PLDT Inc (PHI) 2007 Q3 法說會逐字稿

Good afternoon, everyone and welcome to the PLDT conference call to discuss the Company's nine months 2007 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 Melissa Vergel de Dios for the opening remarks and a bit of introduction. Please go ahead. Thank you.

Good afternoon to everyone. Thank you for joining us today for the PLDT investor conference call to discuss the Company's nine months 2007 financial results. We hope you were able to download the presentation which we made available at our website and web link in conference call (inaudible). For those who do not yet have the information, it is posted at PLDT website www.pldt.com/ph and www.ePLDTonline.com/pldt/ir.

In today's presentation, we have with us now the Management Team of the PLDT Group. We have Mr. Napoleon Nazareno, President and Chief Executive Officer of PLDT and Smart. Mr. Christopher Young, Chief Financial Advisor of PLDT, Miss Annabelle [Lin] Chua, Deputy Treasurer of PLDT and Chief Financial Officer at SMART. And Ms Debbie Tan, Head of Investor Relations. From ePLDT we have Mr. Ray Espinosa, President and CEO.

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

Good afternoon. Thank you for joining us today. Let me start with the first slide.

We are pleased to inform you that the PLDT Group sustained its strong performance through the third quarter of the year. The core income of the Group was up for the first nine months by 13% to PHP26.2b. This reflects core income for the third quarter of PHP9.1b, a PHP1b increase, compared to (technical difficulty) quarter last year. And a 4% increase over the second quarter of '07. This, despite the second quarter having benefited from the election spending and the effect of the peso appreciation.

Pretax income for the nine month period surged by 36% to PHP40b. This reflects increases, or increase in revenue and EBITDA, plus a marked decrease in financing costs which declined by 47% or PHP3.4b year on year, because of low interest expense and lower accretion of financial liabilities compared to last year.

A large part of our pretax income was offset by a threefold rise in our provision for taxes from PHP3.1b to PHP13b due to the deferred tax assets recognized in the previous year.

Reported net income rose by 3% to PHP26.5b. This reflects the combined impact of the following. Lower additional depreciation charges of PHP1b related to the Fixed Line assets of Piltel in '07, compared to PHP6.1b booked in '06 relating to the Fixed Line assets to PLDT.

An increase of close to PHP10b in our provision for income taxes largely accounted for by recognition of deferred tax assets in '06, as mentioned earlier.

Going to page three, consolidation -- consolidated service revenues grew by 9%, breaking the PHP100b mark as the 10% increase in Wireless revenues, combined with the 96% growth in ICT revenues more than offset the 1% decline in Fixed Line revenues.

With approximately 38% of our consolidated revenues being dollar linked, our results continued to be affected by the peso appreciation. Service revenues would have grown by an additional PHP3.7b had the peso remained stable, resulting in a 13% growth year on year.

Our revenue mix continues to shift in favor of Data and ICT, which, in total, grew by 25% to nearly PHP50b and now comprises about half of our consolidated revenues.

Voice revenues slightly declined by 3%, on account of an 8% decline in Fixed Voice revenues, which was compensated by a 3% increase in Cellular Voice revenues.

It is interesting to note the dramatic change in our revenue mix over the last 10 years. SMS started out contributing only 4% of revenues in 2000 to today's level of 33%. Other Data Services started out at 3% of revenues and have grown to 17%. Together, these two services currently make up 50% of consolidation service revenue.

In contrast, Fixed Line Voice revenues have declined from a high of 79% in 1998 to only 23% today.

On page four, EBITDA registered a 4% increase to PHP63b for the nine month period. EBITDA margins declined to 62%, reflecting the combined effect of the peso appreciation, lower margins in our Fixed Line and ICT businesses and stable Wireless markets.

Compared to the second quarter which benefited from the election spending, EBITDA for the third quarter declined by PHP1.2b. Aside from seasonality, this decline also reflects an increase in operating expenses. The more significant of which resulted from the manpower rightsizing program related to the rationalization at the Fixed Line during the third quarter, going to 600 employees, composed largely of telephone operators were retired. A total of PHP533m in MRP costs was booked in connection with this.

It should be noted, however, that EBITDA for the quarter showed a 4% growth versus PHP19.4b in the same quarter last year.

On page five, CapEx for the year is expected to reach a maximum of PHP25b. As at the end of September '07, the Group's CapEx amounted to PHP14.5b, with Wireless accounting for PHP7.1b, Fixed Line of PHP7b and PHP0.4b by the ICT business.

A big part of our spend is aimed at providing incremental capacity to support better than expected Cellular and Broadband data at the end of September, with over 6,000 base stations of which 2,678 are Wireless Broadband capable.

After assessing the first phase of the NGN Network rollout, we have calibrated the rollout strategy, moving forward to achieve better cost efficiencies as we reach out into new markets to expand fixed line covers. 471,000 NGN lines have been installed.

Free cash flow remains robust at PHP36b. PLDT paid cash dividends of PHP28.4b and close to $206m of debt in the first nine months of '07. Total debt of the Group now stands at $1.5b and net debt at $1.1b. Both net debt to EBITDA and net debt to equity continued to be under one times at 0.6 and 0.48 respectively.

In summary, like on page six, the Group posted new record levels once again for the first nine months of '07.

Consolidated revenues grew 9% year on year at over the PHP100b mark. EBITDA increased by 4% to PHP63b, with margin sustained about 60%. Lower financing costs also contributed to core income surging by 13% year on year to PHP26.2b, the third quarter core income registering at PHP9.1b. Core earnings per share were up by 10% to PHP137.30. Reported net income grew by 3% to PHP26.5b.

We now take you through some highlights of the performance of our Wireless business. That is on page seven.

Wireless service revenues grew by 10% year on year to over PHP64b propelled by a 15% increase in Cellular Data, a 3% improvement in Voice revenues and a dramatic expansion of our Wireless Broadband business.

Cellular revenues for the third quarter declined by 5% to PHP21.1b versus PHP22.2b compared to the previous quarter. This quarter on quarter drop in Service revenues reflects the historical weakness of the third quarter, exacerbated by the effect of the election spending on the second quarter of approximately PHP500m.

Depreciation of the peso also had some effect on our Wireless business as approximately 25% of Wireless revenues are composed of international long distance and roaming services and denominated in U.S. dollars. Service revenues would have grown by an additional PHP1.6b had the peso remained stable, resulting in a 13% growth year on year.

Wireless EBITDA expanded by 9% to PHP41.8b, with margin sustained at 65%.

On page eight, the total number of Smart and Talk 'N Text subscribers broke the 28m mark in the first nine months of '07.

Subscriber numbers in the third quarter alone grew by 1.2m. The net additional of 4.1m subscribers for the first nine months of '07, is already more than the total net additions of 3.8m for the entire year of '06. This growth is a result of a combination of one, of our more aggressive and focused subscriber acquisition programs. Two, continued reduction in the cost of handsets and three, the overall improvement in the Philippine economy resulting in increased consumer spending, a significant portion of which is spent on communications.

Although market penetration today stands above 50%, the common view is that the market penetration rate is expected to break the 70% level by 2010. For example, the growth in the number of OSWs alone, not only means more remittances to fuel spending, it also means more potential subscribers for the Wireless business as more family members acquire mobile phones to stay in touch.

Blended ARPUs are expected to continue their decline as we go deeper into the market, targeting the lower income segment. However, subscriber acquisition costs and incremental CapEx also continued to decrease. And as a result, we expect marginal subscribers to remain profitable. Consequently, we expect to be able to keep our margins in the fixed level.

On page nine we are often asked, where is the future growth in the Cellular business? Slide number nine highlights how Smart is able to sustain its market leadership.

What we have effectively done is rank our subscriber base into distinct regions, which we then address with very specific acquisition and retention campaigns.

By way of example, we have packages which address type of usage i.e. catering to those who use only text or those who are heavy Voice users. Our packages adjust for affordability, top ups for prepaid users are available for as low as PHP10, while monthly service fees for our higher end users run all the way up to PHP8,000. A product for heavy overseas usage is also available. As you know, we offer a Wireless Broadband service for those who cannot be served by Fixed Line Broadband.

Slide 10 shows the highlights of our Fixed Line business. Fixed Line revenues declined slightly by 1% to PHP35.7b in the first nine months of '07, as the increase in Broadband and Corporate Data services more than offset the decline in our traditional Fixed Line Voice services.

Approximately 47% of Fixed Line revenues are either denominated or linked to the U.S. dollar. If the peso had remained stable for the past year, Fixed Line revenues would have been higher by about PHP1.4b, or 3% better than our Fixed Line revenues last year.

EBITDA, which was also affected by ForEx, was lower at PHP19.2b, with margins holding at 54%.

Activity experienced worldwide, revitalizing the Fixed Line business, is still with challenges. One of the main initiatives in transforming the Fixed Line is the rollout of the Next Generation Network or NGN. Based on our experiences to date, we are reassessing and calibrating how we will implement future NGN rollout.

We continue to rationalize the Fixed Line organization to make it more appropriate and responsive to the challenges of the business. A significant expense, equivalent to about PHP530m recorded in the third quarter, was the cost of the manpower reduction program. The bulk of our headcount is generally composed of telephone operators, who used to handle placement of long distance calls, which, today, can already be done through direct tariffs.

Moving on to slide 11. Growing Broadband is one of our key strategies to replace declining Fixed Line Voice revenues from international and domestic long distance. As of the end of September '07, we passed the half million mark for combined DSL and Wireless Broadband subscribers, representing net additions of close to 236,000 subscribers during the first nine months of the year. The 530,000 subscriber target for end '07 is now within striking distance, with a full quarter still ahead of us.

SmartBro outpaced DSL with close to 138,000 additional subscribers from the end of '06 compared to incremental DSL subscribers of over 96,000.

Broadband revenues increased dramatically by 43% to PHP5.3b, representing 5% consolidated service revenues.

We expect to see continued dramatic growth in Broadband enabled by increasing affordability and availability of DPs increased commonality and usage of Internet for email, browsing, chatting, downloading and the like.

Slide 12 focuses on ePLDT and our ICT Group. ePLDT reported a 96% increase in revenues to PHP7.4b, mainly due to the continued growth of Ventus and the consolidation of SPI, which was acquired in July '06. ePLDT is part of the outsourcing wave, having two of its biggest revenue sources coming from Ventus, our core standard business, and SPI, our BPO business, which, together, account for 86% of total ePLDT revenues.

Of the total Ventus and SPI revenues, 38% was derived from Voice, 24% from the Healthcare unit, 23% from the Publishing unit and 15% from the Legal Support unit.

The Philippines has made its mark in the world's outsourcing map, specifically in the areas of call center and business process outsourcing. This is a major growth area where the country is expecting to obtain revenues of $13b from the outsourcing industry by 2010. With 83% of ePLDT's revenues being dollar denominated, the peso appreciation had a significant impact on ePLDT. Revenues would have reflected an additional 17% growth, or approximately PHP634m had the peso remained stable.

EBITDA grew by 46% to PHP803m. EBITDA margin, however, dropped to 11% in the first nine months of '07, mainly due to ForEX and higher compensation benefit costs associated with salary increases, the implementation of the incentive schemes designed to improve retention and higher salaries being provided to medical transcriptionists in the United States.

ePLDT third quarter EBITDA margin has already improved, and we expect this trend to continue for the rest of the year onwards as we move forward with the functional integration within the Ventus and SPI groups.

Slide 13 focuses on the BPO business of ePLDT. SPI has three verticals, mainly Legal Discovery, Publishing and Healthcare, with the latter focusing on medical transcription and medical billing. The business has over 4,500 seats and more than 7,200 employees in the Philippines, in U.S., India and Vietnam.

They recorded revenues of PHP4b in the BPO business for the first nine months of '07, driven by a healthy and predictable growth in the Publishing unit, high value, albeit volatile revenues streaming from the Legal unit and consolidation of Springfield, our Medical Billing business, which expanded the revenue base of the Healthcare unit. EBITDA increased to PHP275m from PHP107m last year, although the EBITDA margin declined to 7% due to the consolidation of recent acquisitions.

SPI's third quarter EBITDA margin has already increased, however. And to further improve margins, we have developed and adopted new technology applications in SPI to reduce dependence on license solutions and are implementing the plan to increase the offshoring of SPI's medical transcription work to the Philippines and India.

Slide 14 focuses on our Call Center business. Ventus, our Call Center business has over 5,800 seats and employs about 6,300 people within seven sites throughout the Philippines. Service revenue grew to PHP2.4b from PHP1.9b year on year, reflecting a 23% increase.

With a very significant portion of its revenues denominated in dollars, Ventus has been adversely affected by the peso appreciation. The decline in EBITDA to PHP460m from PHP476m year on year reflects this impact, as well as the squeezing margins arising from the increased radius needed to retain DSRs. We have, however, built into our renewal contracts, an ability to adjust billing should ForEx rates move beyond a certain band. These adjustments, along with the acquisition of new customers, should afford us some protection on the revenue side and, indeed, overall margins.

We are, likewise streamlining our recruitment focuses to meet ramp up requirements and rationalizing our facilities break out and capacity utilization.

On page 15, on capital management, ePLDT is taking steps towards reaching an optimal capital structure. Launched today, and expected to run for three weeks until November 27, is a Consent Solicitation exercise that will seek to amend certain existing covenants of our 2009, 2012 and 2017 notes, which we consider restricting -- at least limits flexibility to make investments, declare dividends or undertake capital distribution.

The solicitation exercise seeks to amend the limitation of restricted payments and the limitation of dividends. If successful, the maximum amount of dividends that can be declared or investments that can be made will just be subject to a maximum consolidated leveraged ratio as well as limitations under Philippine law. PLDT has offered to tighten leverage ratios as part of its continued prudent capital management.

On page 16, if consent from majority of the bond holders of each of the notes is obtained, the amendments will allow the Company flexibility to obtain a more efficient capital structure, improved return on capital and allow maximization of shareholder returns.

The amendments are in order, given our low leverage ratios, which are presently under one time, and given the significant amount of cash building up in the balance sheet.

Finally, I would like to cap the presentation with the outlook for the PLDT Group for '07. We confirm that the '07 outlook for the PLDT Group remains bullish, although a number of factors, including the appreciation of the peso, is anticipated to impact on our financial results. We expect to sustain our solid performance through the fourth quarter, which is historically strong, having the benefit of holiday spending. As a result, we are upgrading our target guidance for the year to PHP34.5b to PHP35b.

Capital expenditure for '07 are estimated at PHP25b, with about PHP14b to PHP15b for Cellular, largely to provide for capacity and support of better than expected increase in the number of our subscribers in Cellular and Broadband, and PHP10b for the Fixed Line and ICT.

We remain committed to capital management with a dividend policy of 70% of our core EPS and on 'look back' approach to assess the possibility of additional distributions.

With the launch of the bond solicitation exercise today, we have taken the first steps towards gaining more flexibility in the utilization of excess cash for investments, dividend declaration and capital distribution. Consistent with our prudent financial management philosophy we have balanced it by proposing tighter debt ratios.

We thank you for your continued confidence in the PLDT Group. Ad we look forward to seeing you when we announce our full year results for '07 early next year.

Good afternoon. And we are now ready to take your questions. Thank you.

Thank you. The floor is now open for your questions. (OPERATOR INSTRUCTIONS). Our first question is coming, now, from the line of Karen Ang of Citigroup. Please go ahead, madam.

Hi. Good afternoon. Thanks for the call. I have three questions. The first is on manpower reduction. How much should we expect on this front over the next two years and how many employees will that involve?

The second question is on your NGN rollout, where you mentioned that you are calibrating the plan etc. What have you learned so far on the NGN rollout and what are you changing if ever there are any changes?

And the last question is on the BPO business. I didn't quite catch what your estimate of the revenues will be for 2010 for this industry, and what is PLDT's target share of this pie? Thank you.

For the manpower program we began, I think, at the end of last year, about 8,700. And we're now down to about 8,000. Moving forward, we are looking at perhaps bringing this down even further to, maybe, roughly about 7,000 within the next two years.

On NGN rollout, we now have about -- over 400,000 installed lines. Roughly about -- over 85,000 subscribers joined the NGN network.

Right now, we are looking at reassessing the deployment of NGN. Since it is relatively new technology we are moving very carefully at this point. And we are looking at first correcting or doing it right first. And therefore we are moving a little bit slower than what was the original schedule.

If I may ask what have been the main challenges or obstacles, if you will, or the difficulties in the initial phase of the rollout?

This is Chris. Maybe I can respond to a couple of things. I think we have two principal objectives of the NGN. One was because it was a cost efficient way to build out, was to explore moving to new areas, which traditionally we hadn't been able to do because the CapEx was too heavy for the revenues we anticipated generating.

Secondly, was the high Broadband productivity in areas where we are currently represented.

I think the principal challenge has been in the reliability, in particular in terms of the quality of the Voice, which is provided on effectively, a joint Voice and Data connection. So we continue to be cautious in rolling it out into the newer areas until we are confident that we -- the quality is there.

In terms of the existing areas where we're currently represented, the -- one of the reasons for moving ahead with NGN, as I said, was to provide data connectivity in a joint voice and data life. Again, because of issues, I think, in terms of the quality of the voice connection, rather than the data connection, we've gone slower in that area as well, than anticipated. In fact, in terms of providing the data connectivity, I think we're relying on more additional ITV style approach to provide the DSL.

So I think it's just taking a little bit longer in terms of testing. I think we want to make sure, in terms of reliability, it's there, particularly on the voice quality. And I think also, in terms of our own internal processes and systems we want to make sure that they are aligned with the way of doing business with the NGN, which, in a number of cases, is different from how we were doing business when we were relying on the legacy network.

I guess the third question was on the BPO. What would be the expectation now in terms of market size and, approximately what PLDT might expect to have in terms of market --?

Based on the market (inaudible) the growth reached it is to basically 10% of the outsourcing contract by 2010. This roughly means, value wise, around 13b in dollars.

One, three? You--?

One, three.

Which is the total pie? You want 10% of the 13b pie?

No. Total pie is 130b.

Okay. Okay.

10%, which is 13b --.

Okay.

For the whole country. Right now, we're doing PHP7b only, for our -- for ePLDT.

Thank you.

Does that answer your question, Miss Ang?

Yes. Thank you.

So it's about 5% only of the total country's revenues at this point, which is about $4b.

Yes.

Thank you for your question, Miss Ang. Our next question is coming, now, from the line of Navin Killa of Morgan Stanley. Please go ahead.

Hi. Thank you for the call. I have three questions, actually.

First, I just noticed that your interest expenses were down quite substantially, especially on a quarter on quarter basis. We can understand the year on year decline, given the pay down in debt. But I notice that on a quarter on quarter basis there was almost a 20% decline in your interest expenses. If you could explain that?

Second, just wanted to relate your NGN reassessment with respect to your CapEx guidance. Is there then a possibility that your CapEx either gets postponed or reduced? And in light of that, if you could share with us your CapEx guidance potentially for next year? And also, I noticed that your nine months spending is way below your full year target. So if you could also elaborate on any timing issues there?

And then the last question I had was, again, on the balance sheet and the capital management announcement you made. If I look at your formal dividend policy, you have mentioned 70% of net income plus a 'look back' approach. Is this something that runs independent to the capital management initiative that we're looking at? Or are the two related? And is there a long term or a medium term gaining target that you have? And if you could perhaps even share what timeframe you want to achieve that? Thanks.

The interest expense is a combination of several things. Basically, the absolute debt levels are down, strengthening of the peso, which effectively translates to a lower impact in terms of our (technical difficulty).

Do you want to continue on the capital management and do the NGN?

Maybe I can try on both the NGN and the last one. I think -- it's basically the dividend payout target of 70% and the look back. In fact, it is an integral part of the capital management program. I think, as we may have discussed with you in the past, the consent solicitation achieved -- is basically focused principally on the 2012 bond, but also we're taking the opportunity to go beyond the restrictions there and look at 2009 and 2017. That will effectively give us flexibility. And not only in terms of dividend payout, but in terms of investments that we may look at in the future.

So I think that flexibility is important when we undertake the look back. Because, to the extent that under the existing governance we have made investments of other capital type initiatives during the year, that would restrict our ability to pay dividends going forward.

So I think we're sticking to the 70% under look back. I think we still think there are some opportunities for us on the investment side. And we would like to incorporate that before we settle the final dividend for the year.

And the NGN, there are certainly some implications in terms of the timing of the NGN rollout. But at this stage we haven't, as yet, fully quantified that. So our guidance that we will give for CapEx going into 2008 and 2009 is probably, at this stage, running at a similar level to what we incurred in 2000 -- increasingly incurring in 2007. So you -- we would say that that will be coming in around the PHP25b level.

You're correct to say that there was a large CapEx which was in the fourth quarter. But I think that a lot of that is reflecting the fact that the additional Cellular subscribers has run ahead of what was anticipated. And there is an element, I think, of network build out on the Wireless side, basically to provide some catch up additional capacity.

At the same time, we've also had quite a bit of success, again, probably ahead of what we were expecting in terms of the Wireless Broadband take up. And, again, we are anticipating a bit of a heavier expense -- CapEx expenditure there in the fourth quarter.

So I think your observation is correct. But I think it reflects the earlier successes during the year and an element of catch up CapEx in the final quarter.

Okay. Sorry. If I can just follow up on the dividend question? So what you are basically mentioning is that we should still expect you to stick to your 70% and look back strategy, but you also mentioned that there are a few investments that you are looking at. And beyond that you might have a slightly more different dividend strategy that comes up, probably next year or so?

I think we're all -- I think the position really hasn't changed significantly. I think what the Consent allow us to do -- you may recall, in particular in respect to the 2012 bond that there was this concept of a basket that was created of funds which were available for dividends, things like share buybacks, investments. So to the extent, for example, we have made an investment, that would mitigate our ability to pay a dividend, or do a share buyback, or any of these capital management initiatives. So the Consent Solicitation allows us greater, flexibility as we go into 2008 and 2009 to proceed with some initiatives on the investment side, and maintain the 70% payout and take a look back at the end of the period to see if we want to pay an amount by way of special dividend, or maybe some type of share buyback arrangement that would take us above that 70% level.

Now, at this stage, we are not anticipating a change on that 70% level. I'd probably say, with the removal of the constraints under existing bonds, or not the removal, but the relaxing of the amendment of the constraints, that gives us flexibility to move beyond the 70% going forward. But at this stage, we're not coming out with an amended number.

I think obviously we have been -- the ultimate objective is clearly to achieve an optimal capital structure, which we indicated in the market that we think that the leverage of the Company could go to 1.25, 1.5 times net debt to EBITDA. Clearly, we're way below that. We have about 0.6 as of the end of September. So this change, I guess, in the covenants package just allows us that flexibility to look into more a medium term timeframe to be able to, I guess, achieve that objective.

Okay. Got it. Thanks a lot.

Does it answer your question, Mr. Killa?

Yes. Thank you.

Thank you for your question. Our next question is coming out from the line of Arthur Pineda of ABN Amro. Please go ahead, sir.

Hi. Thank you for the call. I have three questions. Could you please provide a little more color on your Broadband business? If you could disclose margin trends and what percent of your growth is in urban versus rural areas, that would be great?

Secondly, if you could also disclose a little bit more on ePLDT's margin trends in 3Q? I see that margins improved to 6% -- from 6% in 2Q to 10% in 3Q. If you could talk a little bit more about what caused this improvement and where you see this going into the next quarters?

Lastly, if you could discuss your plans for ePLDT in 2008? I see on the wire that you're looking to list the Company by next year. If you could talk about deal size and timetables or use of proceeds that would be great? Thank you.

Well, on the ePLDT questions, the margins have improved from Q2 to Q3, in the main, because of our -- as far as the BPO business are concerned, we were able to get some price increases from our larger customers, have been able to incorporate CPI Index losses to adjust -- to make adjustments to our pricing in case there's a movement on the CPI Index based on agreed present takers.

There was a significant uplift in the margins of SPI through their own, basically, margin enhancement -- enhancing initiatives, such as developing their own technology based solutions, (investing) in their dependence on license solutions which are more expensive.

Then they started offshoring, MT work to the Philippines and India, and that will increase over time. So we expect the margins of SPI to -- will increase and stabilize around 30% level.

And on the Data Service side, the margins have been very good lately, given that we were able to increase our prices for Data Transfer services significantly, given the demand for data transfer services lately.

On the planned IPO for ePLDT BPO, it's not BPO data that will be listed. We're planning to just IPO the entire outsourcing business. And for that purpose, it will increase to inform the medical product which is called SPI Global Solutions Corporation. That will be the listing vehicle if and when we list by next year.

From where we sit today, the listing probably will have to occur around the second half of next year, given that there are a number of preparatory work, largely on the profit side, and downstream the assets of SPI and Ventus over to SPI Global, and some of that will need to be secured. But just on a cautionary note, obviously the decision to list next year will depend also on market conditions.

The deal size, we don't have a deal size yet. We're in the process of getting a valuation of our -- the entire business. And the valuation has been affected by, in the past, the opposition of at least two companies. So once that is done then we will go about the process of valuing the Company, and estimating our deal size, which will depend, really, on our own requirements for expansion and working practice.

With regards to the Broadband business, this is really a growth driver for the Company. As I mentioned earlier, the subscriber growth has been quite rapid in this area. We now have crossed the 500,000 mark. And our target was 530,000 for year end. It's likely we'll exceed that definitely because end September we were already at 500,000 plus.

Like any business it is a business of scale and therefore the margins will improve as the scale -- as we bring in many subscribers.

With regards to your question as to where the subscribers are coming from. Right now, they are mostly in the cities and the municipalities. And we cover something like 600 cities and municipalities right now on SmartBro, which is our wireless broadband. And that is -- out of the 6,000 base stations that we have on the Cellular, roughly about 2,700 base stations are already wireless broadband enabled.

And because of this, because of the fact that it is riding on the network of our Cellular business, the margins that we are anticipating would be higher than normally would, because CapEx is incremental in that segment.

Right now, we're looking at margin of between 40% to 50%. This is what we anticipate for next year given the volumes that we are looking at.

Okay. Thank you.

Does that answer your question, Mr. Pineda?

Yes it does. Thank you.

Thank you very much. Our next question is coming out from the line of Luis Hilado of JP Morgan. Please go ahead sir.

Hi. Good afternoon and congratulations on the results. I also have three questions. I just wanted to check, in terms of fourth quarter if we should expect any lumpy expenses or transactions? And, as part of that, if we could have an estimate of what the consent fees could be if all the debt holders agree?

Second question related to the Fixed Line business. I just wanted to get some color on the Q-on-Q decline, 4% decline in the number of Fixed Line subs, what your plans are in terms of arresting that decline or any other remedial measures?

And third question is just on Wireless Broadband, if you're planning to launch a 3.5G HSDPA service as well for SmartBro?

Could you repeat your questions please? I'm sorry, we could barely hear you.

Okay. Hello? Yes, the first question was if there's any lumpy transaction expenses expected in the fourth quarter? And in relation to that, what the potential consent fees could be if all the debt holders agree to the change in the covenants?

The second question was if I can get some color on the Fixed Line subscriber decline Q-on-Q, the 4% decline, the sub base?

And last question is in terms of if SmartBro is going to launch on 3.5G wireless broadband service?

I think in terms of looking at the fourth quarter, at this stage, other than normal items, then I guess we're not expecting anything lumpy. If the Consent Solicitation was to be fully taken up by all, then that would translate into a $4m expense to us. Having said that, given our experience in the past, the actual amount is likely to prove quite a bit less than $4m.

To get the consent we actually need 50% plus one at each of the bond levels to be able to get the consent through.

In terms of other things that usually shape the fourth quarter, obviously ForEx to some extent will impact things. So you know it impacts us both in terms of the P&L, in terms of translating our revenue and expenses. It will also will have an impact obviously in terms of the balance sheet translation. So I guess that needs to be factored into the results.

Other areas which there could be some higher than ongoing quarterly expense would be things like the contribution to the retirement fund. Because normally the actuarial valuation is an annual exercise and we approved this on the information that has been provided in the previous year. But obviously in a year such as this where the numbers are down because of the MRP program, interest rates, the (inaudible) and the like, that has to be reassessed and can hit us in the fourth quarter.

Compensation benefits to some extent can be expected -- affected as well because, as you know, we have this long term benefit plan and that is to an extent affected by how the share price moves.

So other than maybe the consent fees, maybe these are other areas that could result in some --

(Inaudible -- microphone not accessible).

Right. These are other things which could affect the results. One other thing that should be mentioned is that we have sold one of our -- there will be one -- there will be gain from a property transaction recorded in the fourth quarter.

Could we have an estimate of the level of the gain? Hello?

Participants, would you please hold the line? All participants please hold the line.

Please continue to stand by. We will reconnect the main line as soon as possible. Thank you.

Sorry, I'm not sure where we lost each other but I'll resume trying to answer your second question on the subscriber numbers. Is that a good place to start?

Yes, that's fine. You can start from there.

I think, if you analyze it, the decrease is not in the postpaid subscribers but in the prepaid subscriber base. And I think that's a deliberate strategy on our behalf. The actual ARPU that we were earning from the prepaid base is very low and the churn on the network relatively high. So I think, from a marketing perspective we have been emphasizing more the postpaid. And I think you're actually quite likely to see continuing churn off on the prepaid over the next few quarters. But as I say, that's unlikely to have a significant impact on the revenue side. They are generally fairly low ARPU contributors to the Fixed Line business.

Okay.

With regards to your question Luis on the Wireless Broadband, we are always looking out for new technologies. And I think you were referring to the WiMax technology which you said, the 3.5?

Actually yes, for HSDPA actually.

For HSDPA, we are also looking at all of these technologies, both WiMax and HSDPA. And you can be sure that we will be exploring this technology as we move forward. And particularly on HSDPA, we are looking at the 850 frequency upwards.

Okay. Thank you. Sorry, just one follow up question to circle back to this first question. Given the full year guidance implied for the PHP9b core profits in the fourth quarter, seems to be that there's no lumpy transactions in the fourth quarter besides the consent fee. Is the PHP9b sort of a minimum we should expect assuming an exchange rate where it is today?

I think Luis we indicated to you how the fourth quarter may be impacted by these various items. So I think we'll leave it up to your skill and judgment to factor in how the PHP9b may vary in the fourth quarter.

Thanks.

Thanks Luis.

Thank you Mr. Hilado for your questions. (OPERATOR INSTRUCTIONS). Our next question is coming out from the line of [Julian Terebago] of ING. Please go ahead sir.

Yes, good afternoon. Congratulations for the -- to management for the results. I just have two questions, the first of which is given your outlook for the dollar/peso, looking ahead, could you please describe your hedging policy and, if possible, strategy moving forward.

My second question would be could you provide a bit of an update on Piltel, specifically the timing and the extent of prospective cash dividends. That's it.

In terms of -- this is two questions, in terms of our dollar/peso expenses I guess there are two aspects to the churn, the stock and the flow concepts. Looking at the stock, which is basically the balance sheet side of the equation, historically we have had significant amount of foreign currency liabilities. But obviously, over time, we would be able to reduce the level of debt that's seen here in our balance sheet, as well as we've entered into certain hedges and with respect to our longer dated bond. So as we stand today, approximately 60%, a little over 60% of the debts are actively hedged from the balance sheet side. So I guess the exposure to future dollar movement is a bit more mitigated than the extent it was a few years ago.

Now on the flow side it's basically the operating results. We've indicated that 38% of our total revenues now are actually dollar denominated or dollar linked. So this includes the international long distance revenues, the fixed line revenues, the ICT which is intrinsically U.S. dollar based. So from an operating standpoint we -- invariably the peso appreciates, that tends to depress our revenues and our earnings because of our debt appreciation.

Now in certain areas we have, for example, the ICT business which typically has, in terms of the revenue is practically all U.S. dollars. We started to look like -- look at the contracts and link some of the renegotiation with respect to ForEx movement or CPI movement. So that's embedded in some of the contracts we are now renewing as well as certain of the transactional hedges in the market.

Now on the Piltel side, we had yesterday announced on the Piltel side the intention to review the (inaudible) preferred shares in December. And that basically are just a map of the many steps that we've taken in respect to cleaning up the balance sheet of Piltel which basically should make Piltel efficient, to be able to start looking at common dividends starting next year.

Okay. Thank you very much.

Thank you for your question. Our next question is coming now from the line of Vijay [Sanas] of Fidelity.

Hi everybody. Thanks for taking the time for the call. I had a question on your mobile TV initiative. And there was some recent news flow on legal controversy where the other broadcasters are preventing your entry into this field. Can you highlight what that controversy is and perhaps also state your ambitions on the mobile TV space or, in general, on the broadcasting space.

Just to clarify, the mobile TV question maybe is more addressed to our media group which is the MediaQuest Group, if I respond to that given by our Director of MediaQuest. There is no issue raised by the broadcasting sector against the mobile TV service of GV Broadcasting. Because GV Broadcasting, which is 100% owned by the retirement fund, is a duly franchised broadcasting entity. The ones that raised the issue before the NTC actually was the Association of Independent Cable Television Providers. So they are not true broadcasters.

Having clarified that, the issue that they have raised is that the mobile television service being a broadcast service should not be done by Smart and they're alleging that myTV is actually a Smart service, which is not the case. The mobile television service is being provided in cooperation and partnership with Smart by GV Broadcasting, or which has been named now the Media and is now Mediascape.

So we have, as far as the media side of the Group is concerned, we are compliant with both the laws and the regulations as far as broadcast service is concerned. The broadcast service strategy of MediaQuest is being pursued under the scenario where they need to partner with a mobile operator rather than go on standalone broadcast service, which is dependent on advertising revenues, which is slightly the model of a TV network operator who would want to just broadcast their signal to be received by mobile phones properly equipped to receive those signals. But the strategy basically chosen by MediaQuest -- Mediascape is different from that. They are working closely, or will work closely with Smart to be able to actively tap into the customer base of Smart.

Right. And perhaps it would be useful to understand what PLDT has invested in this first vehicle which is going to be pushing the whole mobile TV service. What's the investment so far and what do you think is potential investment from PLDT side?

There's no investment from the PLDT side in MediaQuest. That is up to the retirement fund company. So it comes from the assets of the retirement fund.

Right. And just on a separate matter, I wanted a clarification. Last time we spoke about the whole privatization process of the TransCo in the Philippines. And initially there was a view about whether PLDT could participate in that in some manner or the other. But I understood -- I understand that you then changed your mind about it and you decided it would be done through other Group companies rather than PLDT. Has that process -- has that thought process changed or can you update on what the latest there is?

I think that's accurate. I think there were, because of the nature of PLDT's franchise and that being fairly narrowly drafted, that it needs to principally invest in telecommunications related services. I think, in terms of the investment in TransCo, that is an investment which actually will be undertaken by MPIC, Metro Pacific Investment Corporation. So they are proceeding. They have formed a consortium together with an Italian group called Terna. And I think there are two other bidders and that process is under way. It doesn't involve PLDT.

That's great. Thanks very much and I appreciate your taking the time.

Thank you.

Thank you for your question. (OPERATOR INSTRUCTIONS). Our next question is coming out from the line of Kathy Chen of Goldman Sachs. Please go ahead.

Hi. Thanks for the call. I have three questions. Firstly, on the program watch you have stated that you expect total mobile market penetration to increase to over 70% by 2010. Could you share with us how much you expect ARPUs to drop over that time period?

And then related to PLDT's own mobile subscriber growth, I saw recently in the news flow that you're raising your year end subscriber target to 29m to 30m. Do you have any initial guidance on the outlook for growth in 2008?

The other two questions I have are follow up questions, firstly related to the manpower reduction program. What amount of cost savings do you expect as you reduce the Fixed Line headcount down to 7,000 over the next two years?

And then, on the property gain side, I didn't catch how much the gain is for fourth quarter this year. And do you have any initial guidance for '08, again on the property side?

Kathy, I don't think you caught the amount because I didn't say the amount of the property gain.

Should I have put it down as?

No. It's -- at the moment there will be a gain but the amount is still being quantified. There are certain aspects of the transaction that need to be finalized. But it will complete in the fourth quarter.

Okay. And will you expect -- will you do more in 2008?

I think we, in terms of substantial properties, we have one more. And I think there is a good likelihood that that will come through in 2008 yes.

Did you ask Kathy about the MR (inaudible).

Sorry. The first question was on the program watch that the mobile market penetration will increase to 70% by 2010. Could you share how much you expect ARPU to drop over that time period? And then for PLDT itself, if there is outlook on the mobile subscriber growth for '08?

As you know we are over the 50% to 55% penetration. We are already mining the lower end of the market. And we're seeing that the ARPU should decline. But to how much they will decline, right now that would be a little difficult for us to predict. But what is important is that the subscriber acquisition cost is also slowing down, but the incremental CapEx per term is also going down. So at this point in time our subscriber acquisition cost is one-third of one month's ARPU. So it is clear that with the churn that we are having that the margins will be sustained as the penetration goes up and as we increase the subscriber take up. So what is more critical for us is to manage that decline in ARPU by matching it with a decline in the subscriber acquisition cost.

Does that answer your question Ms. Chen?

Yes. Actually the other part of the question was the outlook for PLDT's mobile growth in '08 and then the expected cost savings related to the manpower reduction program?

With the manpower reduction program well there will still be a -- well there is still a plan to bring it down to 7,000 over two to three years. The savings would be more or less flattish because what is happening is that we are also in a unionized environment and there are mandated increases of wages that go with it. So that's why we are looking at just trying to even that out over the next two to three years.

Does that answer your question Ms. Chen?

Yes. Is there any comment on the mobile subscriber growth for next year?

The growth this year -- I prefer to answer the growth this year because it's the fair one I know -- is right now, for the first nine months was 4.1m subs. And just to give you a proper perspective, that is already higher than the entire year's net addition for the mobile group last year. So given the fact that we have a focused acquisition program and very intense drive to increase our positions, we feel that that trend may be sustained next year.

Alright. Thank you.

Thank you Ms. Chen. Our final question is coming out from the line of [Joe Cheronsen] of Citigroup.

Hi. Good afternoon. I have three questions regarding the Consent Solicitation. Number one, for the removal of the restricted payment basket, does it mean going forward there will be no limitation on dividend payout as long as you comply with the consolidated leverage ratio?

My second question is for amending the limitation on dividends, subject to the limitations under the Philippine law, can you elaborate what are the changes there and what are the current limitations, if any, under the current Philippine law.

And my third question is have you considered buying back the bonds or making a tender offer for the bonds, for the U.S. dollar bond? Thank you.

Right. With respect to your questions Joe, on the removal of the restricted payments basket, going forward, assuming we get the required requisite consent, basically we'll get this subject to -- yes, you indicated that the consolidated leverage ratio (inaudible).

The limitation on dividend again the existing covenant with respect to the bonds limited to 100% of prior year's net income. That's a provision that we should remove from the bond covenant. And therefore, going forward, it will be subject to limitations under Philippine law which basically would be the fact that we would need to have sufficient unrestricted earnings to cover the dividends, for every dividend payment we make.

I guess the last question was about buying back. Did you ask about intention to buyback bonds or something?

Yes. Have you considered buying back the bond? Given that with this Consent Solicitation you're not looking to buy back the bond?

No, not at this point. In the past we've kind of bought back some bonds on opportunistic basis but that's not the concentration as of the moment.

Okay. Thank you.

Does that answer your question sir?

Yes.

And that concludes the Q&A session. Before I turn the conference back over to Mr. Nazareno, I would like to give everybody the instant replay information of today's call. This conference will be available on a 24 hour instant replay starting today, daily until November 20, 2007. International caller number is 852 2802 5151. U.S. toll free number is 1 800 839 3018. And the pass code is 758370.

At this time I will turn the call back to Mr. Nazareno for any additional or closing remarks.

On behalf of my colleagues who are here, we thank you all for joining us this afternoon. And we look forward to having a discussion with you again for the year end results next year. Thank you.

Thank you. And that concludes today's conference. Thank you all for your participation. You may disconnect your line in your own time. Have a good day.