications Leasehold Equipment Improvements Cost At January 1 Additions Retirements/disposals Reclassifications/adjustments (Note 4) At March 31 Accumulated Depreciation and Amortization At January 1 Depreciation and amortization Affected by network modernization Others Retirements/disposals Reclassifications/adjustments At March 31 Impairment Losses At January 1 Additions (Note 9) Write-off/adjustments At March 31 Net Book Value at March 31 Investments in Office Transportation Cable Systems Equipment Equipment (Unaudited and In Thousand Pesos) Land Assets Under Construction Total = 199,195,469 P 1,454,778 (1,045,418) 1,364,212 200,969,041 = 34,805,499 P 70,928 – 558,722 35,435,149 = 18,979,908 P 28,376 – 26,818 19,035,102 =9,223,985 P 25,921 (13,068) 55,506 9,292,344 = 2,338,024 P 80,362 (66,694) (2,614) 2,349,078 = 1,600,413 P – – 3,374 1,603,787 =20,318,463 P 4,188,842 (271) (3,077,788) 21,429,246 = 286,461,761 P 5,849,207 (1,125,451) (1,071,770) 290,113,747 141,480,546 16,003,575 8,689,260 7,544,300 1,700,206 – – 175,417,887 367,383 2,467,878 (1,044,285) (20,738) 143,250,784 54 415,997 – 201 16,419,827 – 292,300 – 5 8,981,565 4,454 166,377 (13,039) 433 7,702,525 – 59,358 (65,153) – 1,694,411 – – – – – – – – – – 371,891 3,401,910 (1,122,477) (20,099) 178,049,112 243,822 – (92,032) 151,790 = 57,566,467 P – – – – = 19,015,322 P – – – – = 10,053,537 P 3,182 – – 3,182 =1,586,637 P – – – – = 654,667 P – – – – = 1,603,787 P 372,798 43,530 – 416,328 =21,012,918 P 619,802 43,530 (92,032) 571,300 ₱111,493,335 March 31, 2013 Cost At January 1 Additions Retirements/disposals Reclassifications/adjustments (Note 4) At March 31 Accumulated Depreciation and Amortization At January 1 Depreciation and amortization Affected by network modernization Others Retirements/disposals Reclassifications/adjustments At March 31 Impairment Losses At January 1 Additions (Note 9) At March 31 Net Book Value at March 31 Telecommunications Equipment Buildings and Leasehold Improvements =202,201,632 P 3,132,525 (2,297) 776,631 206,108,491 =28,852,761 P 153,829 – 124,730 29,131,320 =14,144,444 P 244,259 – 106,403 14,495,106 =7,951,568 P 76,422 (472) 980,774 9,008,292 143,047,869 14,551,973 6,485,043 2,530,333 3,503,976 (2,297) 14,492 149,094,373 25 328,716 – (1,262) 14,879,452 138,069 – 138,069 =56,876,049 P – – – =14,251,868 P Investments in Office Transportation Cable Systems Equipment Equipment (Unaudited and In Thousand Pesos) Land Assets Under Construction Total =2,311,840 P 95,181 (15,359) (460) 2,391,202 =1,573,994 P – – – 1,573,994 =17,596,471 P 4,177,296 – (4,350,776) 17,422,991 =274,632,710 P 7,879,512 (18,128) (2,362,698) 280,131,396 6,834,232 1,680,991 – – 172,600,108 (6,295) 231,260 – – 6,710,008 12,284 161,332 (472) (1,058) 7,006,318 – 57,407 (13,267) (181) 1,724,950 – – – – – – – – – – 2,536,347 4,282,691 (16,036) 11,991 179,415,101 – – – =7,785,098 P 3,182 – 3,182 =1,998,792 P – – – =666,252 P – – – =1,573,994 P 468,987 9,373 478,360 =16,944,631 P 610,238 9,373 619,611 =100,096,684 P Office Equipment Transportation Equipment Land Assets Under Construction December 31, 2013 Telecommunications Equipment Buildings and Leasehold Investments in Improvements Cable Systems Total (Audited and In Thousand Pesos) Cost At January 1 Additions Retirements/disposals Reclassifications/ adjustments (Note 4) At December 31 Accumulated Depreciation and Amortization At January 1 Depreciation and amortization Incremental effect of network modernization Others (Forward) =202,201,632 P 13,784,885 (22,281,856) =28,852,761 P 348,336 (3,649) =14,144,444 P 251,136 – =7,951,568 P 284,219 (32,931) =2,311,840 P 257,635 (243,245) =1,573,994 P – – P17,596,471 = 20,754,416 (1,015) =274,632,710 P 35,680,627 (22,562,696) 5,490,808 199,195,469 5,608,051 34,805,499 4,584,328 18,979,908 1,021,129 9,223,985 11,794 2,338,024 26,419 1,600,413 (18,031,409) 20,318,463 (1,288,880) 286,461,761 143,047,869 14,551,973 6,485,043 6,834,232 1,680,991 – – 172,600,108 7,747,607 12,938,614 23,880 1,436,398 1,259 1,394,939 56,978 833,998 – 247,540 – – – – 7,829,724 16,851,489 -4Telecommunications Equipment Buildings and Leasehold Investments in Improvements Cable Systems Office Equipment Transportation Equipment Land Assets Under Construction Total (Audited and In Thousand Pesos) Retirements/disposals Reclassifications/ adjustments At December 31 Impairment Losses At January 1 Additions (reversals) Write-off/adjustments At December 31 Net Book Value at December 31 (P =22,239,228) (P =3,386) =– P (P =32,139) (P =229,768) =– P =– P (P =22,504,521) (14,316) 141,480,546 (5,290) 16,003,575 808,019 8,689,260 (148,769) 7,544,300 1,443 1,700,206 – – – – 641,087 175,417,887 138,069 123,852 (18,099) 243,822 – – – – – – – – 3,182 – – 3,182 – – – – – – – – 468,987 (97,540) 1,351 372,798 =57,471,101 P =18,801,924 P =10,290,648 P =1,676,503 P =637,818 P =1,600,413 P =19,945,665 P 610,238 26,312 (16,748) 619,802 =110,424,072 P In the last quarter of 2011, Globe Group has announced to undertake a network and IT transformation program for an estimated investment of USD790.00 million over the next two to three years. External partners were engaged in 2011 to help manage the modernization effort. In the first quarter of 2012, the estimated useful life (EUL) of certain wireless and wireline telecommunications equipment were changed as a result of continuing upgrade and migration to a modernized network. The net effect of the change in EUL resulted in higher depreciation expense of P =371.89 million and P =2,536.35 million for the three-month period ended March 31, 2014 and 2013, respectively. Assets under construction include intangible components of a network system which are to be reclassified to depreciable intangible assets only when assets become available for use (see Note 4). The Globe Group uses its borrowed funds to finance the acquisition of property and equipment and bring it to its intended location and working condition. Borrowing costs incurred relating to these acquisitions were included in the cost of property and equipment using 4.66%, 2.29% and 2.83% capitalization rates for the three-month period ended March 31, 2014 and 2013 and for the year ended December 31, 2013, respectively. The Globe Group‟s total capitalized borrowing costs amounted to = P219.48 million, P =181.06 million and P =823.90 million for the three-month period ended March 31, 2014 and 2013, and for the year ended December 31, 2013, respectively. The Globe Group is currently recovering decommissioned network assets affected by the conversion to new upgraded equipment from its continuing network modernization project, including computer related assets, from its IT transformation project. The carrying value of the hardware infrastructure and information equipment held under finance lease (included under “Telecommunications equipment” and “Asset under construction”) as of March 31, 2014 and 2013, and December 31, 2013 amounted to =958.63 million, P P =738.09 million and P =753.85 million, respectively. 4. Intangible Assets and Goodwill In the first quarter of 2012, the EUL of certain wireless licenses were changed as a result of continuing upgrade and migration to a modernized network. The net effect of the change in EUL resulted to higher amortization expense of P =140.38 million and P =525.48 million for the three-month period ended March 31, 2014 and 2013, respectively. -5- The rollforward analysis of intangible assets and goodwill follows: March 31, 2014 Licenses and Application Software Cost At January 1 Additions Reclassifications/ adjustments (Note 3) At March 31 Accumulated Amortization At January 1 Amortization Affected by network modernization Others Reclassifications/adjustments At March 31 Net Book Value at March 31 Exclusive Total Customer Dealership Intangible Contracts Right Assets (Unaudited and In Thousand Pesos) Goodwill Total Intangible Assets and Goodwill = 13,681,879 P 26,727 = 28,381 P – = 67,552 P – = 13,777,812 P 26,727 = 327,125 P – = 14,104,937 P 26,727 834,562 14,543,168 – 28,381 29,544 97,096 864,106 14,668,645 – 327,125 864,106 14,995,770 10,232,761 28,381 3,135 10,264,277 – 10,264,277 140,377 149,535 (15,801) 10,506,872 = 4,036,296 P – – – 28,381 =– P – 3,766 – 6,901 = 90,195 P 140,377 153,301 (15,801) 10,542,154 = 4,126,491 P – – – – = 327,125 P 140,377 153,301 (15,801) 10,542,154 = 4,453,616 P Goodwill Total Intangible Assets and Goodwill March 31, 2013 Licenses and Application Software Cost At January 1 Additions Reclassifications/ adjustments (Note 3) At March 31 Accumulated Amortization At January 1 Amortization Affected by network modernization Others Reclassifications/adjustments At March 31 Net Book Value at March 31 Total Customer Intangible Contracts Assets (Unaudited and In Thousand Pesos) =11,260,680 P 11,834 =28,381 P – =11,289,061 P 11,834 =327,125 P – =11,616,186 P 11,834 2,371,335 13,643,849 – 28,381 2,371,335 13,672,230 – 327,125 2,371,335 13,999,355 7,796,686 25,542 7,822,228 – 7,822,228 525,477 62,330 2,093 8,386,586 =5,257,263 P – – – 25,542 =2,839 P 525,477 62,330 2,093 8,412,128 =5,260,102 P – – – – =327,125 P 525,477 62,330 2,093 8,412,128 =5,587,227 P December 31, 2013 Licenses and Application Software Cost At January 1 Additions Retirements/disposals Reclassifications/adjustments (Note 3) At December 31 (Forward) Exclusive Total Customer Dealership Intangible Contracts Right Assets (Audited and In Thousand Pesos) Goodwill Total Intangible Assets and Goodwill =11,260,680 P 30,486 (351,474) =28,381 P – – =– P 67,552 – =11,289,061 P 98,038 (351,474) =327,125 P – – =11,616,186 P 98,038 (351,474) 2,742,187 13,681,879 – 28,381 – 67,552 2,742,187 13,777,812 – 327,125 2,742,187 14,104,937 -6- Licenses and Application Software Accumulated Depreciation and Amortization At January 1 Amortization: Incremental effect of network modernization Others Retirements/disposals Reclassifications/adjustments (Note 3) At December 31 Net Book Value at December 31 Exclusive Total Customer Dealership Intangible Contracts Right Assets (Audited and In Thousand Pesos) Goodwill Total Intangible Assets and Goodwill =– P =7,822,228 P =25,542 P =– P 1,236,242 1,554,065 (351,474) – 2,839 – – 3,135 – 1,236,242 1,560,039 (351,474) – – – 1,236,242 1,560,039 (351,474) (2,758) 10,232,761 =3,449,118 P – 28,381 =– P – 3,135 =64,417 P (2,758) 10,264,277 =3,513,535 P – – =327,125 P (2,758) 10,264,277 =3,840,660 P =7,796,686 P =7,822,228 P Intangible assets pertain to (1) telecommunications equipment software licenses, corporate application software and licenses and other VAS software applications that are not integral to the hardware or equipment; (2) costs of the web application system developed by a third party for Kickstart; (3) intangible assets identified to exist during the acquisition of EGG Group for its existing customer contracts and (4) exclusive dealership right in Taodharma. 5. Loan Receivable from Bayan Telecommunications Inc. (BTI) For the three-month period ended March 31, 2014 and March 31, 2013, interest income related to loans receivable from BTI amounted to = P125.25 million and = P37.99 million, respectively. Principal remittances for the three-month period ended March 31, 2014 amounted to USD$4.37 million (P =197.21 million). As of March 31, 2014 and 2013, and December 31, 2013, loans receivable from BTI amounted to = P4.87 billion, = P5.05 billion and P =5.04 billion, respectively, comprising of principal and interest due until 2023, with quarterly interest payments and semi-annual principal payments. The current portion of the BTI loans is classified under “Prepayments and other current assets” and the noncurrent portion is classified under “Noncurrent assets” in the statements of financial position. 6. Investments Investment in BTI On October 1, 2013, Globe Telecom acquired 38% interest in BTI following the conversion of its unsustainable debt (Tranche B) into 45 million common shares based on the confirmation of the court dated August 27, 2013 of the Amended Rehabilitation Plan. Globe Telecom will further convert its share of the Tranche A debt upon certain regulatory approvals. Globe Telecom‟s acquisition of BTI is intended to increase its current data and DSL businesses using BTI‟s existing platform. As of March 31, 2014, the equity in BTI was recognized as investment in an associate carried at acquisition cost valued at nil. BTI remains in a capital deficiency after Tranche B conversion with a negative book value of common shares at P =47.45 per share. The accumulated unrecognized share in net loss and other comprehensive income as of March 31, 2014 amounted to = P488.68 million and = P31.88 million, respectively. -7- As of March 31, 2014, the National Telecommunications Commission (NTC) approval for the change in control of BTI is still pending. Investment in Automatic Fare Collection System Inc. (AFCS) On January 30, 2014, following a competitive bidding process, the Department of Transportation and Communication (DOTC) awarded to AF consortium, composed of AC Infrastructure Holdings Corp., BPI Card Finance Corp., Globe Telecom, Inc., Meralco Financial Services, Inc., Metro Pacific Investments Corp., and Smart Communications, Inc. the rights to design, build and operate the = P1.72 billion automated fare collection system (AFCS). This is a public-private partnership project intended to upgrade and consolidate the fare collection systems of the three urban rail transit systems which presently serve Metro Manila. On February 10, 2014, AF Consortium incorporated a special purpose company, Automated Fare Collection Services, Inc., which will assume the rights and obligations of the concessionaire. These rights and obligations include the construction and establishment of systems, infrastructure including implementation, test, acceptance and maintenance plans, and operate the urban transit system for a period of 10 years. Globe Telecom‟s investment in the consortium amounts to = P300 million or 20% interest. Investment in FPSI On December 19, 2013, Kickstart entered into a Memorandum of Agreement with FPSI and FPSI‟s stockholders to subscribe to 5.07 million common shares of FPSI for a total subscription price of = P18.88 million to obtain 65% cumulative ownership. FPSI is engaged in acquiring, publishing rights to produce, publish, market and sell printed and electronic books and other electronic documents and content for international and domestic sales. On February 4, 2014, Kickstart entered into a subscription agreement with FPSI for the acquisition of 2.08 million common shares for a total subscription price of = P8.22 million which constitutes 40% ownership. The purchase price consideration had been allocated to the identifiable assets and liabilities of FPSI on the basis of its book values. As permitted by the revised PFRS 3, Kickstart will recognize any adjustment to those provisional values as an adjustment to goodwill upon determining the final fair values of identifiable assets and liabilities within 12 months from acquisition date. From the date of acquisition, FPSI has contributed P =0.11 million of revenue and a loss before income tax of = P1.10 million. Net cash outflow from the acquisition is as follows (in thousand pesos): Total cash paid on acquisition Cash and cash equivalents acquired from Flipside Net cash outflow on acquisition =3,580 P (198) =3,382 P -8- 7. Notes Payable and Long-term Debt Notes payable consist of short-term unsecured US dollar and peso-denominated promissory notes from local banks for working capital requirements. As of March 31, 2014 and 2013, and December 31, 2013, notes payable amounting to = P2,240.45 million, P =2,045.90 million and = P5,219.90 million, respectively, bear interest ranging from 1.26% to 1.55%, 1.12% to 1.65% and 1.12% to 3.00%, respectively. Long-term debt consists of: December 31 March 31 2013 2013 2014 (Unaudited) (Audited) (Unaudited) (In Thousand Pesos) Term Loans: Peso Dollar Corporate notes Retail bonds Less current portion P =31,577,844 14,184,117 4,884,400 16,997,672 67,644,033 6,116,941 P =61,527,092 =38,035,050 P 8,605,548 5,821,284 9,916,082 62,377,964 10,269,612 =52,108,352 P =28,018,106 P 14,321,158 4,877,621 16,864,164 64,081,049 5,980,300 =58,100,749 P The maturities of long-term debt at nominal values as of March 31, 2014 follow (in thousand pesos): Due in: 2014 2015 2016 2017 2018 and thereafter =5,402,643 P 6,136,428 7,554,934 4,924,099 44,011,364 =68,029,468 P Unamortized debt issuance costs included in the above long-term debt as of March 31, 2014 and 2013, and December 31, 2013 amounted to = P385.44 million, P =321.39 million and = P402.34 million, respectively. The interest rates and maturities of the above loans are as follows: Term Loans: Peso Maturities Interest Rates 2014-2022 1.02% to 6.00% in 2014 0.99% to 6.00% in 2013 1.26% to 1.75% in 2014 1.27% to 1.80% in 2013 1.65% to 8.43% in 2014 and 2013 4.89% to 6.00% in 2014 4.89% to 6.00% in 2013 Dollar 2015-2022 Corporate notes 2014-2016 Retail bonds 2017-2023 -9- 7.1 Term Loans and Corporate Notes Globe Telecom‟s unsecured term loans and corporate notes, which consist of fixed and floating rate notes and dollar and peso-denominated term loans, bear interest at stipulated and prevailing market rates. On March 6, 2013, Globe Telecom signed a USD75 million 3-year term loan with floating interest rate with Bank of Tokyo - Mitsubishi UFJ, Ltd., Singapore Branch as lender. The purpose of the loan is to fund Globe Telecom‟s capital expenditures. On March 22, 2013, Globe Telecom signed a USD120 million 7-year term loan with floating interest rate with Metrobank as lender to finance Globe Telecom‟s capital expenditures. On July 29, 2013, Globe Telecom signed a USD40 million 3-year term loan with floating interest rate with Mizuho Bank Ltd. as lender to prepay and refinance certain debts. On December 4, 2013, Globe Telecom signed a P =7,000.00 million 7-year term loan credit facility with fixed interest rate with Land Bank of the Philippines as lender. The proceeds of the loan shall be used to partially finance Globe Telecom‟s general financing and corporate requirements for capital expenditures. The loan agreements with banks and other financial institutions provide for certain restrictions and requirements with respect to, among others, maintenance of financial ratios and percentage of ownership of specific shareholders, incurrence of additional longterm indebtedness or guarantees and creation of property encumbrances. As of March 31, 2014, the Globe Group is not in breach of any loan covenants. 7.2 Retail Bonds On June 1, 2012, Globe Group issued = P10,000.00 million fixed rate bonds. The amount comprises = P4,500.00 million and P =5,500.00 million fixed rate bonds due in 2017 and 2019, with interest rate of 5.75% and 6.00%, respectively. The net proceeds of the issue shall be used to partially finance Globe Group‟s capital expenditure requirements in 2012. The five-year and seven-year retail bonds may be redeemed in whole, but not in part, starting two years before maturity date and on the anniversary thereafter at a price equal to 101.00% and 100.50%, respectively, of the principal amount of the bonds and all accrued interest to the date of the redemption. On July 17, 2013, the Globe Group issued = P7,000.00 million fixed rate bond. The amount comprises = P4,000.00 million and P =3,000.00 million bonds due in 2020 and 2023, with interest rate of 4.8875% and 5.2792%, respectively. The net proceeds of the issue shall be used to partially finance the Globe Group‟s capital expenditure requirements in 2013. The seven-year and ten-year retail bonds may be redeemed in whole, but not in part only, starting two years for the seven-year bonds and three years for the ten-year bonds before the maturity date and on the anniversary thereafter at a price ranging from 101.0% to 100.5% and 102.0% to 100.5%, respectively, of the principal amount of the bonds and all accrued interest depending on the year of redemption. - 10 - The prepayment feature is assessed as clearly and closely related to the host debt instrument, and hence need not be separately accounted for at fair value through profit or loss. The Globe Group has to meet certain bond covenants including a maximum debt-to-equity ratio of 2 to 1. As of March 31, 2014, the Globe Group is not in breach of any bond covenants. 8. Equity and Other Comprehensive Income 8.1 Preferred Shares On February 10, 2014, the BOD approved the amendment of Articles of Incorporation (AOI) to reclassify 31 million of unissued common shares with par value of = P50 per share and 90 million of unissued voting preferred shares with par value of P =5 per share into a new class of 40 million non-voting preferred shares with par value of = P50 per share. As of May 12, 2014, Globe Telecom is still processing its application for the aforementioned amendment of AOI with the Securities and Exchange Commission (SEC). 8.2 Common Stock The rollforward of outstanding common shares follows: At beginning of year Exercise of stock options At end of period March 31, 2014 March 31, 2013 December 31, 2013 Shares Amount Shares Amount Shares Amount (In Thousand Pesos and Number of Shares) 132,596 P =6,629,785 132,406 =6,617,424 P 132,406 =6,620,291 P 80 132,676 4,076 P =6,633,861 11 132,417 3,469 =6,620,893 P 190 132,596 9,494 =6,629,785 P 8.3 Cash Dividends Information of Globe Group‟s cash dividends follows: Per Share Preferred stock dividends declared on: November 8, 2013 Common stock dividends declared on: February 5, 2013 August 6, 2013 February 10, 2014 Date Amount Record Payable (In Thousand Pesos, Except Per Share Figures) =0.15 P =23,838 P 33.50 33.50 37.50 4,435,828 4,440,936 4,975,351 November 22, 2013 December 8, 2013 February 19, 2013 August 22, 2013 February 26, 2014 March 12, 2013 September 22, 2013 March 20, 2014 The dividend policy of Globe Telecom as approved by the BOD is to declare cash dividends to its common stockholders on a regular basis as may be determined by the BOD. On November 8, 2011, the BOD approved the current dividend policy of Globe Telecom to distribute cash dividends at the rate of 75% to 90% of prior year‟s core net income. On August 6, 2013, the BOD further approved the change in distribution from semi-annual dividend payments to quarterly dividend distributions. However, on December 10, 2013, the BOD approved to defer the implementation of the quarterly dividend payout to the second semester of 2014. The dividend distribution is reviewed annually and subsequently each quarter of the year, taking into account Globe Telecom‟s operating results, cash flows, debt covenants, capital expenditure levels and liquidity. - 11 - 8.4 Retained Earnings Available for Dividend Declaration The total unrestricted retained earnings available for dividend declaration amounted to =3,256.86 million as of March 31, 2014. This amount excludes the undistributed net P earnings of consolidated subsidiaries, accumulated equity in net earnings of joint ventures accounted for under the equity method, unrealized gains recognized on asset and liability currency translations, unrealized gains on fair value adjustments and deferred income tax assets. The Globe Group is also subject to loan covenants that restrict its ability to pay dividends. 8.5 Other Comprehensive Income Other Reserves Cash flow hedges As of January 1, 2014 Fair value changes Transferred to profit or loss Exchange differences Income tax effect As of March 31, 2014 = 35,027 P 83,257 (18,425) – (19,449) = 80,410 P Cash flow hedges As of January 1, 2013 Fair value changes Transferred to profit or loss Exchange differences Income tax effect As of March 31, 2013 (P =121,200) (9,215) 55,005 – (13,737) (P =89,147) Cash flow hedges As of January 1, 2013 Fair value changes Transferred to profit or loss Remeasurement losses on defined benefit plan Income tax effect Exchange differences As of December 31, 2013 For the Three-Month Period Ended March 31, 2014 Exchange differences arising Available-forfrom translations Remeasurement sale financial of foreign losses on defined assets investments benefit plan (Unaudited and In Thousand Pesos) = 57,775 P (16,461) – – – = 41,314 P (P = 6,020) – – 11,485 – = 5,465 P (P = 826,357) – – – – (P = 826,357) For the Three-Month Period Ended March 31, 2013 Exchange differences arising Available-forfrom translations Remeasurement sale financial of foreign losses on defined assets investments benefit plan (Unaudited and In Thousand Pesos) =80,275 P 13,816 – – – =94,091 P (P =3,663) – – 784 – (P =2,879) (P =481,951) – – – – (P =481,951) For the Year Ended December 31, 2013 Exchange differences arising from translations Remeasurement AFS financial of foreign losses on defined assets investments benefit plan (Audited and In Thousand Pesos) Total (P = 739,575) 66,796 (18,425) 11,485 (19,449) (P = 699,168) Total (P =526,539) 4,601 55,005 784 (13,737) (P =479,886) Total (P =121,200) 406,194 (183,012) =80,275 P (22,500) – (P =3,663) – – (P =481,951) – – (P =526,539) 383,694 (183,012) – (66,955) – =35,027 P – – – =57,775 P – – (2,357) (P =6,020) (492,009) 147,603 – (P =826,357) (492,009) 80,648 (2,357) (P =739,575) - 12 - 9. Costs and Expenses 9.1 General, selling and administrative expenses consist of: Three-Month Period Ended 2013 2014 (Unaudited and In Thousand Pesos) Staff costs Professional and other contracted services Selling, advertising and promotions Utilities, supplies and other administrative expenses Repairs and maintenance Rent Courier, delivery and miscellaneous expenses Taxes and licenses Insurance and security services Others P =1,950,086 1,756,156 1,731,142 1,144,650 1,089,295 915,942 408,912 407,603 347,038 130,150 P =9,880,974 =1,666,028 P 1,102,517 1,296,996 1,001,275 966,281 839,856 466,441 589,688 335,331 141,963 =8,406,376 P The “Others” account includes various items that are individually immaterial. 9.2 Impairment losses and others consist of: Note Impairment loss on: Receivables Property and equipment Provisions for: Inventory obsolescence and market decline Other probable losses 3 Three-Month Period Ended 2013 2014 (Unaudited and In Thousand Pesos) P =660,231 43,530 =355,990 P 9,373 93,486 36,436 P =833,683 26,566 104,242 =496,171 P 9.3 Financing costs consist of: Three-Month Period Ended 2013 2014 (Unaudited and In Thousand Pesos) Interest expense* Foreign exchange loss - net Swap and other financing costs - net Loss on derivative instruments P =488,007 73,316 67,400 – P =628,723 *This account is net of capitalized expense and inclusive of amortization of debt issuance costs. =506,775 P 49,192 65,487 67,960 =689,414 P - 13 - Interest expense is incurred on the following: Three-Month Period Ended 2013 2014 (Unaudited and In Thousand Pesos) Long-term debt Accretion expense Amortization of debt issuance cost Pension cost Others P =399,002 44,871 26,908 17,226 – P =488,007 =425,075 P 44,666 23,230 10,742 3,062 =506,775 P 10. Contingencies The Globe Group is contingently liable for various claims arising in the ordinary conduct of business and certain tax assessments which are either pending decision by the courts or are being contested, the outcome of which are not presently determinable. In the opinion of management and legal counsel, the possibility of outflow of economic resources to settle the contingent liability is remote. 11. Agreements and Commitments Agreements and commitments with suppliers The Globe Group engaged the services of various suppliers for the upgrade of its wireless, data and telephony network. In partnership with an equipment and service provider and the appointment of a project and program manager, Globe Group is undertaking a transformation upgrade and overhaul of its business support systems, engaging a solution partner for this USD790.00 million modernization project. Deed of Assignment of Certificate of Public Convenience and Necessity by Wordwide Communication Inc. (WWCI) On July 5, 2013, the NTC approved the “Deed of Assignment” (DoA) dated February 13, 2013 executed by WWCI in favor of Globe Telecom. Through the DoA, WWCI assigned and transferred its entire interest including the operation of its Trunk Radio Network, the Certificate of Public Convenience and Necessity granted by the NTC and the pertinent permits necessary to operate the trunk radio to Globe Telecom. The total consideration under the said original DoA was = P30.00 million. On April 1, 2014, Globe Telecom and WWCI signed the Supplemental Agreement to the DoA for final consideration of = P150.00 million to be paid in tranches upon fulfillment of stated conditions. Conditions include reassignment and reallocation of Radio Station Licenses and issuance of associated Frequency Assignment Sheets in the name of Globe. Pending compliance on the conditions, payments will be recorded as advances classified under „Prepayments and other current assets‟ in the statements of financial position. - 14 - 12. Earnings Per Share Globe Group‟s earnings per share amounts were computed as follows: Three-Month Period Ended 2013 2014 (Unaudited and In Thousand Pesos and Number of Shares, Except Per Share Figures) Net income attributable to common shareholders for basic earnings per share (a) Add dividends on preferred shares Net income attributable to common shareholders for diluted earnings per share (b) Common shares outstanding, beginning Add exercised stock options Weighted average number of shares for basic earnings per share (c) Dilutive shares arising from: Convertible preferred shares Stock options Adjusted weighted average number of common shares for diluted earnings per share (d) Basic earnings per share (a/c) Diluted earnings per share (b/d) P =2,939,132 9,860 =646,706 P 9,336 P =2,948,992 =656,042 P 132,596 80 132,406 11 132,676 132,417 469 139 700 116 133,284 P =22.15 P =22.13 133,233 =4.88 P =4.88 P 13. Capital and Risk Management and Financial Instruments 13.1 General The Globe Group adopts an expanded corporate governance approach in managing its business risks. An Enterprise Risk Management Policy was developed to systematically view the risks and to provide a better understanding of the different risks that could threaten the achievement of the Globe Group‟s mission, vision, strategies, and goals, and to provide emphasis on how management and employees play a vital role in achieving the Globe Group‟s mission of transforming and enriching lives through communications. The policies are not intended to eliminate risk but to manage it in such a way that opportunities to create value for the stakeholders are achieved. Globe Group risk management takes place in the context of the normal business processes such as strategic planning, business planning, operational and support processes. The application of these policies is the responsibility of the BOD through the Chief Executive Officer. The Chief Financial Officer and concurrent Chief Risk Officer champions and oversees the entire risk management function. Risk owners have been identified for each risk and they are responsible for coordinating and continuously improving risk strategies, processes and measures on an enterprise-wide basis in accordance with established business objectives. The risks are managed through the delegation of management and financial authority and individual accountability as documented in employment contracts, consultancy contracts, - 15 - letters of authority, letters of appointment, performance planning and evaluation forms, key result areas, terms of reference and other policies that provide guidelines for managing specific risks arising from the Globe Group‟s business operations and environment. The Globe Group continues to monitor and manage its financial risk exposures according to its BOD approved policies. 13.2 Credit Risk Applications for postpaid service are subjected to standard credit evaluation and verification procedures. The Globe Group continuously reviews credit policies and processes and implements various credit actions, depending on assessed risks, to minimize credit exposure. Receivable balances of postpaid subscribers are being monitored on a regular basis and appropriate credit treatments are applied at various stages of delinquency. Likewise, net receivable balances from carriers of traffic are also being monitored and subjected to appropriate actions to manage credit risk. The maximum credit exposure relates to receivables net of any allowances provided. With respect to credit risk arising from other financial assets of the Globe Group, which comprise cash and cash equivalents, short-term investments, AFS financial investments, and certain derivative instruments, the Globe Group‟s exposure to credit risk arises from the default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments. The Globe Group‟s investments comprise short-term bank deposits and government securities. Credit risk from these investments is managed on a Globe Group basis. For its investments with banks, the Globe Group has a counterparty risk management policy which allocates investment limits based on counterparty credit rating and credit risk profile. The Globe Group makes a quarterly assessment of the credit standing of its investment counterparties, and allocates investment limits based on size, liquidity, profitability, and asset quality. For investments in government securities, these are denominated in local currency and are considered to be relatively risk-free. The usage of limits is regularly monitored. For its derivative counterparties, the Globe Group deals only with foreign counterparty banks with investment grade ratings and large local banks. Credit ratings of derivative counterparties are reviewed quarterly. Following are the Globe Group exposures with its investment counterparties for cash and cash equivalents: Local bank deposits Onshore foreign bank Special deposit account March 31 2013 2014 (Unaudited) (Unaudited) 42% 48% 36% 52% 22% - December 31 2013 (Audited) 30% 70% - The Globe Group has not executed any credit guarantees in favor of other parties. There is also minimal concentration of credit risk within the Globe Group. Credit exposures from subscribers and carrier partners continue to be managed closely for possible deterioration. When necessary, credit management measures are proactively implemented and identified collection risks are being provided for accordingly. Outstanding credit exposures from financial instruments are monitored daily and allowable exposures are reviewed quarterly. - 16 - The Globe Group‟s credit exposures and related allowances for impairment follow: March 31 December 31 2013 2013 2014 (Unaudited) (Restated) (Unaudited) (In Thousand Pesos) ₱11,873,264 ₱15,616,059 ₱15,662,472 2,497,735 1,503,841 1,096,929 912,581 2,271,068 1,888,515 15,283,580 19,390,968 18,647,916 Subscribers Traffic Settlements - net Dealers and others Less allowance for impairment Subscribers losses: Traffic settlements and others 4,231,421 250,485 4,481,906 ₱14,166,010 3,421,479 201,992 3,623,471 ₱11,660,109 3,970,421 219,624 4,190,045 ₱15,200,923 The tables below show the aging analysis of the Globe Group‟s receivables: March 31, 2014 Neither Past Past Due But Not Impaired Due Nor Impaired Impaired Less than 30 31 to 60 days 61 to 90 days days More than 90 days Financial Assets Total (Unaudited and In Thousand Pesos) Wireless receivables: Consumer Key corporate accounts ₱198,947 ₱1,017,790 ₱664,885 ₱403,094 ₱2,944,319 ₱1,531,495 ₱6,760,530 5,291 82,841 102,824 118,559 1,760,046 134,864 2,204,424 Other corporations and SME 46,414 180,456 105,383 118,142 706,214 262,521 1,419,130 250,652 1,281,087 873,092 639,795 5,410,578 1,928,880 10,384,084 Consumer 343,684 358,013 135,379 61,277 88,030 1,300,114 2,286,497 Key corporate accounts 124,256 293,989 292,518 254,255 1,305,585 329,554 2,600,157 Wireline receivables: Other corporations and SME Other trade receivables Traffic receivables: Foreign Local Other receivables Total 50,227 69,737 32,077 15,924 36,644 126,085 330,695 518,167 721,739 459,975 331,457 1,430,259 1,755,752 5,217,349 (964) 60,174 1,830 61,039 761,760 100,426 862,186 171,531 63,212 234,743 933,291 163,637 1,096,929 1,872,497 16,017 1,888,514 ₱3,937,223 ₱18,647,916 ₱3,502,537 ₱2,063,000 ₱1,333,067 ₱971,251 ₱6,840,838 - 17 - March 31, 2013 Neither Past Due Nor Impaired Past Due But Not Impaired Less than 30 days More than 90 61 to 90 days 31 to 60 days days (Unaudited and In Thousand Pesos) Impaired Financial Assets Total Wireless receivables: Consumer Key corporate accounts Other corporations and SME ₱615,498 (94,672) ₱597,889 151,507 ₱655,453 156,307 ₱399,753 152,096 ₱1,548,387 670,455 ₱1,264,574 147,961 ₱5,081,554 1,183,654 128,866 649,692 103,601 852,997 131,489 943,249 68,864 620,713 425,332 2,644,174 335,904 1,748,439 1,194,056 7,459,264 Wireline receivables: Consumer Key corporate accounts Other corporations and SME 257,048 161,403 243,222 159,343 120,326 260,471 55,933 268,068 52,282 866,689 1,369,109 262,721 2,097,920 1,978,695 48,901 467,352 - 41,088 443,653 32,742 25,839 406,636 - 12,372 336,373 - 16,105 935,076 - 160,338 1,792,168 - 304,643 4,381,258 32,742 2,224,277 86,539 2,310,816 899,716 ₱4,327,576 ₱1,329,392 ₱1,349,885 ₱957,086 ₱3,579,250 Other trade receivables Traffic receivables: Foreign Local Other receivables Total 161,321 2,385,598 25,598 112,137 186,919 2,497,735 12,865 912,581 ₱3,740,391 ₱15,283,580 December 31, 2013 Neither Past Due Nor Impaired Wireless receivables: Consumer Key corporate accounts Other corporations and SME Wireline receivables: Consumer Key corporate accounts Other corporations and SME Other trade receivables Traffic receivables: Foreign Local Other receivables Total Past Due But Not Impaired Less than 30 days More than 90 31 to 60 days 61 to 90 days days (Audited and In Thousand Pesos) Impaired Financial Assets Total ₱421,441 5,865 ₱830,032 54,851 ₱540,192 121,562 ₱297,678 133,771 ₱3,313,742 1,790,681 ₱1,501,094 170,412 ₱6,904,179 2,277,141 8,276 435,582 139,846 1,024,729 139,840 801,594 89,979 521,428 685,456 5,789,878 344,817 2,016,323 1,408,214 10,589,535 269,178 131,074 239,189 179,856 155,270 432,353 65,571 230,771 81,820 1,083,291 1,459,396 314,513 2,270,424 2,371,857 48,501 448,753 22 51,385 470,430 40,157 47,539 635,161 19,076 315,419 34,055 1,199,165 143,508 1,917,418 344,064 4,986,346 40,179 ₱6,989,044 161,362 31,074 192,436 14,736 ₱4,140,913 1,350,733 153,108 1,503,841 2,271,068 ₱19,390,968 1,189,372 122,033 1,311,405 2,256,331 ₱4,452,093 ₱1,535,316 ₱1,436,756 ₱836,847 Total allowance for impairment losses net of recoveries, amounting to ₱4,481.91 million, ₱3,623.47 million and ₱4,190.05 million includes allowance for impairment arising from collective assessment amounting to ₱990.80 million, ₱298.86 million and ₱986.10 million as of March 31, 2014 and 2013 and December 31, 2013, respectively. - 18 - The table below provides information regarding the credit risk exposure of the Globe Group by classifying assets according to the Globe Group‟s credit ratings of receivables. The Globe Group‟s credit rating is based on individual borrower characteristics and their relationship to credit event experiences. March 31, 2014 Neither Past Due Nor Impaired High Quality Medium Low Quality Quality (Unaudited and In Thousand Pesos) Wireless receivables: Consumer Key corporate accounts Other corporations and SME Wireline receivables: Consumer Key corporate accounts Other corporations and SME Total Total ₱94,385 2,663 24,734 121,782 ₱86,115 2,578 7,146 95,839 ₱18,447 50 14,534 33,031 ₱198,947 5,291 46,414 250,652 287,873 113,377 43,394 444,644 ₱566,426 55,807 10,723 6,486 73,016 ₱168,855 4 156 347 507 ₱33,538 343,684 124,256 50,227 518,167 ₱768,819 March 31, 2013 Neither Past Due Nor Impaired High Quality Medium Low Quality Quality (Unaudited and In Thousand Pesos) Wireless receivables: Consumer Key corporate accounts Other corporations and SME Wireline receivables: Consumer Key corporate accounts Other corporations and SME Total ₱370,346 (83,517) 70,303 357,132 ₱194,895 (10,122) 184,773 215,143 156,766 44,092 416,001 ₱773,133 41,904 4,630 4,479 51,013 ₱235,786 ₱50,257 (1,033) 58,563 107,787 Total ₱615,498 (94,672) 128,866 649,692 1 257,048 7 161,403 330 48,901 338 467,352 ₱108,125 ₱1,117,044 December 31, 2013 Neither Past Due Nor Impaired High Quality Medium Low Quality (Audited andQuality In Thousand Pesos) Wireless receivables: Consumer Key corporate accounts Other corporations and SME Wireline receivables: Consumer Key corporate accounts Other corporations and SME Total Total ₱169,064 2,976 5,617 177,657 ₱234,119 2,804 698 237,621 ₱18,257 84 1,962 20,303 ₱421,440 5,864 8,277 435,581 228,761 124,166 44,126 397,053 ₱574,710 40,413 6,331 4,179 50,923 ₱288,544 4 577 196 777 ₱21,080 269,178 131,074 48,501 448,753 ₱884,334 - 19 - High quality accounts are accounts considered to be high value and have consistently exhibited good paying habits. Medium quality accounts are active accounts with propensity of deteriorating to mid-range age buckets. These accounts do not flow through to permanent disconnection status as they generally respond to credit actions and update their payments accordingly. Low quality accounts are accounts which have probability of impairment based on historical trend. These accounts show propensity to default in payment despite regular follow-up actions and extended payment terms. Impairment losses are also provided for these accounts based on net flow rate. As a result of the migration to new billing systems, billing cycles were pushed back and bills were delivered to customers beyond the normal cycles. As a result, Globe Telecom extended payment due dates, resulting to a temporary increase in the level of receivables with a shift to non-current age buckets. Based on the results of collection efforts, Globe Telecom has assessed that customers' payment habits have not changed significantly and assessment on quality of accounts remain valid. Traffic receivables that are neither past due nor impaired are considered to be high quality given the reciprocal nature of the Globe Group‟s interconnect and roaming partner agreements with the carriers and the Globe Group‟s historical collection experience. Other receivables are considered high quality accounts as these are substantially from credit card companies and Globe dealers. The following is a reconciliation of the changes in the allowance for impairment losses: March 31, 2014 Consumer At beginning of the year Charges for the period Reversals/write offs/adjustments At end of year Subscribers Key Other Traffic corporate Corporations Settlements accounts and SME and Others (Unaudited In Thousand Pesos) Non-trade Total ₱2,742,022 517,736 ₱540,525 41,779 ₱687,874 61,875 ₱219,624 31,208 ₱58,414 7,632 ₱4,248,459 660,231 (308,979) ₱2,950,780 (1,224) ₱581,080 (50,188) ₱699,561 (346) ₱250,485 1,379 ₱67,425 (359,359) ₱4,549,331 March 31, 2013 Consumer At beginning of the year Charges for the year Reversals/write offs/adjustments At end of period Subscribers Key Other Traffic corporate Corporations Settlements accounts and SME and Others (Unaudited and In Thousand Pesos) Non-trade Total ₱2,453,266 299,993 ₱320,404 27,091 ₱543,344 41,200 ₱221,058 (19,302) ₱124,082 7,011 ₱3,662,154 355,993 (194,632) ₱2,558,627 (53,865) ₱293,630 (15,322) ₱569,222 236 ₱201,992 (662) ₱130,431 (264,245) ₱3,753,902 - 20 - December 31, 2013 Consumer At beginning of the year Charges for the period Reversals/write offs/adjustments At end of year Subscribers Key Other Traffic corporate Corporations Settlements accounts and SME and Others (Audited and In Thousand Pesos) ₱2,453,266 1,665,992 ₱320,404 225,907 ₱543,344 203,343 ₱221,058 14,254 (1,377,236) ₱2,742,022 (5,786) ₱540,525 (58,813) ₱687,874 (15,688) ₱219,624 Non-trade ₱124,082 (62,974) Total ₱3,662,154 2,046,523 (2,694) (1,460,218) ₱58,414 ₱4,248,459 13.3 Categories of Financial Assets and Financial Liabilities The table below presents the carrying value of Globe Group‟s financial instruments by category (in thousand pesos): March 31 Financial assets: Financial assets at FVPL: Derivative assets designated as cash flow hedges Derivative assets not designated as hedges AFS investments in equity securities - net Loans and receivables - net* Financial liabilities: Financial liabilities at FVPL: Derivative liabilities designated as cash flow hedges Derivative liabilities not designated as hedges Financial liabilities at amortized cost** December 31 2013 (Audited) 2014 (Unaudited) 2013 (Unaudited) P =671,357 17,149 260,977 25,754,588 P =26,704,071 P3,973 = 2,451 146,496 28,920,306 =29,073,226 P =553,562 P 1,834 222,712 29,166,805 =29,944,913 P P =75,960 92,643 107,967,986 P =108,136,589 P28,892 = 236,787 93,366,505 =93,632,184 P P65,658 = 154,036 107,027,805 =107,247,499 P * This consists of cash and cash equivalents, and long-term investments, receivables, other nontrade receivables and loans receivables. **This consists of accounts payable, accrued expenses, accrued project cost, traffic settlement-net, dividends payable, notes payable, long-term debt (including current portion) and other long-term liabilities (including current portion). As of March 31, 2014 and 2013, and December 31, 2013, the Globe Group has no investments in foreign securities. - 21 - 13.4 Fair Values of Financial Assets and Financial Liabilities The table below presents a comparison of the carrying amounts and estimated fair values of all the Globe Group‟s financial instruments as of: December 31 March 31 2013 2013 2014 (Unaudited) (Audited) (Unaudited) Fair Value Carrying Value Fair Value Carrying Value Fair Value Carrying Value (In Thousand Pesos) Financial assets: Derivative assets AFS investment in equity securities Financial liabilities: Derivative liabilities (including current portion) Long-term debt (including current portion) = 688,506 P = 688,506 P =6,424 P =6,424 P =555,396 P =555,396 P 260,977 P949,483 = 260,977 P949,483 = 146,496 =152,920 P 146,496 =152,920 P 222,712 =778,108 P 222,712 =778,108 P = 168,603 P = 168,603 P =265,679 P =265,679 P =219,694 P =219,694 P 67,644,033 P67,812,636 = 69,145,748 P69,314,351 = 62,377,964 =62,643,643 P 65,903,744 =66,169,423 P 64,081,049 =64,300,743 P 62,469,723 =62,689,417 P The following methods and assumptions were used to estimate the fair values: For variable rate financial instruments that reprice every three months, the carrying value approximates the fair value because of recent and regular repricing based on current market rates. For variable rate financial instruments that reprice every six months, the fair value is determined by discounting the principal amount plus the next interest payment using the prevailing market rate for the period up to the next repricing date. The discount rates used range from 0.09% - 2.09% (for USD floating loans) and 1.02% - 1.23% (for Php floating loans). For noninterest bearing obligations, the fair value is estimated as the present value of all future cash flows discounted using the prevailing market rate of interest for a similar instrument. The fair value of freestanding and embedded forward exchange contracts is calculated by using the interest rate parity concept. The fair values of interest rate swaps and cross currency swap transactions are determined using valuation techniques with inputs and assumptions that are based on market observable data and conditions and reflect appropriate risk adjustments that market participants would make for credit and liquidity risks existing at the end each of reporting period. The fair value of interest rate swap transactions is the net present value of the estimated future cash flows. The fair values of currency and cross currency swap transactions are determined based on changes in the term structure of interest rates of each currency and the spot rate. The fair values were tested to determine the impact of credit valuation adjustments. However, the impact is immaterial given that the Globe Group deals its derivatives with large foreign and local banks with minimal risk of default. - 22 - 13.5 Fair Value Hierarchy The following tables provide the fair value measurement hierarchy of the Globe Group‟s assets and liabilities: March 31, 2014 Fair value measurement using Quoted prices in active markets (Level 1) Assets measured at fair value: Derivative assets Cross currency swaps Embedded currency forwards Nondeliverable forward Deliverable forward AFS investment in equity securities Liabilities measured at fair value: Derivative liabilities Interest rate swaps Cross currency swaps Embedded currency forwards Liabilities for which fair values are disclosed: Long-term debt (including current portion) P =– – Significant Significant observable unobservable inputs inputs (Level 2) (Level 3) (Unaudited and In Thousand Pesos) Total P =669,950 13,173 3,976 1,407 – P =– – – – 88,402 75,155 5,046 – – 88,402 75,155 5,046 – 69,145,748 – 69,145,748 260,977 – P =669,950 13,173 3,976 1,407 260,977 March 31, 2013 Fair value measurement using Quoted prices in active markets (Level 1) Assets measured at fair value: Derivative assets Cross currency swaps Embedded currency forwards Deliverable forward Nondeliverable forward AFS investment in equity securities Liabilities measured at fair value: Derivative liabilities Interest rate swaps Embedded currency forwards Deliverable forwards Liabilities for which fair values are disclosed: Long-term debt (including current portion) Significant Significant observable unobservable inputs inputs (Level 2) (Level 3) (Unaudited and In Thousand Pesos) Total P– = – – =3,973 P 521 1,930 P– = – – =3,973 P 521 1,930 146,496 – – 146,496 – – – 240,991 19,843 4,845 – – – 240,991 19,843 4,845 65,903,744 65,903,744 - 23 - December 31, 2013 Fair value measurement using Quoted prices in active markets (Level 1) Assets measured at fair value: Derivative assets Cross currency swaps Embedded currency forwards AFS investment in equity securities Liabilities measured at fair value: Derivative liabilities Interest rate swaps Cross currency swaps Embedded currency forwards Liabilities for which fair values are disclosed: Long-term debt (including current portion) Significant Significant observable unobservable inputs inputs (Level 2) (Level 3) (Audited and In Thousand Pesos) Total P– = – 222,712 =553,562 P 1,834 – P– = – – =553,562 P 1,834 222,712 – – – 151,493 62,174 6,027 – – – 151,493 62,174 6,027 – 68,046,189 – 68,046,189 There were no transfers from Level 1 and Level 2 fair value measurements as of March 31, 2014 and 2013, and December 31, 2013. The Globe Group has no financial instruments classified under Level 3. 14. Operating Segment Information The Globe Group‟s reportable segments consist of: (1) mobile communications services; (2) wireline communication services; and (3) others, which the Globe Group operates and manages as strategic business units and organize by products and services. The Globe Group presents its various operating segments based on segment net income. Intersegment transfers or transactions are entered into under the normal commercial terms and conditions that would also be available to unrelated third parties. Segment revenue, segment expense and segment result include transfers between business segments. Those transfers are eliminated in consolidation. Most of revenues are derived from operations within the Philippines, hence, the Globe Group does not present geographical information required by PFRS 8, Operating Segments. The Globe Group does not have a single customer that will meet the 10% reporting criteria. The Globe Group also presents the different product types that are included in the report that is regularly reviewed by the chief operating decision maker in assessing the operating segments‟ performance. - 24 - Segment assets and liabilities are not measures used by the chief operating decision maker since the assets and liabilities are managed on a group basis. The Globe Group‟s segment information are as follows: March 31, 2014 Mobile Wireline Communications Communications Services Services Others (Unaudited and In Thousands Pesos) REVENUES: Service revenues External customers: Voice Data Broadband Nonservice revenues: External customers Segment revenues EBITDA Depreciation and amortization EBIT NET INCOME (LOSS) BEFORE TAX2 Provision for income tax2 NET INCOME (LOSS) Core NIAT Other segment information Intersegment revenues Subsidy1 Interest income2 Interest expense Equity in net losses of joint ventures Impairment losses and others Capital expenditure Cost of sales Operating expenses Consolidated P =8,673,224 9,728,727 P =664,889 1,318,967 2,783,062 P =– 61,269 P =9,338,113 11,108,963 2,783,062 815,256 19,217,207 8,037,689 (2,039,471) 5,998,218 253,504 5,020,422 867,900 (2,014,042) (1,146,142) 61,231 122,500 (109,836) (13,966) (123,802) 1,129,991 24,360,129 8,795,753 (4,067,479) 4,728,274 5,683,854 (1,020,443) P =4,663,411 P =– (1,263,757) (298,516) (P = 1,562,273) P =– (124,341) (27,805) (P = 152,146) P =– 4,295,756 (1,346,764) P =2,948,992 P =3,357,262 (P = 322,827) (1,643,000) 150,895 (464,292) (26,936) (626,555) (5,875,933) (2,458,256) (6,795,322) (P = 265,280) (98,216) 11,254 (23,527) – (207,715) – (351,719) (3,674,120) (P = 588,107) 3,729 142 (188) – 587 – (57,503) (174,272) (P = 1,176,214) (1,737,487) 162,291 (488,007) (26,936) (833,683) (5,875,933) (2,867,478) (10,643,714) - 25 - Mobile Wireline Communications Communications Services Services Others (Unaudited and In Thousands Pesos) Cash Flows Net cash provided by (used in): Operating activities Investing activities Financing activities 1 2 P =7,942,577 (3,004,625) (5,325,838) P =541,344 (1,242,584) – P =541,344 (41,030) 102,496 Consolidated P =8,546,078 (4,288,239) (5,223,342) Computed as non-service revenues less cost of sales Net of final tax March 31, 2013 Mobile Wireline Communications Communications Services Services Others (Unaudited and In Thousand Pesos) REVENUES: Service revenues External customers: Voice Data Broadband Nonservice revenues: External customers Segment revenues EBITDA Depreciation and amortization EBIT Consolidated P7,659,812 = 9,433,858 – =647,510 P 1,111,068 2,485,854 =– P 30,403 – P8,307,322 = 10,575,329 2,485,854 929,334 18,023,004 7,670,790 (4,765,615) 2,905,175 172,552 4,416,984 1,171,187 (2,637,711) (1,466,524) 302 30,705 (65,883) (3,519) (69,402) 1,102,188 22,470,693 8,776,094 (7,406,845) 1,369,249 NET INCOME (LOSS) BEFORE TAX2 Provision for income tax2 NET INCOME (LOSS) Core NIAT Other segment information Intersegment revenues Subsidy1 Interest income2 Interest expense Equity in net income of joint ventures Impairment losses and others Capital expenditures Cost of sales Operating expenses 2,419,520 (165,935) =2,253,585 P =– P (1,491,817) (13,946) (P =1,505,763) =– P (69,333) (22,447) (P =91,780) =– P 858,370 (202,328) =656,042 P =3,085,600 P (P =38,967) (1,568,289) 151,666 (482,086) 10,794 (322,266) 7,175,679 (2,497,623) 7,854,588 (P =101,677) (37,250) 20,647 (24,689) – (173,905) 713,891 (209,802) 3,035,995 (P =233,053) 302 145 – – – 1,776 – 96,588 (P =373,697) (1,605,237) 172,458 (506,775) 10,794 (496,171) 7,891,346 (2,707,425) 10,987,171 Cash Flows Net cash provided by (used in): Operating activities Investing activities Financing activities 7,528,421 (5,853,958) (556,624) 1,620,484 (781,144) (2,000,000) 4,055 (1,712) (24,998) 9,152,960 (6,636,814) (2,581,622) 1 2 Computed as non-service revenues less cost of sales Net of final tax - 26 - The reconciliation of the EBITDA to income before income tax presented in the consolidated statements of comprehensive income is shown below: March 31 2013 2014 (Unaudited and In Thousand Pesos ) EBITDA Depreciation and amortization Financing costs Equity in net income (losses) of joint ventures Interest income Gains on disposals of property and equipment - net Other items Income before income tax P =8,795,753 (4,067,479) (628,723) (26,936) 163,705 24,981 44,640 P =4,305,941 P8,776,094 = (7,406,845) (689,414) 10,794 179,990 12,340 (17,057) =865,902 P The reconciliation of core NIAT to NIAT is shown below: March 31 2013 2014 (Unaudited and In Thousand Pesos ) Core NIAT Mark-to-market gains (losses) Foreign exchange losses (gains) Non-recurring items NIAT P =3,357,262 42,864 (51,321) (399,813) P =2,948,992 =3,085,600 P (51,940) (37,596) (2,340,022) =656,042 P 14.1 Mobile Communications Services This reporting segment is made up of digital cellular telecommunications services that allow subscribers to make and receive local, domestic long distance and international long distance calls, international roaming calls and other value added services in any place within the coverage areas. 14.1.1 Mobile communication voice net service revenues include the following: a) Monthly service fees on postpaid plans; b) Charges for intra-network and outbound calls in excess of the consumable minutes for various Globe Postpaid plans, including currency exchange rate adjustments (CERA) net of loyalty discounts credited to subscriber billings; c) Airtime fees for intra network and outbound calls recognized upon the earlier of actual usage of the airtime value or expiration of the unused value of the prepaid reload denomination (for Globe Prepaid and TM) which occurs between 1 and 60 days after activation depending on the prepaid value reloaded by the subscriber net of (i) bonus credits and (ii) prepaid reload discounts; and d) Revenues generated from inbound international and national long distance calls and international roaming calls. - 27 - 14.1.2 Mobile communication data net service revenues consist of revenues from value-added services such as inbound and outbound SMS and MMS, content downloading, browsing and infotext, subscription fees on unlimited and bucket prepaid SMS services net of any settlement payouts to international and local carriers and content providers. 14.1.3 Globe Telecom offers its wireless communications services to consumers, corporate and SME clients through the following three (3) brands: Globe Postpaid, Globe Prepaid and Touch Mobile. The Globe Group also provides its subscribers with mobile payment and remittance services under the GCash brand. 14.2 Wireline Communications Services This reporting segment is made up of fixed line telecommunications services which offer subscribers local, domestic long distance and international long distance voice services in addition to broadband and mobile internet services and a number of VAS in various areas covered by the Certificate of Public Convenience and Necessity (CPCN) granted by the NTC. 14.2.1 Wireline voice net service revenues consist of the following: a) Monthly service fees including CERA of voice-only subscriptions; b) Revenues from local, international and national long distance calls made by postpaid, prepaid wireline subscribers, as well as broadband customers who have subscribed to data packages bundled with a voice service. Revenues are net of prepaid call card discounts; c) Revenues from inbound local, international and national long distance calls from other carriers terminating on our network; d) Revenues from additional landline features such as caller ID, call waiting, call forwarding, multi-calling, voice mail, duplex and hotline numbers and other value-added features; and e) Installation charges and other one-time fees associated with the establishment of the service. 14.2.2 Wireline data net service revenues consist of the following: a) b) c) d) Monthly service fees from international and domestic leased lines. Other wholesale transport services; Revenues from value-added services; and One-time connection charges associated with the establishment of service. 14.2.3 Broadband service revenues consist of the following: a) Monthly service fees on mobile and fixed wireless and wired broadband plans and charges for usage in excess of plan minutes; and b) Prepaid usage charges consumed by mobile broadband subscribers. 14.2.4 The Globe Group provides wireline voice communications (local, national and international long distance), data and broadband and data services to consumers, corporate and SME clients in the Philippines. Consumers - the Globe Group‟s postpaid voice service provides basic landline services including toll-free NDD calls to other Globe landline - 28 - subscribers for a fixed monthly fee. For wired broadband, consumers can choose between broadband services bundled with a voice line, or a broadband data-only service. For fixed wireless broadband connection using Long-Term Evolution (LTE) or Worldwide Interoperability for Microwave Access (WiMax), the Globe Group offers broadband packages bundled with voice, or broadband data-only service. For subscribers who require full mobility, Globe Broadband Tattoo service come in postpaid and prepaid packages and allow them to access the internet via LTE, 3G with HSDPA, Enhanced Datarate for GSM Evolution (EDGE), General Packet Radio Service (GPRS) or WiFi at hotspots located nationwide. Corporate/SME clients - for corporate and SME enterprise clients wireline voice communication needs, the Globe Group offers postpaid service bundles which come with a business landline and unlimited dial-up internet access. The Globe Group also provides a full suite of telephony services from basic direct lines to Integrated Services Digital Network (ISDN) services, 1-800 numbers, International Direct Dialing (IDD) and National Direct Dialing (NDD) access as well as managed voice solutions such as Voice Over Internet Protocol (VOIP) and managed Internet Protocol (IP) communications. Valuepriced, high speed data services, wholesale and corporate internet access, data center services and segment-specific solutions customized to the needs of vertical industries. 14.3 Others This reporting segment represents mobile value added data content and application development services. Revenues principally consist of revenue share with various carriers on content downloaded by their subscribers and contracted fees for other application development services provided to various partners. 15. Note to Condensed Consolidated Statements of Cash Flows The principal noncash transactions are as follows (in thousands pesos): March 31 2013 2014 (Unaudited) (Unaudited) Increase in liabilities related to the acquisition of property and equipment Accretion of interest income from loan receivable Capitalized ARO P =941,810 125,249 – =780,642 P 114,357 786 - 29 - 16. Events after the Reporting Period 1. On April 8, 2014, further to the approval of the BOD dated February 10, 2014 on the amendment of Articles of Incorporation to reclassify unissued common and voting preferred shares into non-voting preferred shares, the stockholders approved the issuance, offer and listing of up to 20 million non-voting preferred shares, with an issue volume of =10.00 billion. The non-voting preferred shares shall be redeemable, non-convertible, P cumulative and may be issued in series. 2. On October 10, 2011, the NTC issued Memorandum Circular No. 2-10-2011 titled Interconnection Charge for Short Messaging Service requiring all public telecommunication entities to reduce their interconnection charge to each other from P0.35 to P0.15 per text, which Globe complied as early as November 2011. On December 11, 2011, the NTC One Stop Public Assistance Center (OSPAC) filed a complaint against Globe, Smart and Digitel alleging violation of the said MC No. 02-102011 and asking for the reduction SMS off-net retail price from P1.00 to P0.80 per text. Globe filed its Answer maintaining the position that the reduction of the SMS interconnection charges does not automatically translate to a reduction in the SMS retail charge per text. On November 20, 2012, the NTC rendered a decision directing Globe to: 1. Reduce its REGULAR SMS Retail rate from P1.00 to not more thanPhP0.80 2. Refund/reimburse its subscribers the excess charge of P0.20 3. Pay a fine of P200.00 per day from December 1,2011 until date of compliance. On May 7, 2014, NTC denied the Motion for Reconsideration filed by Globe last December 5, 2012 in relation to the November 20, 2012 Globe stands to its legal position that it is compliant with the NTC‟s Memorandum Circular No. 02-10-2011, and therefore studying other legal remedies including elevating the case to the Court of Appeals.
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