PLDT Inc (PHI) 2005 Q3 法說會逐字稿

Good afternoon everyone and welcome to the PLDT conference call to discuss the company's nine months 2005 financial and operating results. This conference call is being recorded, replay information will be provided at the end of the call. At this point I would like to turn you over to Ms Anna Bengzon for the opening remarks and a bit of introduction. Please go ahead. Thank you.

Good day everyone, thank you for joining us today at the PLDT investor conference call to discuss the company's nine months financial results. The conference call is being recorded and we will provide replay information at the end of the call.

We hope you got the presentation which we have made available at our web site. For those that have not received the information it's posted at the PLDT web site www.pldt.com.ph. Please then go to the investor relations page and drop down the sub-section called presentation. Inside the investor relations section you can also download the financial statements and MBNA of the company.

For today's presentation we have with us the management team of PLDT Group. We have Mr Napoleon Nazareno, president and chief executive officer; Mr Chris Young our chief financial advisor; Anabelle Chua, treasurer and senior vice president; from SMART there is Peter Lawrence, chief financial advisor and Debbie Tan, head of investor relations. And from ePLDT we have Ray Espinosa, president and CEO.

At this point we'd like to turn over the call to Mr Nazareno for the presentation.

Thank you Anna, good afternoon and thank you for joining us this afternoon on this call. The PLDT Group recorded a net income of 25 billion in the first nine months of the year, up 13% year on year, notwithstanding last year's income, benefiting from a 4.4 billion gain on the Piltel debt exchange transaction.

Our core earnings reached 23.2 billion, an improvement of 14% over our core earnings of 20.4 billion in the same period last year. Our third quarter '05 core profit of 8.2 billion is 2% higher than our second quarter '05 profit of 8 billion and 16% higher than the first quarter earnings of 7 billion. Consolidated service revenues increased by 4% to 89.7 billion, again driven by our wireless business which grew 8% year on year to 55 billion in the first nine months of the year.

Our EBITDA reached 57 billion, 6% higher than last year's 53.8 billion and consolidated EBITDA margins improved to 64% from 52% last year. Free cash flow surged by 51% to 41.6 billion principally due to lower CapEx spending. CapEx for the year is not expected to exceed 13.5 billion. Even the strong cash flows being generated by the Group; PLDT continued to accelerate its deleveraging. In the first nine months of the year we paid down $552 million of debt allowing our debt balance to go down to less than $2.3 billion as of end of September.

On slide 3, earlier today the PLDT Board of Directors approved the declaration of another 21 peso per share dividend to common shareholders. This will be paid before year end '05 to shareholders of records as of November 28 this year. As previously stated we are committed to increasing our dividend payout and to this end we have increased our dividend payout target to 40% of '05 core earnings per share in keeping of the dividends declared today and in May. The final dividend for '05 will be declared with the announcement of our audited ten year '05 results early next year.

I would also like to update you on a number of developments which we recently announced. On October 24 we issued a notice of mandatory conversion for the outstanding 4.6 million Series III convertible preferred shares. On the mandatory conversion date of December 19, '05 PLDT will issue 7.9 million common shares thus increasing the number of our common shares outstanding by 4.6% to approximately 180 million shares.

The diluted effect on earnings is lower, however at only about 1% but PLDT will realize annual savings of 1 billion beginning '06 from the corresponding reduction in preferred dividends paid per year. I am also pleased to report that we have obtained the necessary consent from holders of our 2012 and '07 notes to amend our restricted payments capacity. This will give us greater flexibility to make restricted payments including increasing common dividend payments in the future.

The consent solicitation was overwhelmingly successful as indicated by the high percentage of consents we received. Moreover the tender offer also allowed us to buy back $50.9 million of our '07 notes. The total debt reduction target for the Group in '05 has therefore been increased to 700 million from 600 million.

Moving onto slide 4 for our wireless business. SMART service revenues increased 8% year on year to 55 billion. However service revenues in the third quarter were slightly lower than the second quarter by less than 1% mainly due to the combined effects of macro economic factors and various promotional activities. While July and August revenues were relatively robust, September revenues were adversely affected by certain promotions launched during the month. October revenues however appeared to have recovered following the introduction of the enhanced version of SMART 258 Unlimited Text.

Based on current indications we expect to grow revenues in the fourth quarter relating to the third. EBITDA remained strong at 12.3 billion in the third quarter and EBITDA margins improved to 67% quarter on quarter mainly due to lower marketing expenses. Core earnings grew 13% year on year to 20.4 billion from 18 billion last year. Quarterly core earnings also improved 6% and 24% over second and first quarter earnings respectively. Similarly third quarter '05 core earnings were 20% higher than earnings in the same period of last year.

Moving onto slide 5, this shows the financial highlights of our wireless business for the first nine months of '05. As mentioned earlier service revenues were up 8% year on year. Operating income increased 14% to 28.5 billion on the back of lower marketing expenses attributable to the termination of the SIM-swapping activities and also lower non-cash operating expenses.

Recorded net income held at about 21 billion, notwithstanding the 4.4 billion gain from the Piltel debt exchange transaction recorded last year. More importantly, all profits were up 13% to 20.3 billion despite an 18% increase in provision for income tax. The consolidated debt balance of [mark] and Piltel was $717 million as of the end of September for both '05 and '04. For the nine months of '05 our combined wireless businesses paid down debt of $77 million.

Moving on to slide 6. The combined cellular subscribers of SMART and Talk 'N Text remained at 20.8 million as at September 30, 2005 representing an estimated 58% market share. As we had earlier guided, the effect of the termination of SIM-swapping in May became evident in the third quarter with net subscriber disconnections being recorded in September. The downward trend in the subscriber base is expected to continue for the balance of the year. Blended subscriber acquisition costs over the first nine months of the year continue to decline. In particular prepaid subscriber acquisition costs were down to approximately 250 in the third quarter and are therefore covered by less than 1 month of ARPU.

On October 20 we launched an enhanced version of SMART 258 Unlimited Text. Our experience over the past few months has demonstrated that there is a segment in the market with an appetite for unlimited packages. Accordingly we have introduced refinements to our unlimited offering with an eye to preserving network quality for all our subscribers while encouraging a steady level of top-up.

On a separate [front] our Wifi service is fast gaining popularity. Launched in June this year and targeted primarily at rural areas, we already had about 9,000 subscribers at the end of September. Inclusive of Meridian's 3,500 subscribers we now have 12,500 wireless broadband subscribers. There are no signs of demand for this service slowing down and we are therefore scaling up our operations. We are also in the midst of rolling out a complementary wireless broadband offering for the urban areas which we hope to complete by year end.

Moving on to slide 7. SMART CapEx in the first nine months was down to 4.9 billion compared to 12.8 billion last year. We expect SMART's full year CapEx to reach approximately only 7.5 to 8 billion. SMART's network now at 38 switching centers of which two are already of the Next Generation type. The network covers 98% of the population with only 28 out of a total of 1,610 municipalities in the Philippines are not covered by SMART's extensive network. We are working on providing coverage in these remaining areas as we speak. We are also expanding the reach of our wireless broadband service with 1,400 of our base stations now equipped with wireless broadband capability.

SMART's free cash flow swelled to 30 billion in the first nine months this year compared to 16 billion last year. In fact SMART has already distributed 20 billion to PLDT of which 17.2 billion represented dividend payments and 2.8 billion represented the redemption of SMART preferred shares. SMART expects to distribute another 5 billion to PLDT before the end of the year.

Moving on to slide 8, on the fixed line business. Fixed line revenues improved 2% year on year to 36.7 billion mainly due to higher data revenues. On a quarter on quarter basis, fixed line revenues grew slightly to 12.5 billion on the back of some improvement in our local exchange and national long distance revenues. EBITDA was steady quarter on quarter at 6.7 billion despite recognizing manpower rightsizing expenses of 226 million in the third quarter of '05. Other cash operating expenses remained under control with selling and promotions, maintenance and [rent] declining in the third quarter compared with the second quarter. As at the end of September we had about 76,000 DSL subscribers, exclusive or not including SMART Wifi; up from 49,500 as of year end '04. We expect the number of DSL subscribers to increase further as we expand the coverage of our DSL network, bundle DSL with PCs under a preferred payment purchase scheme, and introduce more affordable packages to residential subscribers.

On slide 9 this shows the performance of the fixed line business for the first nine months of the year. Service revenues are up 2% to 36.7 billion, cash expenses were up 3% to 14.2 billion while non-cash expenses particularly depreciation increased by 7% to 11.2 billion. EBITDA was up 4% to 20.3 billion and margins improved to 55%. Interest expense decreased by 14% to 7 billion reflecting the benefits of the deleveraging of the fixed line business. Aside from the reduction in interest expense, the strengthening of the peso also caused our overall financing cost to decline by 38% to 5.8 billion from 9.4 billion.

As a result of the combined impact of higher EBITDA and lower financing costs, offset in part by higher depreciation charges, reported net income of the fixed line business more than doubled to 4 billion in the first nine months of '05 from 1.8 billion last year. Core earnings before ForEx gain improved by 11% to 2.8 billion from 2.5 billion.

Moving on to slide 10, as we continue the upgrade of our fixed line network to an all [Wifi] Next Generation network our CapEx increased accordingly to 4.2 billion in the first nine months of the year. CapEx for full year '05 is expected to be no more than 5.5 billion. The NGN upgrade will be implemented over two to three years and our engineers have already completed most of the planning and preparation for this transition.

Fixed line free cash flow grew to 31.6 billion inclusive of 20 billion of dividends and other distributions from SMART.

On slide 11, PLDT [paid a breakdown] $472 million in the first nine months of the year reducing its debt balance to $1.5 billion. We also paid another $50.9 million today representing the '07 notes that were tendered. By year end '05 we expect fixed line debt levels to go down to $1.4 billion which is half the level of debt we had back at the beginning of '02 at about $2.8 billion. This aggressive deleveraging has allowed our interest expenses to decline by 14% to 7 billion in the first nine months of '05, from 8.1 billion in the same period last year. As a result of the significant debt reduction of PLDT approximately 73% of our debts are hedged through transactional hedges and US dollar cash balancing. This substantially mitigates our exposure to foreign exchange risks going forward.

On page 12, this is about our call center business. In the first nine months of '05 our call center revenues grew by 51% to 1.4 billion from 904 last year. The increase in revenues was driven by higher capacity utilization and upward price adjustment for certain new programs being handled by [inaudible]. At the end of September '05 ePLDT had over 3,300 seats. Full new sites are expected to be operational by early '06. By year end '06 our call center businesses are expected to have approximately 4,800 seats.

Page 13 shows the financial highlights of ePLDT. Service revenues increased by 37% to 2.1 billion due to higher call center and internet data center revenues. The increase in Netopia's revenues was partially offset by a decrease in Infocom's revenues. Call center revenues accounted for 65% of total ICT service revenues followed by internet service revenues representing 20% and the balance, mainly from the Vitro internet data center. Netopia now has about 170 stores with over 7,700 PC terminals.

Cash operating expenses increased by 36% to 2 billion, due mainly to higher compensation expenses associated with growth of our call center business. Maintenance and selling and promotion expenses are also up due to the expansion of our internet café business and product launches from NetGames, our internet and gaming company. Non-cash expenses were down 63% to 306 million, mainly due to the impairment provision recognized by ePLDT in '04. ePLDT recorded a net profit of 109 million in the first nine months compared to a loss of 516 million last year.

Page 14 recaps the consolidated financial results of the Group for the period. Service revenues grew 4% to 89.7 billion, operating expenses were up 2% to 47 billion. Operating income therefore increased by 10% to 40 billion and the EBITDA improved 6% to 57 billion. EBITDA margins were robust at 64% compared to 62% last year. Financing costs are down 40% to 7.6 billion, mainly due to the two main factors. First interest costs were lower by 1.2 billion and second ForEx and derivative losses in the nine months of '04 of 846 million reversed to a ForEx gain of 2.6 billion following the strengthening of the peso this year.

As a result of the significant releveraging of the Group coupled with the hedge transactions entered into by PLDT the estimated impact on our earnings in fluctuations in the US dollar peso exchange rate has been reduced. We estimate that for every peso change in the US dollar peso exchange rate we recognize approximately 1.7 billion of translation gain or loss based on our outstanding balance as of September 30, '05 vis-à-vis an estimated impact of 2 billion at the beginning of the year.

Provision for income tax grew by 34% to 8.1 billion from 6.1 billion last year. Reported net income increased 13% to 25 billion. ForEx earnings excluding ForEx gains or losses; and gains arising from the debt of Piltel debt exchange transaction recorded in '04 grew 14% to 23.2 billion.

Slide 15 shows our consolidated cash flow and balance sheet highlights. Consolidated CapEx decreased by 6.7 billion to 9.6 billion for the first nine months of '05. At this point we expect full year '05 consolidated CapEx to be no more than 13.5 billion compared to our previous guidance of 16 billion. Free cash flow surged to 41.6 billion or about $714 million and was used to reduce debt of 552 million US during the period.

To date PLDT has also utilized approximately 100 million US for which free cash flow this year for dividends to common shares. The common dividends declared today would amount to another $65 million of free cash flow being paid to shareholders. As at the end of September the Group's total debt is already below $2.3 billion versus 3 billion last year. The Group's net debt is now below $1.7 billion of cash balances reached 33 billion pesos or about $518 million.

Net debt to EBITDA and net debt to free cash flow have improved significantly to 1.2 times and 1.7 times respectively as of end of September '05. We expect the total debt to further drop to $2.1 billion by year end '05. In conclusion, let me update you on our targets for the year. We are increasing our debt reduction target in '05 to $700 million as a result of our continued strong cash flow generation and the successful tender offer we made on the '07 notes.

On this basis we are confident that we can meet our debt to EBITDA target of 1.5 times early in '06 as we are already at 1.6 times as of the end of September '05. Because our cash flows grew and our flexibility improved following our consent solicitation exercise we expect to increase our dividend payout over time. The common dividend we declared today and the increase of our dividend payout targets of 40% of '05 earnings are clear signals of our commitment to improve shareholder returns. Our target for '06 is to achieve a 50% dividend payout of '06 for earnings.

Thank you and we would now like to open the floor for questions.

The floor is now open for your questions [OPERATOR INSTRUCTIONS]. The first question will be coming from [Navin Keeler], please go ahead.

Hi, thank you for the conference call and congratulations on the good result. I had actually three questions, first in terms of your CapEx budget which obviously you have cut down for this year, how does it look like next year as potentially some kind of [inaudible] doubt starts to kick in? And perhaps on a related note if you could update us on the latest developments on the 3G front as to when do we expect the licenses to be issued etc?

The second question I had was on depreciation expenses which seem to have increased substantially on a quarter on quarter basis. I assume there is some changes in terms of your estimated useful life, if you could throw some light on that.

And perhaps in terms of your estimated use for life, you could throw some light on that and perhaps quantify the impact from the change in the depreciation policy?

And the third question I had was, in terms of tax rate going forward, given the expected change in the corporate income tax rate from the latter part of this year and potentially an increase in VAT from some time next year, how do you expect that to impact your earnings for next year? Thanks.

Thank you for the questions. Let me take up your first question on the CapEx budget and the prospect for 3G. For next year we are still looking at the same guidance as we had estimated in the first half of this year of about 16 to 17 billion [yearly] split 50/50 between fixed and wireless. The 3G CapEx is already included in that and also the NGN continuing rollout that would spill over next year and the year after that is also included. The 3G licenses we expect to be issued towards the end of the year, the government is still evaluating. The deadline for applications I believe is December 8 or 7 and from there it will evaluate and hopefully we are looking towards the end of the year for the licenses to be issued. We are prepared to embark on that because our network is essentially 3G ready already, both on the core network side and on the [RF] side. So the investment that we're looking at is not really that much when it comes to 3G roll out.

Maybe I can try answering a question on the depreciation. The main reason for the increased quarter on quarter is that we had a number of projects which are effectively construction in progress which actually [went deeper] during the quarter. Therefore we began to depreciate these projects in the current quarter.

So I think if you're looking for guidance as to how that depreciation charge will move forward I think the consolidated depreciation charge was about 5.8 billion. I think it's going to run at a similar level for the balance of the year and as we go into next year.

In terms of the tax rate, obviously it's a composite of what's happening across the Group but at SMART on the fixed, and obviously it's fixing to some extent the profitability in PLDT. The tax rate for the year, I think the composite rate will probably come in the region of 24 to 25% and we would expect that probably to increase as we go into next year where we're not quite complete in terms of our full budgeting for [inaudible] but it probably will be in the range of maybe 2 to 3% higher if we look at 2006 compared to 2005, but we obviously have to fine-tune that over the next month or two.

Thanks a lot.

Does that conclude your question sir?

Yes thanks.

Thank you sir. And the next question will be coming from [Mr Jose Luis Salado] please go ahead sir.

Hi good afternoon, thanks for the call and congratulations on the results. I also have three questions. The first question is in relation to the dividend payout. Now that you've changed the new limit on the parent company dividend payout I was wondering if you will be acting as well in terms of SMART's dividend payout restriction? At least you could remind us if there are any and if you can pay [out of] free cash flow from SMART instead of out of income?

The second question is, I just wanted to get more color on the promotional activities that you mentioned in September [inaudible] impacted the revenue [paid]. What sort of promotions and have these promotions already been [inaudible] going forward?

And the third question is, a couple of things on the Q on Q OpEx side. There seems to be big swings in provisions for the third quarter as well as the rent expense, I just wanted to get more color on that.

Well Luis thank you for the questions. Let me answer the number two first. On the promotional activities that you were asking, this is in relation to the third quarter revenues. As you know the third quarter revenues went down very slightly compared to the second quarter and there are really two reasons for that. Number one was the fact that the inflation was higher and therefore the disposable income left for our consumers were a little bit less than before. The second was of course, if we look at the monthly trend in the third quarter the July and August were doing okay but September suffered a loss in revenue and this was due to the promotion that we tried in place of the 258 that we terminated a month earlier before that. And it resulted to less, or it had a negative impact on revenue. If we look at October where we have re-launched an enhanced version of 258 the trend is that the revenue in October is now higher than September and in fact the trend in November is also showing an increase. So we feel that the third quarter revenues will be better than -- the fourth quarter revenues will be better than the third.

Luis it's Peter I'll take your first question on the dividends. We're happy to report that actually SMART has now paid off its first two year [inaudible] lines, it's what we call Phase 1 and Phase 2. So it's only the Phase 3 line that still contains any restrictions in relation to dividends and each time we pay a dividend we get a waiver from that particular restriction so we wouldn't really see any difficulty in SMART continuing to pay a very high percentage of our profits up to PLDT. I think it's been indicated in the presentation we've paid 20 billion already this year and we'll top that up with another 5 billion by the end of the year subject to that consent coming through; we don't expect any problem in getting those consents. The banks in [inaudible] are quite used to those requests nowadays. So going forward we would expect to still be able to pay sufficient level of dividends to allow PLDT to meet their own objectives in terms of returns of dividends to common shareholders.

Just a follow up Peter, can you actually pay beyond 100% if you wanted to.

No the only option we have is we do have a few preference shares left which we can redeem so that's the only option we have. But we have the corporate code here to monitor as well. But we're aware of that particular issue and it's also tied up with the fact that of course Piltel is quite profitable nowadays as our subsidiary of SMART so we'll be looking at trying to look at the relationship between Piltel and SMART. The bottom line of the objective will be to ensure that PLDT has the funds to pay on the dividends that are required for the common shareholders.

Thanks for that.

Thank you sir does that conclude your question sir?

Just one last question. On the Q on Q rent and provisions?

I think maybe on the provisioning, basically what's happened is we're looking at lower levels of provisioning I think on the fixed line going forward. I think we've been providing up until now round about 6 to 7% of our revenue [inaudible] provisions. That is likely to be at a lower rate going forward given the collection levels that we've been seeing over the last 12 to 18 months. We've been up to 96/97% so I think the provisioning level that you see in the third quarter is possibly more likely to see going forward.

Secondly if you have a look at the second quarter it was fairly high because there was an inventory provision in there which SMART booked and there's been no repeat of that in the third quarter. Nor was there a similar provision in the first quarter, that was a specific I think [super] handsets which they provided against.

Now in terms of the [rent] if you look at actually the average level for the first and the second quarter it's running at about 500 million pesos per quarter and I think it's up slightly in the third quarter to about 550. Again I think you need to look at it closer to the 500 to 550 million pesos as the run rate per quarter.

Okay thank you.

Does that answer your question Mr Salado?

Yes it does, thanks.

Thank you sir. And the next question will be coming from Miss [Karen Ng] from Thailand. Please go ahead ma'am.

Hi good evening and thanks for the call. I have three questions. First is can you provide more elaboration on your NG and build-out plans? Exactly what does that entail? Do you intend to convert your entire network? And what do you think more importantly it will translate to in terms of cost savings going forward? And I suppose of the 16 to 17 billion you expect in Group CapEx, what part of that is for the NGN?

Second question is, you're saying you're targeting a better fourth quarter compared to third quarter in terms of revenue growth for the wireless business. But at the same time you expect your total subscribers to continue to decline. So is it safe to say then you are expecting existing subscribers to boost usage and on the basis of what?

And the last question is on your EBITDA margin guidance for each of the wireless and fixed line segments for the full year and into 2006. Thank you.

Thank you for the questions Karen. Let me deal with the NGN first. Two weeks ago we had our first staff call on a purely NGN network which was [involved] in [out of bound] in Metro Manila in a SMART base station connected by copper into the residencies of a subdivision for 138 subscribers. And this went beautifully. In other words what we have done here is we have converged our network to a certain extent and taken advantage of the strength of both the fixed and the wireless network. Given that our base stations are spread all over the country, and as I have said, we are as of the end of September covered 98% of all the municipalities and [inaudible] in the country, that makes us therefore -- that gives us a tremendous advantage in terms of reach when it comes to deployment of the NGN for fixed.

What we are doing really is converging our both fixed and wireless network into one, one that is IP centric and for two basic reasons; one is to achieve cost efficiency that would be a dramatic improvement compared to the existing. And second is of course to be able to bundle and to have services that would involve both fixed and wireless combined. And given our plan to also combine the back room which is the rating and billing, that gives us a tremendous advantage considering that we have the most robust backbone and transmission -- fiber backbone and transmission in the country.

With regards to the [third] going down and the revenues going up on the fourth quarter, our subscriber base is going down mainly because we are purging our, what we call the SIMs that have been SIM-swapped over the past month. And our -- we terminated the SIM-swapping activities last May and it takes about four to six months after that before these subscribers which are non-revenue generating anyway, they're just going from one network to another, taking advantage of the pre-loaded loan to be purged up off our system. And that's the reason why the subscriber base seems to be reducing over the next three months. But on the other hand the revenues, which is really the focus and the more important determinant for our success, we are monitoring very closely and we are directing our marketing efforts towards enhancing usage and revenues. And that is why we are saying that the revenues in the fourth quarter, based on the current trends in October and early November, is favorable and will be higher than the third quarter. Also basically because the fourth quarter is Christmas season and therefore people are more inclined to spend.

The third question --

If I can just comment on the margins. At the moment the wireless margins are 55 to 66% level and the fixed line is tracking about 54 to 55% so on a consolidated basis we're around about 63 to 64%. And we think that's probably sustainable for the balance of the year. I think as we go into '06 and '07 I think it's going to be probably challenging to maintain the margins at that level. So maybe we've seen some weakness, maybe 1 or 2% lower as we go into '06 and '07.

Maybe just as a follow up, the NGN network -- my question is what sort of cost savings do you expect? And is it more likely going to help maintain margins rather than pull up margins?

I think that's a fair statement. I think there will be savings across the board, maintenance expenses are likely to be lower because you'll have pure exchanges, the [inaudible] were likely to be lower. Premises expenses will be lower and eventually you will see headcount expenses lower. But I think the business model that we're running is one exactly as you say, that that allows us to maintain the margins at these already relatively high levels as we look out to the '06 and '07, rather than seeing any significant margin expansion.

Thank you.

Does that conclude your question Miss Ng?

Yes thanks.

Thank you. And the next question will be coming from Henry Cubb from [inaudible] please go ahead.

Hi there. Thanks very much for the call. Just a couple of questions, first regarding the Series III issue. Does that mean that the billion peso enhancement to income will be accrued this year 2005? Or would it be in next year 2006?

Second question is just on the narrowband subscribers, there also seems to be a large number of deactivations there. Are most of those churning into broadband?

And lastly again just on the subscriber market outlook. Do you feel that the market's now saturated, if not in terms of subscribers but in terms of revenue base?

On your first question Henry the mandatory conversion date for the Series III preferred has been set at December 19. So the preferred dividends will accrue after that date. So it will be prospective in terms of the 1 billion per annum savings in preferred dividend pay out that you are talking about.

So we'll see the benefit in 2006?

Correct.

Okay.

With regards to the question on narrowband subscribers, the subscriber base of our company Infocom under e-PLDT which caters to the narrowband subscribers has gone down.

[Inaudible]. And there has been a shift to broadband subscribers of course because our DSL subscribers have gone up, we are now at 76,000 plus the 3,500 that we have for wireless broadband and it's showing no signs of slowing down. So over time that should be shifting from -- we estimate there's about over 700,000 still of the narrowband subscribers which we can migrate into broadband.

I think Henry at least on the PLDT fixed side I'm not actually aware that we've seen any significant decline on the narrowband side. I think our recollection is that in fact we're about 88,000 to 90,000 higher in terms of subscribers on the narrowband side at the end of December '05 compared with '04.

Okay I was comparing it to the first half report but there might be a reporting difference there which is as [450,000] --

It's certainly not on PLDT fixed, maybe there's some specific issues reflecting PLDT. Certainly at the end of September we'll be worth 370,000 on the fixed [line].

And could you just give an update on your expectations on the ILB side, whether you're seeing, expecting revenues there to be eroded substantially over the next couple of years as people start using voice over broadband or --

Well I think as we've discussed many times the issue really is a trade off to some extent in terms of how we decide or how we approach the broadband market here. Our broad strategy is to be fairly aggressive in terms of pushing our broadband product [inaudible].

I think our strategy is to be fairly aggressive in pushing the broadband product both on the fixed and the wireless side which effectively then would earn for us a fixed monthly charge against what we are earning in terms of the international business which is a permanent poll charge. So yes we think there will be pressure on the ILB side going forward however offsetting that we would see that the growth of the revenues from the broadband side, particularly for our retail customers would be able to absorb some of that pressure that we anticipate going forward.

Do you have a target for broadband subscribers for next year?

Yes we are looking at about 200,000 to 250,000 broadband subscribers fixed and wireless by the end of next year.

Okay thank you very much.

Thank you. The last --

I think there's still a question on the penetration?

Yes just on whether you feel the market's saturated in mobile.

On mobile, based on the latest market study that we have done there is still a remaining 25 million of the addressable market is not using a cell phone and that is the market we are focusing on. They are at the lowest income level and so we are studying as to how to approach such a market and it would require a different service offering and we are still at this point studying how to get them into the [practice] of using the cellular service.

We are still looking at subscriber growth after all of this SIM-swapping, purging of SIM-swapped SIMs out of the system. And by the beginning of next year we should see the real net take up when it comes to the subscriber base, and while the growth will not be as much as we have had before, we are still anticipating a slight growth in subscriber take up.

Okay thanks very much indeed, thank you.

Does that conclude your question Mr Cubb?

Yes thank you.

Thank you sir. And the next question will be coming from Mr [James Sullivan] from Singapore, please go ahead sir.

Hi good afternoon thank you very much for the conference call. I was just wondering if you could walk through the current pricing for the wireless broadband offering versus a DSL and a narrowband dial-up product?

Our current offering for wireless DSL which is directed to the rural areas outside Metro Manila for example and [inaudible] City is at the promotional price right now of 788 pesos a month. Or roughly how much in US dollars? About $14.

A month?

Yes and if you compare that to a DSL subscription it ranges from 15 to about 3,500 pesos a month depending on the speeds and if it has limited use or -- and that roughly translates to about $30, to $27 up to $55. That’s the kind of pricing situation in the market right now that we are on the services that we are offering.

Great, thanks very much.

Does that conclude your question Mr Sullivan?

Yes it does thank you very much.

Thank you. And the next question will be coming from Mr [Mossisus Kirk] from Philippines, please go ahead sir.

Just a couple of questions. One is on slide 7 you said that approximately 1,400 base stations are equipped with broadband wireless capability. Are these Wifi stations or WiMAX stations?

The second question is how are you going to rationalize moving forward, three wireless standards namely 3G, wireless, WiMAX and Wifi?

Also on the DSL and broadband subscribers, how is the business case shaping up? I would imagine looking to increase it to [200] and 150,000 next year would entail something like a subscriber acquisition cost. Would you have a figure on that since you plan to bundle PCs and make more affordable packages for these wired line broadband subscribers?

With regard to the first question for the wireless broadband, the one that we are deploying in the rural areas is a 2.4 megahertz standard, that is on Wifi. The WiMAX, the standards are still in the making and right now we are anticipating or we are still in the planning stages with regards to the WiMAX technology.

On the urban areas however we are deploying the much faster and higher capacity type of wireless broadband which is the Canopy technology of Motorola; that's at 5.8 megahertz. And that’s what we are deploying in the urban areas where greater speeds and capacities we foresee would be needed.

Combining technologies depends on how it progresses and as you know things change as a lot of R&D is invested into these technologies. And the beauty of our situation is we have the footprint to be able to pursue any of these technologies when it comes to frequencies available. So that we have secured and therefore we are quite flexible as to adopt ourselves in terms of technology deployment or to make any changes along the way if need be.

In terms of the subscriber acquisition costs there is effectively not that concept that you were indicating of subsidizing the computer. Effectively what's happening, the various programs that you see are that the computer is being [fed] over a period of time. But there is no subsidy being supplied either by PLDT or SMART. So there is not a concept effectively of the incremental subscriber acquisition costs. There is obviously an incremental capital cost, but not a soft cost in terms of the marketing support.

But in terms of say profitability, would you say that DSL broadband is still being subsidized by the fixed lines? Or when do you expect broadband subs to be able to stand on their own financially?

I think they are. Basically the marginal CapEx cost for a fixed line DSL is something in the region of about $100. And as [Polly] indicated, it depends which particular product that the [site] subscribes for. But it's in the region of 1,500 to 3,000 pesos per month. So obviously we're recovering the implemental capital cost relatively quickly. So from our perspective, there is not that element of subsidy that you're referring to.

So the marginal capital cost is something that’s directly related to the DSL? There's no assumption of sharing of existing network facilities to that DSL sub?

Well effectively the network itself is there, and it exists and it [figuratively] services the ILB business, the NLB business, the global exchange business; the DSL product sits on top of that network.

So it's treated as sound basically for your computations?

Basically it doesn’t change as a result of expansion of the DSL facilities. And to the extent that we would have to provide incremental capacity in terms of international links of transmission facilities, we would factor that into the consideration of the incremental capital cost.

That 200,000 to 250,000 next year, would you say it's still about half capacity of your DSL subs post the completion of the NGN? Or you can do more after you complete the NGN network?

The NGN, the new generation network basically allows you to offer a range of facilities and a range of products, one of which would be the DSL offering. The NGN, at least the initial stages of build out which covers '05, '06 and through to some extent '07, but it won't stop to the extent that you want to continue to provide new services. If the DSL or whatever broadband product comes after DSL is successful, then obviously we'll continue to invest in the network to support that.

It is a highly scaleable type of investment. So what we're doing is, well we are building ahead of demand. We can easily increase or decelerate the build out.

Okay, thank you sir.

Thank you. Does that conclude your question Mr Kirk?

Yes it does.

Thank you and the next question will be coming from Mr [Jeff Tam] from CSFB Hong Kong. Please go ahead sir.

HI good afternoon everyone, thank you for having the call. Most of my questions have been answered; I just have one follow up question. Can you talk about progress on your acquisition plans, if any? There were early reports about things like BayanTel or a terrestrial broadcaster. Can you please comment on that? Thank you.

Okay. With regards to the acquisition plans I suppose you were referring to the BayanTel; the discussions are, as far as I know, no longer in existence. And the [DPH], it's still work in progress at this point in time.

Are there any acquisitions that you're [writing] out right now, or is that it?

I think that’s it.

Thank you.

Hello sir, does that conclude your question, Mr Jeff Tam?

Yes, thank you.

Thank you. And the next question will be coming from Mr [Joe Cherosipi] from Hong Kong. Please go ahead sir.

Hi, thanks for the call. I have two questions. Can you give us an idea what will be the net subscribers as in third quarter for both prepaid and postpaid if we take out the effect of the SIM swapping termination?

And my second question is with PLDT looking to pay higher dividend, what is the guidance on that reduction for the next two years. Thanks.

Okay, I think what we’ve seen in terms of the net subscriber additions in the third quarter for SMART was basically no movement from the end of June. But as [Polly] mentioned in his presentation, we did have a reduction in subscribers in September.

So basically when you saw that revenues were just 1% down, so basically just about all of the reduction we saw in September would have been the manifestation of the stopping of the SIM swapping. And as [Polly] also mentioned, we'd expect to see that decline to continue in the fourth quarter. So we hope that answers your question.

I think in terms of the debt reduction our maturities are about in '06 and '07 about 350 to about 350 -- about US$350 million level. And obviously we would anticipate playing down that debt as it matures to the extent that we could increase that through other activities, for example the recently concluded [spend] being an example. Obviously we would strive to increase it beyond that, but I think you could look at the 350 as a base level for '06 and '07.

Okay, thank you.

Does that conclude your question Mr Cherosipi?

Yes thanks.

Thank you and there is a follow up question from Mr Jose Luis Salado. Please go ahead sir.

Thanks, I just have the one follow up question. I just wanted to know, the cost of sales was up about 21% Q on Q despite the flat net adds. Is that indicative that your gross adds were healthier third quarter versus second quarter? Or is there anything other working in that number?

Actually, Luis I'll take that one. In fact the gross additions were down from 3.5 million at SMART and a combined basis with Piltel and the postpaid to about 2.7 million. The subscriber acquisition costs per brand were all down quarter on quarter. The SMART prepaid down to 237 per sub, postpaid down from 17,500 to 14,500 and the -- even Talk 'N' Text down from 251 to 226. But the cost of sales also includes the cost of phones on postpaid for retention. So when you look at the cost of sales, you need to look at that in the context of the non-service revenues as well, and look at the net figures.

So if you look at those net figures and get that subsidy added to the commissions and the adds and promo we spend, the subscriber acquisition costs are down across all our categories.

Thanks very much indeed.

Does that conclude your question Mr Salado?

Yes it does.

Thank you very much and the next question will be coming from -- a follow up question from Mr Henry Cubb. Please go ahead sir.

Hi there, I just wanted to confirm that I didn’t hear the CapEx number for the next two years. Was it 13 or 15 billion for the next two years?

Neither of those, Henry, 16.

16, okay. Thank you.

Does that conclude your question Mr Cubb?

It does.

Thank you very much sir. [OPERATOR INSTRUCTIONS] The next question will be coming from Mr [Irwin Raynon] from the Philippines please go ahead sir.

Hello, thanks for the call. I basically have two questions. First is, what is the company's plan for CDMA if there is any?

Second, regarding 3G, what is the company's business plan like, any service offerings, suites? And the period of roll out for the 3G.

Well the first question is on CDMA. There are no current plans on CDMA as far as the non-3G type of technology is concerned, but we are always in the look out for any kind of technology that would enhance our market position of course.

With regard to the 3G, we are already busy preparing the roll out program for the 3G, and it's true that the handsets have yet to come down for it to suit the demands of our type of market, but nevertheless we are already looking at several kinds of services such as video streaming and all other airborne access for 3G set up, mainly targeted to the higher income level.

The roll out period is fairly easy, our network is 3G ready. We have already set the beginnings of 3G and we're looking at a good coverage within the next couple of months.

Just a follow up question, do you believe the 16 to 17 billion CapEx budget for '06 and probably the succeeding years might be enough for 3G on a yearly basis?

Yes, the 16 to the 17 billion estimate CapEx over the next two years already includes the NGN expansion, the converged technology programs that we are looking at, and, of course, the 3G deployment as we plan it to be. So the 16 to 17 billion CapEx already includes those.

Alright, thank you so much.

Does that conclude your question Mr Raynon?

Yes, thank you.

Thank you very much. That concludes the question and answer session. Before I turn the conference back to Mr Nazareno I would like to give everybody the instant replay information of today's call. [OPERATOR INSTRUCTIONS]. At this time I will turn the conference back over to Mr Nazareno for any additional or closing remarks.

Ladies and gentlemen on behalf of my colleagues here we thank you so much for joining us today and we're looking forward to talk to you again early next year for our year end '05 results. Thank you.