ITU/ BDT «Training and Trials on Network Planning Tools for Evolving Network Architectures» Architectures» June 44-8 2007 Moscow, Russian Federation Business Planning and Modeling Oscar González Soto ITU Consultant Expert Strategic Planning and Assessment June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 1 Business Planning and Modeling Content • Role of Business Planning today • Basic business concepts • Telecom business modeling June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 2 Business Planning and Modeling Role of Business Planning – Forecast solutions, costs and revenues – Evaluate future Cashflows, NPV, IRR, ROI, etc. – Perform “What-if” analysis for optional alternatives on Volume of customers, customer mixes and services domains – Perform benchmarking with “best in class” operators – Decision making on strategy and actions in competition based on quantified evaluations – Recommend alternatives and actions to ensure success June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 3 Business Planning and Modeling Definition 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 revenues expected from the project; • the planned expenses (investment and operations); • the accounting statements and the financial indicators characterising the profitability of the project. June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 4 Business Planning and Modeling Types of business plans plans Strategic Business Plan for evaluating a strategy: • aid for making internal decisions for the whole company (strategic guidelines at the national level, all markets) Tactical Business Plans for specific projects : • aid for making internal decisions for 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, June 2007 slide 5 ITU/BDT Network Planning/ Business Planning - O.G.S. Business Planning and Modeling Iterative process for evaluation Strategic objectives, strategic guidelines modifications Marketing planning modifications Network planning modifications Operations planning Human resources planning modifications Business Plan Evaluation June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 6 Business Planning and Modeling Interaction between analysis and business plan Business Plan Analysis Costs models Revenues Financial indicators Evaluation Sensitivity studies SWOT Pricing Service portfolio Technologies used Action plans what parameters to improve, how to adjust models June 2007 slide 7 ITU/BDT Network Planning/ Business Planning - O.G.S. Business Planning and Modeling Business model structure Demand Human Resources Tariffs Corporate Customers Revenue Ordinary Customers Revenue CAPEX OPEX Evaluation with Ratios and financial indicators : NPV, IRR, pay-back, EVA, ROCE June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 8 Business Planning and Modeling Services 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 June 2007 slide 9 ITU/BDT Network Planning/ Business Planning - O.G.S. Business Planning and Modeling Expenses calculation Customers Services Network construction operations extension Customer Care provisioning repairing call center CAPEX June 2007 Labour Costs Marketing Billing Administrative & general costs OPEX ITU/BDT Network Planning/ Business Planning - O.G.S. slide 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 June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 11 Business Planning and Modeling Financial 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 June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 12 Business Planning and Modeling The purposes of the accounting statements Income statement to analyze potential profit is the profit enough ? Balance statement to analyze the financial structure how to finance the development enough / too much equity ? Enough/ too much debt Cash-Flow statement to make payments at every due date to have the right cash at the right time June 2007 slide 13 ITU/BDT Network Planning/ Business Planning - O.G.S. Business Planning and Modeling Income statement OPEX Revenues - CAPEX + EBITDA Depreciation Taxes - Earning before income taxes, depreciation and amortization -- EBIT Earning before interests, and income taxes, Net Income June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 14 Business Planning and Modeling CAPEX: 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 ) June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 15 Business Planning and Modeling OPEX= OPEX 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 June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 16 Business Planning and Modeling Income statement Cost of sales Total revenues Operating expenses Gross margin (sales) Depreciation Income EBITDA from operations Taxes Interests EBIT Other incomes June 2007 Dividends Net income Retained earnings slide 17 ITU/BDT Network Planning/ Business Planning - O.G.S. Business Planning and Modeling Cash Flow Revenues, funds Inflows Cash balance Out flows June 2007 IRR NPV CASH FLOWS OPEX CAPEX Working Capital changes ITU/BDT Network Planning/ Business Planning - O.G.S. Taxes slide 18 Business Planning and Modeling INFLOWS and OUTFLOWS Customers Shareholders Sales of services Increase of equity (operating income) (capital increase) Banks, lenders Increase of debt (credit, loans) INFLOWS cash flow OUTFLOWS Labour costs Training Technical Network & admini& equipment strative Tax expenses Staff Suppliers June 2007 Service providers Government Debt repayment with interests Dividends Shareholders Banks, lenders slide 19 ITU/BDT Network Planning/ Business Planning - O.G.S. Business Planning and Modeling Rules for Equipment Depreciation Residual Value Delayed depreciation 100% Linear depreciation x% RV at Yn Accelerated depreciation Years 0 Y0 June 2007 Yn ITU/BDT Network Planning/ Business Planning - O.G.S. Ym slide 20 Business Planning and Modeling CashCash-Flow and components over time Financial evaluation and cash flow 3000 2000 1000 Capex investment KEuro Opex 0 Capex extension Y0 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 Capex substitution Residual value -1000 Revenues Cash flow -2000 -3000 -4000 evaluation period June 2007 slide 21 ITU/BDT Network Planning/ Business Planning - O.G.S. Business Planning and Modeling Business domains and trends Illustration case for customer categories and revenues Growing Volume 3-8% Small& Medium Enterprise 8% SOHO (1-2 people) 10-20% High-End Residential >3000 Operator 300-500 70-120 60-80 Growing revenues Large Corporations 0.5- 1% 30-55 60-70% feasibility as a function of mix of categories L-E Residential Classes Of Customers business Revenues/Month (Euro) “Customer stratification should be analyzed per country” June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 22 Business Planning and Modeling Full capacity cost Cost per unit Importance of Modeling Economy of scale per technology and size u1 u1 = a1+ B1 / S u2 = a2+ B2 / S u2 m1 m2 X M1 t1 = a1 S + B1 t2 = a2 S + B2 t2 t1 m1 m2 X M1 Equipment size M2 M2 Equipment size Impact by occupancy or fill-in degree June 2007 slide 23 ITU/BDT Network Planning/ Business Planning - O.G.S. Business Planning and Modeling Importance of Modeling: Deployment Strategies C: Balanced between COOP and demand satisfaction Equipment Deployment:CAPEX Solution B (Once for all) B: High risk, CAPEX and OPEX Solution C (Optimized) Solution A (yearly) Demand forecasts A: High OPEX by installation costs risk to satisfy demand Years Major impact on CAPEX and OPEX June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 24 Business Planning and Modeling Key Factors in competition: competition: Business feasibility Feasibility space highly dependent on country size and economic level Revenues per customer/year (ARPU) Preasure by payment capability, churn or regulation constraints Business Feasibility area: r1 $ r2 $ Preasure by required NPV and IRR n1 n2 Volume of Customers/type Business feasibility area limited by positive NPV and payment willingness June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 25