Converge Keeps Building as Margins Narrow, Keeping Borrowing a Necessity

 

Philippine broadband provider spent ₱5.7 billion on capital expenditures in the first half, while slower growth and rising costs pressured earnings

Converge ICT Solutions Inc. continued pouring money into its fiber network during the first half of 2026, betting that broader coverage will eventually produce new customers and recurring revenue even as the company’s profitability weakened.

The Philippine broadband provider spent about ₱5.7 billion on capital expenditures and intangible assets during the six months ended June, more than double the roughly ₱2.6 billion spent in the comparable period a year earlier. Much of the investment supported continued network expansion, including Converge’s effort to deepen its presence in the Visayas and Mindanao and build approximately 900,000 additional fiber ports during the year. 

That spending underscores Converge's central challenge. The company must continue building infrastructure to secure future growth, but the financial returns from that investment are taking longer to emerge.

First-half revenue increased 3% to approximately ₱22.45 billion, yet net income declined 8% to ₱5.49 billion. Residential revenue, which accounts for more than four-fifths of the company’s business, grew only about 1%. Enterprise revenue rose 15%, but its smaller contribution wasn’t enough to offset the weaker profitability.

Converge’s gross margin fell to about 64.4%, from 66.3% a year earlier. Its earnings before interest, taxes, depreciation and amortization margin narrowed to 59.1%, from approximately 61.8%, while its net profit margin declined to 24.4%, from 27.3%.

The deterioration worsened in the second quarter. Revenue increased just over 2%, while operating profit fell 14% and net income declined nearly 16%. The figures suggest that costs associated with operating and supporting the company’s enlarged network are rising faster than the revenue it generates.

Cost of services increased 9% during the half, driven partly by higher depreciation, personnel costs and service fees. General and administrative expenses rose almost 13%, reflecting promotional spending, managed-service fees, repairs, maintenance and other expenditures related to network growth.

Depreciation and amortization increased as earlier capital expenditures began flowing through the income statement. That accounting expense doesn’t consume current-period cash, but it highlights the growing cost of the company’s physical infrastructure.

Cash Flow Provides a Cushion

Despite the decline in reported earnings, Converge’s underlying cash generation remained resilient.

Net cash provided by operating activities reached approximately ₱8.88 billion, slightly higher than the ₱8.80 billion generated a year earlier. Operating cash flow exceeded reported net income by more than 60%, partly because depreciation and other noncash expenses reduced accounting profit without immediately affecting cash.

The strong cash inflow allowed Converge to fund its ₱5.7 billion capital program largely from operations. After capital expenditures and intangible-asset purchases, however, the company was left with only about ₱3.18 billion in simplified free cash flow, down from roughly ₱4.54 billion a year earlier.

Converge also paid around ₱3.55 billion in dividends during the first half. Capital expenditures and dividends therefore exceeded the cash produced by operations, before accounting for other investing and financing requirements.

That gap increased the company’s reliance on external funding.

Converge raised approximately ₱6.95 billion from new borrowings during the period. Total borrowings climbed to about ₱28.26 billion at the end of June, from ₱24.10 billion at the end of 2025. Net debt rose to approximately ₱15.60 billion.

The added debt doesn’t yet present a serious balance-sheet problem. Converge’s net-debt-to-EBITDA ratio remained at a conservative 0.6 times, while interest and debt-service coverage stayed comfortably above covenant requirements.

Still, higher borrowing illustrates the financial consequences of pursuing an investment program that exceeds internally generated free cash flow after dividends. Finance costs became a heavier burden in the second quarter, rising to approximately ₱506 million from ₱382 million a year earlier.

The company is effectively using its balance sheet to bridge the period between constructing network capacity and generating revenue from that capacity.

Ports First, Customers Later

Fiber-network investment requires operators to spend before they know how many customers will subscribe. Converge must install backbone capacity, distribution lines, neighborhood ports, and related equipment before a household or business can connect.

That model can produce attractive returns when a large proportion of the new network is eventually occupied. Once constructed, fiber infrastructure can support recurring subscription revenue at relatively high incremental margins.

The risk is that subscriber take-up fails to keep pace with construction.

Converge ended 2025 with approximately 8.3 million fiber ports across a nationwide network spanning more than 890,000 kilometers. Its 2026 program is intended to substantially increase that coverage, particularly outside Luzon. 

Yet subscriber growth appeared to lose momentum during the second quarter as inflation pressured household demand. The company’s subscriber base ended June at roughly the same level reported at the end of the first quarter, even as additional network capacity was being constructed. 

Unused fiber ports don’t immediately generate revenue, but the capital invested in them still contributes to depreciation, maintenance requirements and financing costs. That combination can compress returns until customer take-up improves.

The pressure is already visible in Converge’s return on invested capital, which declined as its asset base expanded faster than earnings. The company is now carrying more network infrastructure, but each peso invested is producing a lower return than before.

A Capital-Allocation Test

Management has reduced its full-year capital-expenditure target to ₱17 billion to ₱20 billion, from an earlier range of ₱18 billion to ₱23 billion. It also lowered its revenue-growth outlook to between 4% and 6%, reflecting weaker residential demand.

Even at the lower end of that spending target, Converge would need to invest another ₱11.3 billion during the second half. Reaching the top end would require another ₱14.3 billion.

That would place additional demands on operating cash flow and could require further borrowing, particularly if the company maintains its dividend payments. The precise funding requirement will depend on the timing of network construction, supplier payments, debt repayments and customer collections.

Converge remains highly profitable by conventional telecommunications standards. Its EBITDA margin is close to 60%, operating cash flow is substantial and leverage remains modest.

But the first-half results exposed a widening gap between network investment and earnings growth.

The company is spending heavily to create capacity for future customers at a time when its largest business is barely growing. Its cash-producing operations provide considerable financial flexibility, but they no longer fully cover the combined demands of capital expenditures and shareholder distributions.

For investors, the question is no longer whether Converge can afford to build. For now, it can. The more important question is whether the new network will attract enough paying customers to restore revenue growth before depreciation, operating expenses, and interest costs claim a larger share of earnings.

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Disclaimer: This is for informational purposes and is not investment advice. Figures come from company disclosures and exchange data; valuation ratios reflect the author’s calculations based on cited inputs.