ITU/ BDT «Training and Trials on Network

Planning Tools for Evolving Network Architectures»

Architectures»

June 4-
4-8 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 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 5

Business Planning and Modeling

Iterative process for evaluation

Strategic objectives, strategic guidelines

modifications
Marketing planning
modifications
Network planning
modifications
Operations planning
Human resources modifications
planning

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

Analysis Business Plan

Costs models
SWOT Revenues
Pricing Financial indicators
Service portfolio Evaluation
Technologies used Sensitivity studies
Action plans

what parameters to improve, how to adjust models

June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 7

Business Planning and Modeling

Business model structure

Demand

Human
Tariffs Resources

Corporate Ordinary
Customers Customers CAPEX OPEX
Revenue Revenue

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
Leased Added
rental fee Mobiles Data
local calls lines Video value
ld calls services
idd calls

Total Revenues

June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 9

Business Planning and Modeling

Expenses calculation

Customers
Services

Network Customer Care Labour Costs

construction provisioning Marketing
operations repairing Billing Administrative
extension call center & general costs

CAPEX OPEX
June 2007 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 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 13

Business Planning and Modeling

Income statement

OPEX
Revenues

CAPEX
- +
EBITDA
Earning before income taxes,
depreciation and amortization
Depreciation -
EBIT
--
Earning before interests,

Taxes - 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 Operating
revenues expenses
Gross
(sales) Depre-
margin
ciation
Income
from EBITDA Taxes
operations Interests

EBIT Dividends
Net
Other income Retained
incomes earnings

June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 17

Business Planning and Modeling

Cash Flow

Inflows Revenues, funds

Cash
CASH FLOWS IRR
balance NPV

Out Working
Taxes
flows OPEX CAPEX Capital
changes

June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 18

 Business Planning and Modeling
INFLOWS and OUTFLOWS

Customers Shareholders Banks, lenders

Sales of services Increase of equity Increase of debt

(operating income) (capital increase) (credit, loans)

INFLOWS

cash flow

OUTFLOWS

Labour Network Technical Debt

Tax Dividends
costs & & admini- repayment
Training equipment strative with
expenses interests

Staff Suppliers Service Govern- Banks, Shareholders

providers ment lenders

June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 19

Business Planning and Modeling

Rules for Equipment Depreciation

Residual Value

Delayed depreciation
100%

Linear depreciation

x% RV at Yn

Accelerated
depreciation
Years
0

Y0 Yn Ym

June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 20

 Business Planning and Modeling
Cash-
Cash-Flow and components over time

Financial evaluation and cash flow

3000

2000

1000 Capex investment

Opex
0 Capex extension
KEuro

Y0 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 Capex substitution

-1000 Residual value
Revenues

-2000 Cash flow

-3000

-4000
evaluation period

June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 21

Business Planning and Modeling

Business domains and trends
Illustration case for customer categories and revenues
>3000
Large Corporations
0.5- 1% Operator
300-500
Growing Volume

Small& Medium
3-8% Enterprise
business
Growing revenues

70-120 feasibility
8% SOHO (1-2 people)
as a
High-End 60-80
10-20% function of
Residential
mix of
30-55
60-70% L-E Residential categories

Classes Of
Revenues/Month (Euro)
Customers
“Customer stratification should be analyzed per country”
June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 22
 Business Planning and Modeling
Importance of Modeling
Economy of scale per technology and size
Cost per unit

u1 u1 = a1+ B1 / S
u2 u2 = a2+ B2 / S
Full capacity cost

m1 m2 X M1 M2 Equipment size

t1 = a1 S + B1
t2
t2 = a2 S + B2
t1

m1 m2 X M1 M2 Equipment size

Impact by occupancy or fill-in degree

June 2007 ITU/BDT Network Planning/ Business Planning - O.G.S. slide 23

Business Planning and Modeling

Importance of Modeling: Deployment Strategies

C: Balanced between COOP

Equipment Deployment:CAPEX
and demand satisfaction

Solution B Solution C
(Once for all) (Optimized)
B: High risk,
Demand
CAPEX Solution A forecasts
and OPEX (yearly)
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 Preasure by payment capability,

customer/year churn or regulation constraints
(ARPU)
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