PLDT Inc (PHI) 2006 Q1 法說會逐字稿

Good afternoon everyone and welcome to the PLDT conference call to discuss the company's first quarter 2006 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 Miss Anna Bengzon for the opening remarks and a bit of introduction. Please go ahead thank you.

Good afternoon everyone, thank you for joining us today to discuss PLDT first quarter 2006 results. The conference call is being recorded and we will provide the replay information towards the end of the call.

We hope you got the presentation which we have made available on a series of websites. For those who have not received the information please go to the PLDT website at www.pldt.com.ph and go to the investor relations page. You will see a section there called presentation and there you will see the presentation we will be giving today as well as the financial statements and MVNA for the first three months of 2006.

For today's presentation we have with us the management team of PLDT Group. We have Mr. Poly Nazareno, President & CEO, Mr. Chris Young, CFO of PLDT. From Smart we have Annabelle Chua, CFO; Debbie Tan of investor relations. We also have with us from ePLDT George Tan and we have [Don Ray].

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

Good afternoon. Thank you very much for joining us today. In the first quarter PLDT Group had a strong growth in core net income reaching 7.6 billion, up 16% year on year. We define core net income as earnings excluding additional depreciation charges, ForEx gains and the recognition of certain deferred tax assets in order to better reflect the underlying performance of the business comparable from period to period. Core net income available to common shareholders grew 22% to 7.5 billion pesos, reflecting benefit of lower preferred dividends. Our core EPS increased 14% to 0.41 pesos per share notwithstanding the 6% increase in outstanding common shares to about 181.4 million from 170 million last year.

Reported net income declined 7% owing mainly to higher depreciation expenses and lower ForEx gains of 1.6 billion compared with 3.2 billion last year. EBITDA grew 8% to over 20 billion and margins improved to 67%. Our consolidated net debt as of end of March '06 was at $1.4 billion down 35% year on year while our net debt to EBITDA has improved considerably to less than 1 times. CapEx spending in the first quarter increased to 4.9 billion, mainly driven by our 3G roll out, wireless broadband expansion and NGN upgrade.

On the next slide number 2, the 2% growth in our service revenues was driven mainly by our wireless business which grew 7% to 18.8 billion. Fixed line revenues net of intra-segment transactions declined 6% principally due to the 6% appreciation of the peso which reduced our local exchange in international long distance revenues. ICT revenues grew 33% with a continued growth in our call center businesses. With approximately 35% of consolidated revenues linked to the US dollar, a strengthening peso lowers our service revenues in peso terms. We estimate that for every 1 peso change in change in ForEx the growth in our consolidated service revenues will be reduced by slightly less than 1% versus our revenue base in '05 of 121 billion.

The PLDT Group has 23 million combined wireless and fixed line subscribers. Smart and Piltel registered net additions of about 490,000 in the first three months of 2006. It is encouraging to note however that our subscriber additions or net adds in April alone have already surpassed the net additions in the entire first quarter benefiting from the new promotions launch.

On the broadband front, DSL subscribers have now reached the 100,000 mark while wireless broadband subscribers increased to 40,000 at the end of March. We are quite optimistic that take-up for our broadband services will accelerate as we gradually build out the network, become more efficient in service provisioning and improve the service in general.

Slide 3. The 2% growth in our service revenue coupled with a 2% decline in our cash operating expenses led to an 8% improvement in EBITDA. Our EBITDA margin is now at 67% compared with a full year '05 EBITDA margin of 65%. In addition, our non-cash expenses also declined 3% reflecting lower provisions mainly on the fixed line side of the business. Additional depreciation charges amounting to 1.9 billion per quarter will be recorded this year due to changes in the estimated useful lives of certain assets in our fixed line business which will be affected by our NGN upgrade. As previously indicated our depreciation expense was run at approximately 30 billion in '06 before returning to more normalized levels beginning '07.

Core profit on slide 4. Core profit grew 16% to 7.6 billion from 6.5 billion in the first quarter of last year. Under our redefined core net income calculation our core profits for '05 has been adjusted to 29 billion to reflect the exclusion of the additional depreciation charges, ForEx gains and the recognition of deferred income tax assets. Our core net income available to common shareholders improved more dramatically by 22% to 7.5 billion. In December '05 we mandatorily converted the Series III CPS into 11 -- no sorry 7.9 million additional common shares. As a result of the conversion we will generate annual cash savings of 1 billion from the reduced preferred dividends paid.

Reported net income though was down 7% mainly due to the additional 1.9 billion in depreciation and lower ForEx gains of 1.6 billion compared with 3.2 billion in the first quarter of '05. The lower ForEx gains are basically driven by our lower debt balances and higher proportion of hedged debt.

Consolidated -- on slide 5 consolidated CapEx reached almost 5 billion versus our full year estimate of 18 billion. Smart has put in place 800 3G sites and 2,000 wireless broadband enabled base stations. PLDT fixed line on the other hand installed an additional 65,000 broadband lines in the first three months of the year.

Our free cash flow for the most recent four quarters remained strong at 46.3 billion reflecting higher CapEx spend and increasing working capital requirements. Despite the lower free cash flow generated in the first quarter of 6.4 billion our cash balance increased by 5 million to 38 billion. Our free cash flow coupled with our healthy cash balance will more than be sufficient to pay higher common dividends as well as further pay down debt.

Slide 6. PLDT fixed line reduced debt by $65 million in the first three months. Given the strength of the peso we are taking advantage of opportunities that will allow us to accelerate our debt reduction efforts. Consolidated debt balance is down to $2.1 million while net debt balance is [inaudible] $1.4 billion as at the end of March. Our leverage ratios have improved even further with net debt to EBITDA below 1 times and net debt to free cash flow of 1.7 times.

We are pleased to announce that Piltel has issued a notice to prepay 43.5% of its debt or about $177 million in June 2006. Piltel will prepay third party creditors $56 million while Smart, which holds about 69% of Piltel debts, will receive the balance of $121 million. As a result of the prepayment of Piltel debt we are increasing our debt reduction target for the year to $350 million from the 300 million previously indicated.

In slide 7 we show our wireless service revenues and EBITDA. Smart remains the industry leader in cellular with a market share of approximately 58% most in terms of subscribers and revenues. Service revenues grew 6% to 19 billion in the first three months mainly driven by the success of our Smart 258 Unlimited Text promo. On a quarter on quarter basis service revenues declined 4% as the fourth quarter revenues are usually boosted by Christmas holiday related spending. EBITDA increased 7% to 12.4 billion with the judicious management of cash expenses. Our largest cash cost, selling and promotions expense was down year-on-year to below 800 million from over 1 billion in the first quarter last year. EBITDA margin improved to 66%.

On slide 8 you can see that ARPUs have held fairly well year-on-year at around 360 for Smart Buddy and 245 for Talk 'N Text. And even more significant our SACs have been controlled to below one month prepaid ARPU such that we are able to generate profits even from very low ARPU subscribers. As of the first quarter we are able to recover our subscriber acquisition costs within half a month of ARPU.

Slide 9. Certainly the more challenging market we operate in is requiring us to figure out what strategies can best work. Let me share with you some of our latest initiatives as well as explaining to you our rationale for offering such promotions.

First, we do believe that SMS will still be the main driver for growth in the lower income bracket. In this respect we have put in place SMART 258 Unlimited Texts which gives best value to subscribers. For those that are truly financially challenged we have SMART "All-Text" which provides no expiry SMS at a very low top-up of 12 pesos only.

Second, we see encouraged voice usage by offering flat rate plans and also bundling voice together with unlimited SMS offers. The re-launch of the 10 pesos for three minute calling and the recently launched combo package of unlimited SMS with five minute voice call promo have become quite popular with our subscribers.

Third, we recently launched 3G in the market reinforcing our position as the technology leader in the sector. We are committed to upgrading our networks to 3G and expanding coverage quickly. We have also set our 3G service rates in line with existing 2G ones to encourage early adoption. In the meantime we are also acquiring rich media content to enhance the 3G user experience.

Last but not definitely the least is our expansion into the broadband space. Just a couple of weeks ago we re-launched our wireless broadband service under the brand name Smart Bro. Our wireless broadband service is a very cost effective means for us to quickly gain coverage by using existing SMART base stations which already cover 99% of the population. Through Smart Click also, we are able to offer broadband services in remote areas where fixed line coverage is limited or even absent but the need for communication is just as great. As of today we have already rolled out 12 Smart Click stations, this is our mobile internet café, in areas such as Zamboanga and [Botana].

On Slide 10, core net income of our wireless business increased 4% to 5.7 billion due to higher revenues and lower interest costs. Reported net income however grew 11% to 7.7 billion boosted by the recognition of deferred tax assets amounting to 1.3 billion offset in part by lower foreign exchange and derivative gains.

Slide 11. Let me now go through highlights of our fixed line business. Fixed line revenues grew 3% to 12.1 billion mainly due to increases in our data service revenues which more than offset the declines in local exchange and ILD revenues. The growth in data revenues were driven by a 49% increase in our broadband DSL revenues as well as higher DFON rental income from Smart. The 6% appreciation of the peso from about 55 pesos last year to an average of 51.80 to $1, significantly impacted about 57% of our dollar linked revenues arising from our local exchange and ILD business. The basic monthly fee we charge our residential subscribers has declined by 6% to around 615 due to downward adjustments under our currency exchange rate adjustment mechanism.

On slide 12, broadband subscribers grew by over 25,000 in the first three months of the year to 140,000. From its base of 57,000 in the first quarter last year DSL subscribers almost doubled to 101,000. The potential for broadband is immense. Including our own dial-up Vibe subscribers, surveys indicate that there are about 1 million dial-up subscribers in the country. We believe that these subscribers will eventually upgrade to broadband as we further expand our broadband network and also as price points go down. Today the majority of our new subscribers choose our 999 pesos per month DSL package.

Slide 13. Fixed line EBITDA grew 9% to 7.5 billion and EBITDA margins improved to 62%. This is mainly due to the combined impact of higher revenues, lower provisions for doubtful accounts and higher cash operating costs. Excluding the 1.9 million of additional depreciation and ForEx and derivative gains, the core net income of fixed line grew 71% to 1.7 billion. Clearly our efforts in recent years to average -- to address the challenges of the fixed line business are now evident in our results. Revenues have remained stable despite the continuing pressure of traditional voice revenues. Costs have been contained, collections have improved, debts are down which in turn resulted in substantial reductions in interest and other financing costs.

Slide 14. Fixed line free cash flow in the first quarter of '06 remained robust at 9.4 billion supplemented by dividends from Smart of 7 billion. The cash was utilized to reduce fixed line debts by $65 million. Another 5 billion was used for the payment of final common dividends of 28 pesos per share in April '06. Fixed line debt balance is down to $1.3 billion. The PUT option obligations under the Series V, Series VI and Series VII convertible preferred shares are also decreasing as holders continue to voluntarily convert their shares into common stock driven by the improvement in PLDT's share price. Here today our share price has increased by 23%.

On Slide 15 just to give you a quick update on our NGN project. On Friday May 5 we launched Pwede! Card. Pwede is the developed word for can be -- can do, can be. A can be card. A converged product made possible by our NGN capabilities and the extension of Smart's prepaid platform onto PLDT's fixed line products. Pwede! Card is the first reloadable PIN based prepaid card that provides access to a combined range of voice and internet services at affordable rates. Pwede! Card can be used from different devices within the PLDT Group, namely the PLDT fixed lines, PLDT and Smart Talk payphones and SMART and Talk 'N Text cellular phones.

In addition we are aggressively expanding our broadband coverage through NGN. We are initially targeting areas where we see pockets of internet dial-up subscribers. As we move into Next Generation communications the NGN will give us enormous flexibility to offer new services at enhanced provisioning turnaround times and at improved cost efficiencies.

Slide 16. Let me give you some highlights on ePLDT's financial and operating results. ePLDT's service revenues grew 25% to 813 million driven mainly by the continued growth of its call center business. Approximately 70% of ePLDT's revenues are derived from the call center business, 18% from internet and gaming and 10% from Data Center. ePLDT's consolidated EBITDA increased 7% to about 150 million in the first quarter of '06.

Most of you are aware that ePLDT has agreed to make an investment in PhilWeb for 20% of the company's outstanding content staff of 500 million. PhilWeb is principally engaged in internet based gaming through its tie up with PAGCOR. ePLDT plans to assist PhilWeb in the further roll out of its internet sports betting and casino stations using the telecommunications network resources of PLDT Group. More importantly the investment together with our acquisition of Level Up! Philippines, will beef up our gaming content for our mobile and broadband services. We believe that these investments are critical in order to differentiate our offerings versus competition and also to encourage usage among our subscribers.

We move now to slide 17. ePLDT rentals -- revenues are up 38% to 563 million. In US dollar terms our call center revenues are up by $3 million year-on-year to about $10.7 million in the first quarter of '06. EBITDA increased to 135 million and EBITDA margins improved to 26% from 24% last year. Our call center business is another area where we can see further growth opportunities. While this business may be small relative to the rest of the PLDT Group, its contribution to the Group's overall value should be benchmarked versus other call center/BPO companies which trade at above 15 times PE.

The higher valuations being attributed to this sector is driven by the fact that the entire industry is expected to grow at a compounded average growth rate of close to 40% per annum over the next five years. Presently we have about 3,700 call center seats across four locations and we are ramping up seat utilization upon completion of two new sites by June this year.

On the last slide, our outlook on '06. Our earnings for the first quarter this year have been more encouraging than anticipated earlier. We see revenues continue to grow while costs are managed down including interest expense. Cash flows will remain strong and should enable us to pay debts of at least $350 million as well as increase our dividend pay out to 60% of core '06 earnings. Thank you.

Thank you sir. The floor is now open for questions. [OPERATOR INSTRUCTIONS]. Our first question is coming from the line of Karen Ang. Please go ahead.

Hi good afternoon and thank you for the call. I have three questions. The first has to do with your revenue growth expectation. What sort of consolidated revenue growth are you targeting for the year? And specifically, can you comment on the stronger than expected NLD national long distance revenue growth in the first quarter and how sustainable that is?

The second question is also related to revenue growth and has to do with Smart. What sort of wireless -- consolidated wireless revenue growth are you targeting? And what sort of net add assumption goes into that target?

And the final question is can you share your views on the competitive landscape for 2006? In particular can you asses the threat of the regulator coming back and let's say clamping down on your dominant market position as well as assess this threat of the smaller operators in the market to Smart [inaudible] in 2006? Thank you.

Thank you for the questions Karen. The first question is on revenue growth expectations for the consolidated or the entire Group. I would say that our outlook for that would be in the low single digit number for the end of the year. Right now our growth overall has been 2% and more or less that should be at the same level towards the end of the year.

I think Karen to some extent, just to pitch in, that will also depend what happens with the exchange rate. As you know on the fixed line side, and I think as Mr. Nazareno mentioned in his presentation, close to 60% of fixed line revenues are impacted by the movements in the exchange rate. So to the extent that the peso either strengthened or weakened during the balance of the year that would impact on that number. As you can see it did affect the first quarter numbers to some extent as well.

Of the fixed -- I think of the fixed the reduction of the rates that we had to adjust to was amounting to about 6%.

On the second question for the revenue growth on Smart, for the first quarter we hit about 6%. Smart is less affected with foreign exchange fluctuations only I guess limited to our inbound IDD traffic. So we are looking at higher single digit growth for Smart.

The third question refers to the competitive landscape, the regulator coming in on a dominant basis. I think one of the reasons why earlier this year or late last year our regulator has come out with that publication and subjected it to public hearing was because they were wanting to be recognized as a special body by the Congress more or less to get them to be classified as independent pretty much like the way our Central Bank is being regarded when it comes to the official charter. I think that was the original objective however the hearings have been going on.

We have presented our side of it and they have appreciated and we have submitted a paper that was quite thick given that our -- justifying the position that we have in the market and that there is healthy competition; the rivalry is intense. And that our tariffs are one of the lowest compared to the rest of the world. So, so far it is just still on a debate stage. We don’t think that will come to fruition really unless it is legislated and that requires legislation which fortunately or unfortunately in our country takes time. Thank you.

And on the threat of the smaller players to Smart this year?

There is only one small player in the cellular arena and they have a share of about -- a revenue share of about 2.5 to 2.7%. That is Sun. The service offerings or the promotions that we have lodged with regards to the Unlimited Text promo that we have and which is popularly subscribed has more or less stunted to a certain extent their growth. And that's the reason that over the last few quarters they have remained at that share. And also their coverage has been limited so far, so they need to expand their network to be able to be in a position to compete really.

Thank you.

Thank you.

Thank you Miss Ang. Our next question is coming form the line of Luis Hilado from Singapore, please go ahead.

Hi good afternoon, thanks for the call and congratulations on the results. I had four questions, the first one essentially is also related to competition. The first quarter net market share went in favor of your competitor. You did indicate in April you have a very strong net add number but I'm just wondering what is your line in the sand, in terms of either revenue or subscriber market share, where you would react to your competitors making headway?

Second question is a follow up on just the -- I didn't catch the answer to national long distance revenues. Do you think the 1.8 billion in the first quarter is a sustainable number for the rest of the year?

Third question relates to the fixed line. There seems to be some renewed erosion in terms of the subscriber base in the first quarter. What actions are you taking to arrest that or any remedies for that?

And last question is in terms of the Pwede! Card. What sort of a differentiation between it and Smart Money?

Okay, that took time to list down. Thanks for the questions Luis. For the first quarter, as I pointed out in my presentation, our subscriber and revenue share has remained strong at 58%. If you take a look at the net adds we had 490,000 net adds in the first quarter versus our main competitor's net adds which was at 790, right Chris?

[Inaudible].

790,000. Let me point out that in the first three months of this year our gross adds have remained strong actually. What has happened was in the first two months the churn was at a higher level as we have been doing the continuing clean up on our subs base out of the spillover from the SIM swapping of February of last year. On the month of March our net adds went up actually and that continued even further in April such that in April our net adds have been 50% more than the entire net adds of the first quarter. So that is the churn when it comes to net adds at this point. However let me caution that what we are doing really is we are monitoring the revenues on a daily basis rather than the net adds. We are more concerned that the subscribers that we add should generate revenue rather than just adding subscribers for the sake of just adding.

On the second question, I didn't quite get it, the 1.8 billion.

I think that question is specifically on the NLD where there has been a bit of an improvement. I think our expectation for the full year is that we could probably crack round about what we achieved in the first quarter. There have been a number of promotions to try to stimulate usage on the NLD and I think we have some other things that we're planning during the balance of the year. So we think that that first quarter is probably sustainable for the balance of the year. Of course it depends to some extent on the success of the various promotions that we have during the year.

On the third question which is what you seem to see as a renewed erosion of subs base in the fixed. Let me point out that that's precisely the reason why we are pursuing the NGN roll out quite vigorously because the NGN roll out allows us to penetrate areas where we don't have copper but where demand for fixed line are present. So in fact this year we have just submitted to the Board for an additional NGN power lines of about -- how much is that Chris? 65,000 lines additional to be installed within the next few months. And so we are really pursuing the NGN to sort of mitigate whatever churn we're having on the subs base. Having said that I don’t think our overall fixed line base went down substantially.

It's down a little bit.

Just by a little bit.

I think in the first quarter it's down about 27/28,000 but again as Mr. Nazareno says I think we've identified a number of areas where we're currently not providing servers where we will be able to access at very reasonable capital costs based on build out of the NGN during the balance of the year. So there is again steps that we're taking that would mitigate any reduction in the fixed line going forward.

And number four, with regards to Pwede! Card. Pwede! Card really is the first re-loadable prepaid card which is a universal card and which is PIN based; in other words you can introduce your own PIN for the security of the card. And the card can be used -- you only need the card and the card's number -- account number, it's like a phone -- a cellular phone number.

In other words it really belongs to a certain fixed HLR for us and therefore it is purely network based. In other words you can use the card across all the services of the company and you can use it without having a phone actually by using existing phones; you can borrow a Smart phone or a Talk 'N Text phone and you just dial a certain access number. And then after that you dial your account card number and then your PIN number and then you can proceed to use any phone whatsoever and it depletes the balance that you have in the card. Once you use up the balance you can then go to any [Sori Sori] store with an e-load outlet and you can reload the card.

That's -- the difference is -- I suppose you know the function of our Smart Money card? That card is a cash card that is linked to the phone and it is more or less also linked up to our mobile banking system. So the Smart Money card deals with values while the value transfer -- in other words you can transfer from one Smart Money card to another values -- money values while the Pwede! Card is the service of the Group -- it's limited to the service of the Group at this point. So the Pwede! Card is a universal prepaid card usable any service across the entire Group.

Just a follow up to that. That will eventually adjust your distribution cost expenses?

Yes because number one we sort of consolidate all the different prepaid cards that is now distributed all over the country. We have a Telesulit card, we have a Budget card, we have all kinds of cards -- Buddy prepaid cards. All of these are all consolidated in the universal card called Pwede! Card.

Okay, thanks.

Thank you.

Thank you sir. Our next question is coming from [Nicholas Chang] from Singapore. Please go ahead.

Good afternoon gentlemen and thank you for the call. I have two questions. The figure of 350 million that you're setting aside for your debt reduction program, I'm just wondering would that increase in the year if you continue in performing at your first quarter levels?

And the second question is, would you then be targeting to retire higher coupon, i.e., more expensive debt with that? Thanks.

Yes I think the -- if there are opportunities to start that certainly we would want to, but the reality is that we have over the course of the past few years, especially last year, to be ready -- able to pre-pay what we could in terms of higher coupon debt. So there is a very limited pool of debt that we can realistically pre-pay already by this time.

But the announcement today included the fact that we have started to pre-pay Piltel third party debts, hence the increase of the targeted debt reduction from 300 to 350. So that’s something that we could still pursue for the balance depending on sort of the way the cash flows and other developments have been over the course of the year.

Okay, thank you.

Thank you Mr. Chang. Does that conclude your question?

Yes it does.

Thank you. Our next question is coming from [Ardra Pinanel] from Singapore. Please go ahead.

Hi, thank you for the call, just three questions. First it appears that PLDT is more aggressive than its competitor in 3G with the base station roll out and trials. Could you please elaborate on your plans and expectations on 3G especially on the market size and pricing this quarter [element] given that the tariffs seem to be pegged at 2G levels it would issue some price thickness.

The second question I had was, if you could elaborate on the broadband business with details on capacity and targets and subscribers as well. Given -- are you going to launch subsidies as well and how could you address the issue of low PC penetration in the Philippines?

Now the third question I had was do you have a disclosable gearing target at this point? Could you shed light on potential capital management activities given the firm's declining gearing and high free cash flow yield? Thank you.

With regards to 3G, I would like to point out that our CapEx for the 3G in phase 1, which includes about 1,000 sites, will only reach to about 50 to $60 million. And the reason why it is cheap is because our existing base stations are already of the generation where a 3G upgrade would be much easier, much quicker and, of course, cheaper than if you started with the earlier generation of 2G networks.

So number one, our CapEx is not as much when you look at the installations that we have done, or the roll out that we have done which is about 800 base stations already at this point. Now we are looking at several opportunities of value added services by which we can see new revenue streams with the aid of 3G. Now we are concentrating on two things; number one is the content or the way to access 3G should be very simple and easy. And we're doing that with our own portal -- 3G portal, and making it easy for the subscribers in terms of ease to press in order to get to our 3G portal. And we're trying to do that, and the first feedback is that we are in the step of the right direction.

The second is of course we are exploring various 3G services that will allow us to really see which ones would quit; as you well know, in the world there is still no clear [inaudible] for 3G. And so therefore what we are doing is making use of our subscribers to experience as much as possible video calls on an affordable basis and in fact we are still doing it for free up to May 30 so that they can experience that. And video streaming will be done at low prices and viewing TV programs like news and sports clips on an understandable tariff like, for example, our tariff for streaming is at 10 pesos for 30 minutes. In other words, it is really understandable and quantifiable by the customer before he decides to use it.

So these are the things that we are looking at and hopefully at the time when 3G handsets will be going down, there will be more usage. Let me point out though that at this point we have already 250,000 Smart subscribers with 3G handsets out there in the market, and roughly I think about 60 to 70% of them are prepaid actually -- high end prepaid users. And who are also techno savvy and would like to get into internet browsing -- high speed internet browsing through their mobile phones. So that’s the other avenue that we are looking at.

Lastly, towards the end of this year we will be able to introduce i-mode on 3G and on 2G so that will be a different [inaudible] for us because the partnership that we have with NTT DoCoMo will be able to give us that edge by which we can introduce i-mode smoothly at the end of the year.

The second question is an estimate of the broadband business, the potential. Right now, as of end of April, we already have close to about 170,000 broadband users in the country. And about 50 or so thousand of that is wireless broadband and the rest is DSL. If you take a look at our narrowband which is Vibe or the dial-up service, we now have about 420,000. Recent studies reveal that that is the total subscriber base alone and dial-up is about 1 million. So we are really looking at that base first, to migrate into our service at this point.

So that alone represents a potential of about an additional million dial-up subscribers switching to broadband for a better experience. I am not saying that the dial-up will die completely because what we are experiencing actually is the dial-up subscribers is growing, so they are experiencing first the slow version before they're going up to the faster version and have a better service. And that is what is happening in the market and we are exploiting that as rapidly as we can by rolling out broadband fast.

So therefore we are looking at our subscriber base for the year to double -- I mean the base at the end of last year to double by the end of this year.

Sorry, just a follow-up on that one --

We're talking about 250,000 [inaudible].

Sorry just a follow-up question on that one. In terms of the ARPUs acceptable with regard to that doubling of subscriber base. Do you have any assumption to that?

Well right now the market is favoring our 999 pesos per month package on broadband. So roughly about 1,000 pesos per month of ARPU.

And that’s doubling assumed around 999 a month as well?

How's that?

The doubling of the subscriber base is also premised on that ARPU level as well?

Yes. We feel that that is the case, at least for this year. The price points could go down lower moving forward.

Okay. Thank you.

Thank you sir. Does that conclude your question?

There was a third one --

The gearing target --

Well I think broadly we are at the net debt level of 1.4 at the moment so there is, with the debt reduction that we're looking, at potentially we could be trending down closer to below 1 billion or 1.1 billion.

I guess from a sort of sustainable debt to our gearing ratio we would probably be looking at one times debt to EBITDA or one times debt to equity, but I guess the -- at the moment, the bias has been to pay down more debt than probably what will be required under those cycles in the sense that one, is that the peso has been quite strong so we've been taking the opportunity to pay off our debts while the peso is strong. Second, US dollar interest rates have also been trending up on the other hand so we want to avoid having to pay higher interest rates. And thirdly because we are still situated in the Philippines we've maintained a more conservative, I guess, sort of stamp in terms of the risk management for the moment compared to say if you were in an investment country.

So that’s kind of just the general approach to the gearing level. I think it will alter the -- in terms of how we look at it from a free cash flow standpoint the view really is to try to move forward the situations where we are allocating roughly the same amount for debt deduction to [inaudible] towards a dividend payment as well. So that’s as against a situation last year where 80% of the free cash flow was being used to pay down debts. So that’s kind of the general broad capital management sort of approach that we're taking for this year.

Okay thank you.

Thank you sir. Our next question is coming from [Katie Chen] from Hong Kong, please go ahead.

Hi thanks for the call. I have three questions. The first is can you give us what the full year tax rate guidance is? And if you expect to be able to benefit from any 3G tax holiday over the next few years?

The second question is also related to guidance which is can you remind us what the guidance is for EBITDA margins this year on a consolidated basis as well as for fixed line and wireless?

And the last question is what is your outlook on potential acquisitions this year? And are you currently in any discussions?

Maybe I will deal with the first two questions on the tax rate. Essentially at the moment most of the taxable -- most of the earnings that would be attract full statutory tax rates other than the fact that from a P&L standpoint we still have some deferred tax assets that have not been recognized which we expect to recognize this year and that would essentially amount to about 5.5 billion pesos. So depending on your own earnings forecast the best thing to do would be to try to back step up, [inaudible] tax rate and then back out at 5.5.

On the 3G there is an application that we have filed with the Board of Investment for certain incentives and that is currently being reviewed and processed by the BOI. I think we have read news accounts that a similar application of our competitor has been approved. So in that case we feel quite confident that you should be able to have similar incentives as well given that it's extremely defined under the investment [priority] plan as an eligible item. The impact will not be significant at the onset given that the 3G earnings may not be significant at the onset, but over time hopefully that becomes a more meaningful holiday for us. We have certain other tax holidays in some of our smaller subsidiaries which we also have been taking advantage of certain -- in the call center side, in the Meridian side as well.

On the second question which is the guidance in EBITDA numbers. On the first quarter we hit about 66% on the wireless side and around 62% on the fixed side. We foresee that these levels will be sustainable for the end -- up to the end of the year.

On the third question which is the potential acquisitions outlook, our first priority remains at looking at debt reduction to stabilize our balance sheet financial strength and at the same time also improving the dividend payout for our investors. Those are the two main priorities. If our cash flow, which has remained strong at this point in time, offers some excess, we are looking at an opportunity at the ePLDT side mainly relevant to our strategic thrust on overall development of content which is essential in providing revenue streams in both our broadband initiative and on our 3G initiative. And also looking at other areas within ePLDT which is delivering right now a strong growth for us at 25% on a year-on-year basis.

Okay thank you.

Thank you Miss Chen. Our next question is coming from the line of Mr. [Tindal] from Singapore.

Hi could I ask you, thank you very much for the call. I have three questions. The first question is just on where the growth in your cellular subscribers are coming from. This morning I think Globe talked about a fairly even growth rate in their subscriber growth from Metro Manila, Luzon and outside of Luzon, and I was just wondering whether you had the same experience in the first quarter as well? Or whether one area is actually growing faster than other regions?

The second question is just on the effect on your churn rates from Globe's per second billing. Do you think that has had a significant effect on your subscriber base or not?

And the third question is just on cross selling opportunities. Presumably the 170,000 or so broadband subs that you have are your premium subscriber base. What cross selling initiatives are you taking to sell other services to those 170,000 users? For example Smart 3G is there already on Globe. Thanks.

The first question is where the subscriber growth is coming from on our cellular business. Generally we are now mining the lower end of the subscriber base or the lower end of the market really which is what we classify as the B and E and perhaps lower C. We are seeing that the growth outside the Metro Manila is more than what we can generate within Metro Manila when it comes to 2G services. And the reason for that is the penetration in the provinces are essentially lower than up here in a thickly populated urban area like the Metro Manila. As I told you our subscriber growth net adds for that matter has been growing quite satisfactorily for us. In April our net adds was 50% more than the entire net adds of the first quarter that we had. Now the reason for that is because the churn rates essentially have gone down based on the promos that we have launched for those who were not able to top up right away within our base. And we are experiencing churn rates right now at below 2% versus the before 2, to 4.5% levels that we had at the earlier part of the year.

The second question is on the per second billing. We are monitoring as to whether that has been affecting our business almost on a daily basis and we are not seeing that affecting really our business. We have launched counter promos such as the flat rate offer on voice, the 10 pesos per call for a three minute call and 15 pesos for a five minute call . And somehow that has delivered for us extra revenue and therefore we are not seeing the impact on the per second billing.

The third is --

[Inaudible - microphone inaccessible].

We're not really exploring that on cross selling of broadband yet. The -- well if you call cross selling the Pwede! Card that is to a certain extent you are able to avail of our broadband service on Pwede! Card on a prepaid basis in any internet café in the country that belongs to us of course, Netopia. And therefore that is the kind of cross selling that we're doing. It's really a universal card it can be used for any of our services across the Group.

Okay thank you.

Thank you Mr. Tindal, does that complete your question sir?

Yes it does thank you.

We have a follow up question from Luis Hilado, please go ahead.

Hi I just had one follow up question on the issue of tax. Does the 5.5 billion already include the impact of the potential tax holidays from the call center and Meridian as mentioned? And could you also let us know how long the tax holidays of those two subsidiaries are?

No the 5.5 to 7 is a tax holiday. I think Meridian has a tax holiday good for another five to six years. Call centers are different, two years basically but some of them you could go for extensions to those holidays.

Thank you.

Thank you sir. Our next question is coming from Nicholas Chang, please go ahead.

Oh hi I have a follow up question. The 350 million debt reduction that you’ve -- for debt reduction. What would change that amount throughout the year?

I think it's more opportunistic in terms of being able for example to buy back let's say PLDT bonds from the open market or opportunities like that.

So in other words the 350 could -- it's not a fixed number. It could increase depending on what opportunities are presented?

That 350 is a base number based on the maturities and what we have targeted essentially for the year for now. So if there are -- there could be incremental amounts, but what we are indicating, it's not like last year where you could go up to 700. No way will it swing by that much. So you're talking about a few --

A few million.

A few millions here and there, it's not going to dramatically change.

Right okay. So in other works priority goes towards, well possibly dividend distribution in ePLDT and 3G?

Well I -- yes it's -- they can talk of the free cash flow outlook, yes I think there is opportunity to do 350 plus a little more. There's an opportunity to do the 60% dividend payout and there's an opportunity to fund the acquisitions of ePLDT if things alter or move according to plan.

Right okay thank you.

Thank you Mr. Chang. Does that conclude your question?

Yes it does thanks.

Thank you. [OPERATOR INSTRUCTIONS]. There appear to be no further questions at this point of time and that concludes the question and answer session. Before I join the conference back over to Mr. Nazareno I would like to give everybody the instant replay information for today's call. [OPERATOR INSTRUCTIONS].

At this time I will turn the conference back over to Mr. Nazareno for any additional or closing remarks. Please go ahead sir, thank you.

Thank you. On behalf of my colleagues at the PLDT Group who are here today, we thank you so much for joining us today and we look forward to seeing you early August for our first half results. Thank you.

Thank you and that concludes today's conference. Thank you for your participation. You may disconnect your line in your own time. Thank you.