Oscar González Soto ITU Consultant Expert Strategic Planning and Assessment

1. ITU / BDT Regional Network Planning Workshop with Tool Case Studies for the Arab Region Cairo - Egypt, 16– 27 July 2006 Business Planning and Modeling Oscar González Soto ITU Consultant Expert Strategic Planning and Assessment ITU/BDT Network Planning/ Business Planning - O.G.S.

2. Business Planning and ModelingContent • Role of business Planning today. Basic concepts • Telecom business modeling • Typical evaluation results ITU/BDT Network Planning/ Business Planning - O.G.S.

3. Business Planning and ModelingDefinition of business plan • A Business Plan presents the calculation of the financial indicators that enable the managers to evaluate the financial performances of an entreprise in order to take decisions. • A Business Plan summarises the results of the planning process: • the objectives to reach ( subscribers demand, sales) • the description of all activities requested by the project; • the future revenuesexpected from the project; • the planned expenses(investment and operations); • the accounting statements and the financial indicatorscharacterising the profitability of the project. ITU/BDT Network Planning/ Business Planning - O.G.S.

4. Business Planning and ModelingTypes of business plans • Strategic Business Plan for evaluating a strategy: • aid formaking internal decisionsfor the whole company (strategic guidelines at the national level, all markets) • Tactical Business Plans for specific projects : • aid formaking internal decisionsfor a particular area, or a market segment: IN, mobiles, IP • Short term Business Plans for management control : • aid for monitoring the implementation of projects • preparation and follow-up of budgets, ITU/BDT Network Planning/ Business Planning - O.G.S.

5. Strategic objectives, strategic guidelines modifications Marketing planning modifications Network planning modifications Operations planning modifications Human resources planning Business Plan Evaluation Business Planning and ModelingIterative process for evaluation ITU/BDT Network Planning/ Business Planning - O.G.S.

6. Business Plan Costs models Revenues Financial indicators Evaluation Sensitivity studies Analysis SWOT Pricing Service portfolio Technologies used Action plans what parameters to improve, how to adjust models Business Planning and Modeling Interaction between analysis and business plan ITU/BDT Network Planning/ Business Planning - O.G.S.

7. Demand HumanResources Tariffs CorporateCustomersRevenue OrdinaryCustomersRevenue CAPEX OPEX Evaluation with Ratios and financial indicators : NPV, IRR, pay-back, EVA, ROCE Business Planning and ModelingBusiness model structure ITU/BDT Network Planning/ Business Planning - O.G.S.

8. Business Planning and ModelingServices Revenues calculation Customers Services Telephone connection fee rental fee local calls ld calls idd calls Mobiles Leased lines Data Video Added value services Total Revenues ITU/BDT Network Planning/ Business Planning - O.G.S.

9. Business Planning and ModelingExpenses calculation Customers Services Network construction operations extension Customer Care provisioning repairing call center Marketing Billing Labour Costs Administrative & general costs CAPEX OPEX ITU/BDT Network Planning/ Business Planning - O.G.S.

10. Business Planning and Modeling Financial Statement • Income Statement:Net income = revenues - expenses • Balance Sheet: Company capital = Assets - liabilities • Cash flow statement :Cash balance = Inflows - outflows All fundamental financial indicators are carried out with the elements of these 3 statements ITU/BDT Network Planning/ Business Planning - O.G.S.

11. Business Planning and ModelingFinancial indicators calculation The most useful economical indicators are : - Net present value (NPV) - Internal rate of return (IRR) - Discounted Payback period (DPP) - Net cash flow (NCF) - Discounted cash flow (DCF) - Operating income - Revenue per service/service class ITU/BDT Network Planning/ Business Planning - O.G.S.

12. Business Planning and ModelingThe purposes of the accounting statements Income statementto analyze potential profitis the profit enough ? Balance statement to analyze the financial structurehow to finance the developmentenough / too much equity ? Enough/ too much debt Cash-Flow statementto make payments at every due dateto have the right cash at the right time ITU/BDT Network Planning/ Business Planning - O.G.S.

13. Business Planning and ModelingIncome statement OPEX Revenues - + CAPEX EBITDAEarning before income taxes,depreciation and amortization - Depreciation EBITEarning before interests, and income taxes, - -- Taxes Net Income ITU/BDT Network Planning/ Business Planning - O.G.S.

14. Business Planning and ModelingCAPEX: Capital Expenditures • CAPEX contribute to extend the fixed assets, and they are depreciated over an economic life time • CAPEX are necessary for extending the business or for improving the range of services provided by the operator. • Examples : • Purchase of land & buildings, • Network construction • Purchase of information systems (hardware & software ) ITU/BDT Network Planning/ Business Planning - O.G.S.

15. Business Planning and ModelingOPEX= Operations Expenditures OPEX are expenses which don't contribute to extend the fixed assets, and consequently are not subject to depreciation OPEX are necessary for running the company, - Technical operations (switching, transmission, local loop,..) - Commercial operations (marketing and sales) - Administrative operations (support,..) Examples : - Labor costs for operations, - Travelling expenses, periodic administrative costs, - Rental of equipment, rental of cars, rental of buildings - Interconnection fees ITU/BDT Network Planning/ Business Planning - O.G.S.

16. Cost of sales Total revenues (sales) Operating expenses Gross margin Depre- ciation Income from operations Taxes Interests EBITDA Dividends EBIT Net income Other incomes Retained earnings Business Planning and ModelingIncome statement ITU/BDT Network Planning/ Business Planning - O.G.S.

17. Business Planning and ModelingCash Flow Revenues, funds Inflows IRR Cashbalance CASH FLOWS NPV Outflows Working Capital changes OPEX CAPEX Taxes ITU/BDT Network Planning/ Business Planning - O.G.S.

18. Customers Shareholders Banks, lenders Sales of services Increase of equity Increase of debt (operating income) (capital increase) (credit, loans) INFLOWS cash flow OUTFLOWS Labour costs Training Technical & admini- strative expenses Network & equipment Debt repayment with interests Tax Dividends Staff Suppliers Service providers Shareholders Govern- ment Banks, lenders Business Planning and ModelingINFLOWS and OUTFLOWS ITU/BDT Network Planning/ Business Planning - O.G.S.

19. >3000 Large Corporations Operator business feasibility as a function of mix of categories 0.5- 1% 300-500 Small& Medium Enterprise 3-8% 70-120 Growing Volume SOHO (1-2 people) 8% Growing revenues 60-80 High-End Residential 10-20% 30-55 60-70% L-E Residential Classes Of Customers Revenues/Month (Euro) Business Planning and Modeling Business domains and trends Illustration case for customer categories and revenues “Customer stratification should be analyzed per country” ITU/BDT Network Planning/ Business Planning - O.G.S.

20. u B / S u = a + 1 1 1 1 Cost per unit u = a + B / S u 2 2 2 2 Equipment size m X M M m 1 1 2 2 t = a S + B 1 1 1 t 2 Full capacity cost t = a S + B 2 2 2 t 1 Equipment size m m X M M 1 1 2 2 Business Planning and ModelingImportance of ModelingEconomy of scale per technology and size Impact by occupancy or fill-in degree ITU/BDT Network Planning/ Business Planning - O.G.S.

21. Price per line for two Greenfield scenarios 1 200 1 000 800 Suburban Cost per Line (Monetary units) 600 Rural 400 200 0 Years since start 0 1 2 3 4 5 6 7 8 9 Business Planning and ModelingImportance of ModelingEconomy of scale through time Impact by customer volume ITU/BDT Network Planning/ Business Planning - O.G.S.

22. C: Balanced between COOP and demand satisfaction Equipment Deployment:CAPEX Solution B (Once for all) Solution C (Optimized) Demand forecasts B: High risk, CAPEX and OPEX Solution A (yearly) A: High OPEX by installation costs risk to satisfy demand Years Business Planning and ModelingImportance of Modeling: Deployment Strategies Major impact on CAPEX and OPEX ITU/BDT Network Planning/ Business Planning - O.G.S.

23. Revenues per customer/yea (ARPU) Non feasible by lack of payment capability, churn or regulation constraints Feasibility area: users range r2 $ Non feasible by low NPV and IRR Feasibility area: tariff range r1 $ n1 n2 Volume of Customers/type Business Planning and ModelingKey Factors in competition: Business feasibility • Business feasibility space as a function of volume and ARPU • Feasibility space highly dependent on country size and economical level ITU/BDT Network Planning/ Business Planning - O.G.S.

24. Business Planning and ModelingRole of Business Planning Evaluations to be based on robust techno-economical tools due to high number of alternatives and complexity Case study for medium size country with mixes of customer classes and triple play services domains: • Multiservice IP Network with integrated operation available • Three service categories: Voice, Data/Internet, Video distribution • Modeling demands, multiservice traffic flows, dimensioning, network resources, CAPEX, OPEX and financial results for different levels of competition • Evaluate differential future Cash-flows, NPV, IRR, etc. for a 10 years period ITU/BDT Network Planning/ Business Planning - O.G.S.

25. 4 7e+08 6e+08 1 5e+08 Internet 4e+08 2 2 Internet & 3e+08 VoDSL 3 3 Euro Internet & 2e+08 Video 4 1e+08 All Services Y0 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 (reference) 0e+08 1 -1e+08 -2e+08 Year Business Planning and ModelingExample for what-if economical analysis Network NPV for new multiservice network operator Effects of the mix of services on Reference Scenario ( Low Competition) ITU/BDT Network Planning/ Business Planning - O.G.S.

26. 1 Internet 2 Internet & VoDSL 3 Internet & Video 4 All Services (reference) Business Planning and ModelingExample for what-if economical analysis Network NPV for new multiservice network operator Effects of the mix of services with decreased revenues (30%) in High Competition 5e+08 4 4e+08 3e+08 2 2e+08 Euro 3 1e+08 Y0 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 0e+08 -1e+08 1 -2e+08 Year ITU/BDT Network Planning/ Business Planning - O.G.S.

27. Business Planning and Modeling Summary Remarks • Ensure proper modeling of key techno-economical factors and professional tools • Focus on multiple customers, multiple services domains • Take benefit of all economies of scale • Maintain business indicators within benchmark margins in • competition ITU/BDT Network Planning/ Business Planning - O.G.S.