PLDT Inc (PHI) 2008 Q2 法說會逐字稿

Good afternoon everyone and welcome to the PLDT's conference call to discuss the Company's first half 2008 financial and operating results. This conference call is being recorded. Replay information will be provided at the end of the call. At this point I would like to turn you over to Ms. Melissa Vergel de Dios, Head of Investor Relations for the introductions. Ma'am, please go ahead, thank you.

Good afternoon. Thank you for joining us today to discuss PLDT's first half financial and operating results for 2008. As mentioned in the conference call invitation, today's presentation is posted at our website. For those who have not been able to do so, you may download the presentation from www.pldt.com.ph under the Investor Relations section.

For today's presentation we have with us members of the PLDT Group management team. Joining us today are Mr. Manuel V. Pangilinan, Chairman, Mr. Napoleon L. Nazareno, President and Chief Executive Officer for PLDT and Smart, Mr. Christopher Young, Chief Financial Advisor of PLDT, Annabelle Chua, Treasurer of PLDT and Chief Financial Officer, Smart, and from ePLDT, we have Ray Espinosa, President and CEO. At this point let me turn the floor over to Mr. Nazareno for the presentation.

Good afternoon, ladies and gentlemen. Thank you for joining us today. Allow me now to present PLDT's first half 2008 financial and operating results.

PLDT's strong performance in the first quarter of 2008 was sustained in the second quarter as you will see from our financial results. Service revenues are up by PHP3.2b or 5% to PHP70.3b. EBITDA increased by 4% to PHP43.8b, with EBITDA margin maintained at 62% compared to the same period last year and up from 61% for the full year '07. Income before tax grew to PHP30.1b representing a 15% growth year-on-year. Provision for income tax amounted to PHP10.4b, up 19% or PHP1.7b from PHP8.8b in the first half of '07. Reported net income grew by 13% to PHP19.3b, up from PHP17.1b last year. Core net income rose 9% to PHP18.7b. This translates to an earnings per share of PHP97.92 compared with PHP90.16 for the first half of last year. The period ended with the peso dollar exchange rate appreciating by 3% to PHP44.896 compared to PHP46.246 last year. Using these exchange rates our reported and core income show increases over last year of 16% and 12% respectively.

Let me now take you through a more extensive discussion of our performance. PLDT's core income grew by PHP1.5b or 9% to PHP18.7b in the first half of 2008. Increases in revenues and EBITDA of 5% and 4% respectively, as well a 19% decrease in financing costs account for the improvement in core income. In US dollar terms core income for the first half '08 stood at $417m, up 12% from $373m last year.

Reported net income for the first half 2008 amounted to PHP19.3b, a 13% increase over last year. In US dollar terms, PLDT's reported net income grew by 16% to $429m in the first half '08 compared to the first half of '07. The higher reported net income in the first half of '08 mainly resulted from a PHP900m net gain on ForEx revaluation and derivative transactions, composed of a one time gain of PHP700m resulting from the de-designation of the principal swaps and option contracts as hedges. And a PHP200m net gain on ForEx revaluation of our financial assets and liabilities and the mark to market for our derivative instruments.

Following our strong performance and consistent with the committed 70% dividend payout ratio, PLDT declared an interim cash dividend of PHP70 per share, representing 17% increase over the interim dividend of PHP60 in 2007. The interim dividend will be payable on September 22 to stockholders on record as of August 22.

You will recall that in January '08 the Board approved a share buyback program of 2m shares. To date we have bought back 1.74m shares into treasury for a total of PHP4.4b or an average of PHP2,532 per share. This represents an incremental 1.3% net value appreciation to earnings per share. Affirming its commitment to capital management and to take advantage of current share price levels, the Board approved a new share buyback program for an additional 2m shares. Similar to the first program, repurchases will be made subject to the availability of cash and at levels when management feels that the market price does not reflect the share's inherent value.

On slide five, in the first half of 2008, consolidated service revenues increased by PHP3.2b or 5% to PHP70.3b. Contributing to this increase was the 14% growth in data and ICT revenues, which accounted for 53% of total service revenues. Offsetting part of this growth was the 4% decline in voice revenues, largely due to the peso's appreciation year-on-year which neutralized increases in cellular voice revenues.

It is worth noting that the first half registered growth despite the first half of '07 having had the benefit of election spending. Moreover, against a bearish economic backdrop, second quarter '08 consolidated revenues managed to grow 1% quarter-on-quarter to PHP35.4 from PHP34.9b in the first quarter '08.

Approximately 27% of the first half '08 total service revenues are linked to the US dollars. As hedge contracts were taken out to partially cover 2008 dollar exposures, only 12% of the first half '08 consolidated service revenues were exposed to the peso's movement. Had the peso remained stable, our revenues for the first half of 2008 would have grown another PHP1.2b or 2% for a total of 7% growth year-on-year.

EBITDA grew by 4% to PHP43.8b in the first half '08 with EBITDA margin held steady at 62% year-on-year. The margin for Wireless remained strong at 65%, the Fixed line at 55% while ICT stood at 10%. Second quarter '08 consolidated EBITDA grew by 1% quarter-on-quarter to PHP22b with Wireless EBITDA having grown by 5% over the first quarter '08.

Consolidated cash operating expenses grew by PHP1.6b or 7% year-on-year to PHP24.8b on account of PHP1b in higher compensation costs and manpower reduction expenses which were offset by lower accruals related to a share-based incentive plan, maintenance expenses that included the cost of improving our quality of service as well as electricity and fuel costs.

Margins in the Fixed line and ICT businesses are under pressure and require tighter cost management. In the Fixed line, certain expenses are to a degree externally determined. Though consumption of electricity and fuel can be managed internally, costs per kilowatt hour of power and costs for per liter of fuel are outside our control.

In addition the Fixed line business must abide by wage increases mandated by law or bargaining agreements. The key to managing increases in compensation has been the implementation of a series of manpower reduction programs. Over the last 12 months, the number of Fixed line employees has decreased by 642 to 8,028. In terms of employment generation, the ICT business grew by over 2,000 people during the same period.

On slide seven, the Group generated free cash flow of PHP28.2b in the first half of '08, PHP3.8b higher than the PHP24.4b in the first half of '07. Note that the increase is partially due to the lower CapEx by PHP1.3b in the first of this year, compared with the same period last year.

Notwithstanding the lower first half '08 CapEx we are increasing our CapEx guidance for 2008 from PHP25.4b to PHP28.5b, to support higher than expected cellular and broadband subscriber growth and accelerated investments in wireless broadband capacity. A portion of this year's CapEx covers our investment in a second cable landing station and the Asia America Gateway for additional international bandwidth capacity and redundancy. The additional PHP3b in CapEx serves to underscore PLDT's long term commitment to the business despite the bearish economic outlook.

The balance sheet continued to show strength with net debt maintained at $900m with net debt to EBITDA still below 1 at the first half of this year.

On slide eight, our cellular subscriber base grew to 33.2m as of the end of June 2008, reflecting a 23% growth year-on-year and an 11% growth from the end of '07. The 3.2m net additions in the first half of 2008 were 9% higher than the 2.9m net adds in the same period last year. Growth in net adds continues to come principally from Talk 'N Text which added 2.8m subscribers, nearly three times that in the same period in 2007. The strong take up is consistent with its target markets still having the highest potential for growth.

Net blended ARPU declined by 16% year-on-year to PHP220. Margins remained above 60%. And subscriber acquisition costs have continued to be well controlled with subscriber acquisition costs covered by a week's ARPU.

Service revenues for the Wireless business in the first half of '08 are up 7% to PHP45.8b year-on-year. Growth was driven by an 11% increase in cellular data revenues and 109% in wireless broadband revenues. Data services contributed 55% to total cellular service revenues in the first half of '08, with bucket-priced SMS packages now comprising 57% of total cellular data revenues.

EBITDA in the first half of '08 improved by 5% year-on-year to PHP29.7b. EBITDA margin would have remained at 66% if not for a one-time charge in the satellite business which resulted in a slight reduction of EBITDA margin to 65%. Both service revenues and EBITDA registered quarter-on-quarter growth of 4% and 5% in the second quarter of this year respectively, in spite of the overall market conditions [beset] by inflation.

On slide ten, looking at our first half results, you may not get the sense that our Wireless business is slowing down. Headline market penetration continues to rise and now hovers at about 68%. Nonetheless, we continue to keep a close watch on our market in order to remain sensitive to their needs and in order for us to continue growing the business.

Having consistently pursued segmentation of the market, we have also been able to identify usage patterns and develop products that serve these patterns. This information on the customer and his needs dictate the variety of offers that we make available. We believe that the customer must be given choices so that he can decide which offer best suits his requirement and his budget.

Bucket packages have become the market's preference indicative of subscriber affordability issues. Recognizing that the prepaid subscribers are the segment most affected by price increases and in support of government efforts to alleviate this burden, we continue to offer relevant and affordable products and services that include pure on-net SMS, pure on-net voice as well as various combinations of on net and off net SMS and calls. For example our All Text 20 package allows the user to send 100 on-net text messages and 10 off-net messages. As an alternative for the same PHP20 a Talk 'N Text customer can choose the Laha Txt 20 which allows him to send 50 text messages to all networks. It all depends on the subscribers' needs and usage patterns.

On slide eleven, allow me to share with you some of the recently introduced products and services offered by Smart arising from our continuing pursuit of innovation. In March, Smart launched the prepaid version of SmartBro called SmartBro Plug-it which provides laptop users mobile access to broadband services through the use of a USB or access device. Top ups are in denominations as low as PHP30 with charges as low as PHP10 for every 30 minute use. As of end June there were over 32,000 subscribers using this service.

In July, Smart introduced Uzzap, the country's first flat rate, all in one, unlimited instant messaging service. Uzzap is an Internet protocol, IP based, downloadable application which allows users to merge several messages -- several messaging services such as SMS, instant messaging and email into their mobile phone. Since its launch less than a month ago, we have seen over 45,000 subscribers registered. Uzzap is still presently on trial usage.

Smart Music Store was also recently launched. As the first of its kind, this value added service is a one stop music shop that offers an extensive music catalog as well as exclusive content.

On slide twelve, Fixed line service revenues of PHP24.6b in the first half '08 reflects a modest 4% growth year-on-year. Had the peso remained stable the Fixed line would have reflected additional revenues of PHP400m or another 2% growth. Corporate data and DSL continued to register growth year-on-year. The contribution of data services to total Fixed line revenue is now at 36% compared to only 31% last year. Local exchange and national long distance revenues remained stable compared to the same period last year. International long distance continued to decline due to the impact of the stronger peso and the reduction in termination rates and call volumes. EBITDA in the first half of '08 increased by 3% to PHP13.6b due to higher revenues, with EBITDA margin slightly lower at 55%. EBITDA declined 4% quarter-on-quarter due to higher cash OpEx.

On the Fixed line transformation program, focusing on quality and service improvement, we are pleased to report continued progress in our delivery of service for both voice and DSL. Our efforts are concentrated on shortening response and restoration times. Further declines in validated troubles have been recorded. The impact of spending for improving [outside plan] facilities is almost becoming evident. Though still a work in progress, the Fixed line is on its way to achieving its transformation.

On slide 13, part of energizing the Fixed line involves tapping new markets. Our Corporate Business Group has been aggressive in offering various packages, providing service, connectivity and bundled products to corporate clients. This recognizes that the corporate market has needs which cannot be fully served by wireless applications, thus ensuring a steady source of demand for the Fixed line services.

Our corporate segmentation strategy has identified the following niche markets to focus on, namely the banking and financial sector, the electronics and semiconductor industry and the outsourcing or BPO industry. Another growing and underserved segment of the market is composed of the small and medium sized enterprises or SMEs estimated to be around 300,000 in number. In these markets, PLDT is the partner of choice.

Landline Plus which provides a fixed-wireless telephone line to customers in areas with limited or no available PLDT fixed facilities has grown its subscriber base to over 116,000 at the end of June 2008, composed of approximately 70,000 postpaid and 46,000 prepaid subscribers.

On slide 14, Broadband continued to expand rapidly with total Broadband subscribers now at 758,000 up 179,000 or 31% from 579,000 at the end of 2007. SmartBro added over 106,000 subscribers while DSL added 70,000. The recent launch of Plug-it prepaid contributed 32,000 subscribers to the growth in SmartBro base. Total service revenues from Broadband in the first half of this year grew by 53% to PHP5.1b, representing 7% of total service revenues.

We continue to be the market leader in Broadband owing more than 70% of market share. Broadband has the potential to develop in a manner similar to cellular with the confluence of several factors. First, the continuing decline in the cost of PCs and access devices. Second, the availability of prepaid, sachet-priced offerings for as low as PHP10 per 30 minute usage. And finally the growing number of unique Internet users among Filipinos which was last reported at between 13m to 16m people.

On slide 15, service revenues of ePLDT, our ICT business, increased by 3% to PHP5b, contributing 7% of total PLDT Group revenues. The growth in ePLDT's service revenues can be attributed to an 8% increase in Ventus or call center revenues as well as 15% increase in Vitro data center revenues. These increases were offset by an overall decline in SPi or BPO revenues. While publishing and medical billing verticals met revenues expectations, healthcare and legal verticals registered lower than expected revenues.

Of total ePLDT revenues, 85% were accounted for by Ventus and SPi. Contributions from the different verticals were as follows. Call centers at 33%, publishing 23%, medical billing 19%, legal 13% and medical transcription 12%.

ePLDT EBITDA margin of 10% in the first half of this year was lower than the 11% margin last year. This was largely due to the negative impact of the peso appreciation on the largely dollar denominated revenue base as well as higher levels of compensation, maintenance and rent expenses.

On slide 16, in terms of outlook Ventus continues to register a pipeline of potential new contracts as well as expansions of existing contracts, which require a gradual increase of 1,000 seats by the end of the year. This includes expansion of the Iloilo site by 150 seats and in the Sampaloc center by 350 seats. For SPi two of our four verticals are doing quite well, namely publishing and medical billing. We continue to face challenges in the legal and medical transcription verticals. And we are looking to address these in intensified sales efforts and improved efficiencies.

Meanwhile ePLDT's smaller businesses such as Vitro and Netopia are showing improvements. We expect that ePLDT's efforts in the second half will focus on tackling the different challenges faced by its various businesses. These results of these efforts or the results of these efforts may not yet be reflected in the first half of '08 but will be key in generating desired returns in the medium term.

Let me now turn over the floor to our Chairman, Mr. Manuel Pangilinan for the outlook for the rest of the year.

Thank you, [Poly] and good afternoon to everybody. At the beginning of this year, when we conveyed to you the guidance of our core profit for 2008, we struck a rather cautious note about prospects for the entire year and given at that time the rising prices of crude oil, of minerals and metals and of commodities in general. And to a degree those anxieties were confirmed in the first half of 2008 when crude oil hit its historic high, although of course that's moderated since.

We also believe that the full impact of the inflation given its rather latent effects on in particular consumer spending still has to be felt. And we felt that it's in the third quarter that that full impact will be realized. And indeed I think the Bangko Sentral has said that the July inflation number is 12.2%. And I think the statement of (inaudible) said that the inflation rate will moderate only at the start of the fourth quarter. So we're quite apprehensive about the third quarter numbers for this year.

As well as Poly indicated to you, the third quarter is a seasonally low quarter compared to the other three quarters of the year, so given the extent of school expenses and the rainy days, typhoons and all that. So I think in fact in the July number net take-up is lower than the previous six months that we've seen. So it's a slight cause for concern. Of course the fourth quarter is a very strong quarter for the Group as a whole. So it may talk the same for the -- for what we anticipate to be a softer, weaker third quarter.

What management will do in responding to these concerns would be to obviously, as again as Poly indicated, despite the control on our cash expenses, of course a continued drive with very stronger packages to raise revenues. As you could see our guidance on service revenues will actually be -- the revenues for the second half will be greater than the revenues for the first half. And prospects for the fourth quarter which could compensate hopefully for the adverse effects of third quarter prospects.

In that light, we are maintaining our core net income guidance up PHP37b for the year, hopefully with a slight bias to a number that is higher than that.

EBITDA for the second half will more or less mirror what the EBITDA was for the first half at about PHP2b (sic - see presentation) for the second half or slightly above that.

Now with respect to capital management we have -- the policy is to pay out a minimum of 70% and an undertaking to look back at the end of the year or early next year as to the cash position of the Company. If we have not made any significant new investments, then we are able to likely raise the dividend payout to a number higher than the 70% of core income.

This morning the Board of PLDT has also approved the buyback of another 2m shares. As Poly indicated we have already bought 1.7m shares. We should complete that in the next few months. And this further 2m share buyback is good for the next 12 months, that the Board has approved. It is EPS enhancing. For every 2m shares we buy at certain prices, it would raise core EPS at least 1.3%. And given the low price of PLDT that probably should be more than 1.3% in EPS enhancement.

CapEx will rise by PHP3b. We think it is time to invest more given the more positive prospects for growth in subscribers both in our traditional cellular, this has -- and of the Broadband side of the business. So we're cautious, but I think confident that we can meet the numbers that we have indicated to all of you.

I think that ends the presentation and we open now for Q&A. Thank you.

We will now open the floor for your questions.

Okay. The floor is now open for your questions. (OPERATOR INSTRUCTIONS) The first question will be coming from Mr. [Louis Suardo]. Please go ahead.

Hi, good afternoon. Thanks for the call and congratulations on the results. I just had three questions. Sorry if I missed out, but I noticed that cost of sales for the second quarter went up quite dramatically. If I'm right, it's about 61%. I'm just wondering what's driving the number.

The second question is if you could give us some color about -- in terms of where subscriber growth these days is coming from. Is it geographically or income class wise?

And the third question is just on what percentage of OpEx and CapEx do you say is related to inflationary pressures domestically?

The cost of sales were higher in the second quarter versus the first, Louis. But that is matched by an increase also in terms of the non-service revenues from the sales of handsets. And basically, the portion on the activation side as well as the launch of the SmartBro prepaid Plug-it, this contributed to that. But it was compensated for. So on a net basis the product subsidy did not dramatically change.

The second question was some color on where the sub growth is coming from geographically and income class.

With regards to your second question, Louis, the -- out of the 3.2m net adds for the first half of this year, something like 2.8m came from Talk 'N Text. Understandably that should be metro Manila area, more in the provinces.

The third question was what percentage of OpEx and CapEx are related -- or are affected by inflationary pressures?

With regards to OpEx the ones that are basically affected are -- one would be the maintenance cost, that's one. The second is the fuel costs are up. And the third is the power costs are up in the various cell sites that we have. So what we are doing is putting in measures of bringing down the kilowatt hour consumption for example, to bring down the power costs. And also limiting the consumption of fuel. Like for example, trimming down our air conditioning costs to a certain extent where it can be reduced. So we're putting in measures by which we are able to mitigate the increase in these costs borne out of imported inflation.

Just a quick follow up.

For the CapEx I guess the increase would be in the form of the construction materials or additional buildings or additional sites that we're putting up.

There is a follow up for this question.

Yes.

In terms of the CapEx increase I understand the bulk of it is really for new investment. But is there any portion of it which is related to inflation, like in the PHP3b increase which is inflationary linked, or is this pure new investment?

The PHP3b increase in CapEx is not really inflation. It is because we are increasing our coverage and capacity for both broadband and the normal cellular service. We are also accelerating the 3G 850 deployment that we have laid out. That is during the second half of this year.

Thanks a lot.

Thank you. We have the next question coming from the line of Navin Killa from Morgan Stanley. Please go ahead.

Hi, thanks for the conference call and congratulations on your results. Actually I had three questions. One, I just wanted to get your views on the noise that we had earlier this year from the regulator regarding reduction in access charges. What's the thought process there, how the discussions have progressed and where are we in the process? If you could throw some light.

Secondly, in terms of your CapEx guidance again, I know in the past you have basically guided towards PHP25b per annum kind of spending. Is it therefore right to assume that this CapEx increase is one-off and going forward we'll probably go back to the PHP25b range? If you could throw some light on that.

And then lastly, a question on capital structure. Your net debt to EBITDA is obviously very low at 0.5 times. And I know you have a look back approach to dividends. But are you also considering a one time gearing up alternative to make the balance sheet more optimal? Thanks.

On the first question regarding the current moves of government to reduce the interconnection charges, the proceedings remain pending before the NTC. We still have to find out from the NTC if subsequent hearings will be held. But in our effort to stem the issue and by way of helping the public make it through the rising inflation and prices, the industry and I would say led by Smart, really voluntarily offered to the Commission to come out with very specific promos that would address some of these concerns and make basically cross network telecoms more affordable, even as it is very affordable today.

We remain confident in our view that there is no basis for any regulator intervention at this stage given that the market is very competitive. the prices of all the three operators remain very affordable to the consumer and have been made more affordable through the introduction of these new promos. So that is where we stand today. And we still have to hear from the regulator what they propose to do with their pending circulars.

Second question was on the CapEx guidance, whether this year is one-off.

With regards to CapEx, the PHP28.5b that we are putting up as guidance would likely remain the same within the next two to three years. Having said that, our depreciation is approximating that amount so is to be quite reasonable.

On the capital management issue, I think the approach remains the same. We would continue with the 70% payout with the loop back for the full year. And in addition to that, as discussed in the presentation, the Board has approved the further buyback of shares, beyond the initial 2m, to a total of 4m. And we remain open to leveraging up the balance sheet in support of expansion of the business, in particular acquisitions. We have not in the past proposed a one-off distribution to leverage up the balance sheet and that remains the case. That is not something we are considering at the moment.

If I could just ask a follow-up question on my first question. You mentioned that you've launched some promotions to make cross-network calls more affordable. Could you please give some examples there? And how have you been able to achieve that if your interconnect rates remain high?

We do have a variety of, a range of promos available. And, as we indicated in the presentation, they -- some of them are pure on-net, some are combination of on-net and off-net. Some are pure off-net. So, for example, in the case of our bestseller which is All Text 20 a subscriber who tops up this All Text 20 is able to send 100 on-net and 10 off-net messages for PHP20 valid for one day.

There's an alternative PHP20 package also under the Talk 'N Text brand which we call the Laha Txt 20 which will allow a subscriber to send 50 messages to any network, be it on-net or off-net. So there are a wide range of choices. And the consumers at the end of the day are able to decide, based on their own usage patterns, which one best suits their requirements.

Okay. Thank you.

Thank you sir. Our next question will be coming from the line of Arthur Pineda from ABN Amro. Please go ahead.

Hi. Thank you for the call and congratulations on your results. Two questions from me. Firstly with regard to the slowdown that you've mentioned in the third quarter, are you already seeing any decrease in billable usage patterns in July and August?

Secondly, it seems that you are significantly outperforming your peer. What do you think you're doing differently that's made you more effective in squeezing revenue share?

The third question I had was with regard to your discounted SMS programs. How is the take-up so far in this? And do you think this could actually lead to capacity and CapEx issues going forward? Thank you.

With regards to the first question of slowing down in the second quarter, let me just point out that --

Third quarter.

Third quarter.

Sorry, third quarter. Normally the third quarter is the low quarter for us based on the normal seasonality of the industry, mainly because of the school expenses. It's school opening and therefore the consumer wallet is directed towards that. Plus the fact that we have several typhoons during this time and that affects the take up of our business. So in July we have seen a little bit of slowdown in our net adds. And that we feel is caused by the seasonality more than perhaps the effect on inflation. What is impacting us with regards to inflation are the costs. We're seeing that already in the last two months. And therefore that is the one that we are addressing quite aggressively.

With regards to outperforming our peer, perhaps you can ask them that question?

The third is with regards to capacity, we are increasing our CapEx if you may notice our CapEx guidance for the balance of the year. And that is because we have had a tremendous increase in our subscriber net adds for both cellular and broadband. And therefore we are at a point where we have to scale up our capacities for both SMS and voice. And that is what exactly we are doing. We are also accelerating the rollout of our 3G expansion for the 850 frequency. And that is going to happen in the balance of the year.

Okay. Thank you.

Thank you sir. Next question will be coming from the line of Jody Santiago from UBS. Please go ahead.

Yes, hi. Good afternoon and congratulations on the results. I have three questions. One is a follow-up on the CapEx guidance. Are you able to give us some guidance on what is the sustainable level, broken down by Fixed line and cellular maybe for the next two years?

And maybe CapEx as a percentage of sales, what is the sustainable level?

Secondly, could you give us an idea on the profit implications of the promos that you've launched on inter-network calls as well as the discounted SMS?

And then lastly, again a follow-up question on the fact that you seem to be doing better than the competitor on the low-end segment. Could you distinguish for us the positioning of Talk 'N Text versus Touch Mobile based on your views?

The CapEx for this year, the PHP28.5b is roughly broken down at 64% for Mobile and about 31% for Fixed and the ICT is at 5%. Broadly that should be more or less the breakdown for next year's CapEx.

For the profit implications of the promos that were launched, they are highly profitable, as you can see in our margins. It is really volume driven and therefore what we are doing in that we are providing the consumers an array of choices for them to be able to get what they want at a particular time and a particular day. And if they can do 100 messages for that day, we have a package for that. If they will only do 50 messages for that day, we have a cheap package for that too. If they want to mix it up with calls, few calls, we have a package for that too. So this allows for them to be quite sticky with us and also, at the same time, avail of the service whenever they want to, pretty much impulse-like. And so, being SMS centric in our revenues allows us to be able to generate a high level of margin at this point in time.

The last point was how do we distinguish positioning between Talk 'N Text and Touch Mobile.

Maybe you can ask the other side first --

Okay.

On the positioning. But what we're saying, the Talk 'N Text maybe I can just describe what this Talk 'N Text positioning is. (Inaudible) has always stipulated that our Talk 'N Text positioning is a no-frills type of service, purely talk -- purely cheap talk and cheap text. And that is what you get, value for your money. And that is the positioning for Talk 'N Text.

Can I have one follow-up question on the CapEx? What do you think is the sustainable CapEx to revenue level after all this expansion is done?

The CapEx relative to sales is about 15%.

Okay. Thank you.

Thank you sir. Our next question will be coming from the line of Ms. Kathy Chen from Goldman Sachs. Please go ahead.

Hi. Thanks for the call. I have three questions. On the Fixed line side, could you give us an update on the collective bargaining agreement with the union and expected impact on the Fixed line employee expense?

And also what is the outlook on potential further manpower reduction program?

Secondly, for the ICT business, can you give a little bit more color on the reason for the disappointing trends on the healthcare and legal BPO revenues?

And what is the outlook for revenues and EBITDA margin for ICT in the second half?

And then lastly just a follow-up on the Mobile margin commentary. As the blended ARPU for Mobile continues to come down, how much lower do you think you can get subscriber acquisition costs to go down as well to maintain the margins?

I'll try to answer the CBA question because Mr. [Valdez] is not here. He's over there. From what I understand the CBA decision by the labor arbiter has been appealed by PLDT before the NLRC. So that remains pending before the Commission. The Commission has the power to review the decision of the NLRC. And I think it's still -- we've submitted our position insofar as that matter is concerned. And we're just awaiting the disposition of the appeal by the Commission. So that's where it stands today.

Second question was to give some color regarding the results of healthcare and medical transcription.

In the case of the litigation support, there are two units of SPi that have been quite disappointing because of weaker than expected revenues. Litigation support, which is one of the verticals, usually displays very weak revenues in the second quarter. And the pick up in revenues are for this more back-ended. It occurs towards the end of the third quarter and seems to go up in the fourth quarter. That has been the historical trend. So the management of the litigation support units are banking on the back-ended revenues to happen. We're keeping a close eye on the sales effort. They need to intensify the sales effort obviously to get more projects from existing customers as well as to broaden their customer base.

In the case of healthcare, which is really more medical transcription, there the revenues of RMT unit has actually been due principally to the departure of some customers brought about by some quality and turnaround issues. But I do have to stress that these quality and turnaround issues have been addressed actually well within the second quarter. And these issues have stabilized already to the point that the healthcare unit has actually signed up a few number of new accounts. And it's also received expansion accounts or contracts from their existing customers.

So it seems that there is some good development within the healthcare unit. But we remain very cautious about their outlook for the balance of the year. And we are quite mindful of the need, on their part, to strengthen themselves in terms of the operational issues. But in terms of the quality, they have been achieving quite a turnaround lot in terms of quality. The quality ratings have been anywhere from 95% to 98%, which is very good. And they have been able to land a few major accounts in terms of hospitals, which would sort of be -- it would -- these new accounts sort of buttress the fact that the quality issues have been addressed.

The next question was how much lower subscriber acquisition costs could go in order to allow us to keep our margin. Subscriber acquisition costs. I guess the question was with ARPUs continuing to decline, subscriber acquisition costs also declined but how much further can it decline to allow us to maintain our margin?

Well right now the subscriber acquisition cost is equivalent to one week of one month's ARPU which is, if the blended ARPU was PHP220, it's 22% of that blended ARPU. And what we can manage is to manage -- to be able to maintain the margin, is to try to drag down that subscriber acquisition cost as the ARPUs go down. And as long as the subscriber acquisition goes down as low as -- lower than the way the trend of the ARPU is going down, then we preserve the margin. And that is entirely controllable by us. We can bring that subscriber acquisition cost to zero.

Okay, thanks. I actually have two follow-up questions. Firstly on the CBA, on the Fixed line employee side, what is the implication for Fixed line employee expense? And is there room for more manpower reduction programs?

And then secondly, on the ICT side, what is the outlook for margins in the second half?

The question was what is the room for further manpower reduction program, reduction of manpower.

On the manpower issue, I think an important component of that is the continued build-out on the Fixed of the NGN. As we talked about some time ago, we would anticipate that as the network changes the skills that are needed to maintain and operate the network change. And also the simplification of the architecture of the network will also allow us to operate more efficiently.

So I think there are opportunities to do that. However at this stage we are effectively operating both the NGN and the legacy network. And we're probably at least 12 to 18 months away from a full reliance on the NGN. So I think there are some opportunities for greater efficiency. But I think we have to wait until we're reliant on the one network on the Fixed side. I guess that's where the greatest efficiencies are likely to occur. I think both on the Wireless and the ePLDT side the operations are operating fairly efficiently.

And then her final question was what is the outlook for the second half in the ICT business?

As far as the EBITDA margin is concerned, I guess for the overall year we're looking at in the mid margin of -- hitting a margin, EBITDA margin in the mid-teens. The margins are really being waved down by the two SPi units that have not been performing well. So much of our achieving the margin targets would depend on those two units.

Thank you ma'am. The next question will be coming from the line of Rama Maruvada, Macquarie Securities. Please go ahead.

Good afternoon everyone. Congratulations on a good set of numbers. I have two questions. Firstly, with regards to -- looking on quarter-on-quarter SMS usage, basically text usage and also revenues, it does look like there's a big uptake in the volume of text messages that's been sent through your network this quarter compared to the past several quarters. My question in this regard is what specifically do you think has been driving this transition? I do note that you talked a bit about standard to bucket promo migration. But this trend seems to be pretty much across the board in both standard text and bulk SMSs. So if you could specifically pinpoint any particular promotion or something different that you have done this quarter, that would be great.

Second question relates to provisions. You've been taking pretty low provisions, in fact none, on Wireless for the past two quarters. What do you think would be an optimal provision rate going forward?

Rama, we can't tell you the details, but there was an adjustment that was carried through, I guess, year-to-date, basically in the second quarter. So if you look at this quarter-on-quarter, it is not that dramatically changed in terms of volumes of messages. But I'll just send you the details offline.

Okay.

And then was the provision question on Wireless or --

Yes, provisions on Wireless. In general they seemed to be pretty low last quarter and this quarter. So what do you think -- how do you think about the steady state given that you do have a wireless broadband rollout going on at the moment?

Wireless business is principally pretty safe, so that's why there is very minimal provision for bad debts under Wireless business.

Okay, understand. Thank you.

Thank you sir.

Are there any other questions from those who have called in? Otherwise we'll take the questions from the floor.

There are no questions as of the moment ma'am. Back to you.

Thank you. Are there any questions from the floor? There are microphones which you can use. No questions? I guess that ends our question and answer portion. We now turn the floor over back to Mr. Pangilinan for any final comments.

As (inaudible) was saying, maybe we're being a little conservative. Well, we are. I think -- our job is -- you've seen the -- we were conservative at the start of the year. And the first half numbers show that PLDT has outperformed, above the core guidance numbers. So the mandate to management is, continue to do that. So I think, in a way, we're being cautious, but very confident that at least the guidance numbers will be met, if not exceeded, for the year 2008. Thank you and we look forward to seeing you with respect to our third quarter results.

Thank you. That concludes the call's question and answer session. I would like to give everyone the instant replay information of this call. This conference will be available on a 24 hour instant replay starting today daily, on through August 19, 2008. Replay information (inaudible). International caller number 852 2802 5151. U.S. toll free 1 800 477 6039. The pass code is 791640. Conference leader is Ms. Melissa Vergel de Dios. And that concludes today's conference call. Thank you for your participation. You may now disconnect and good day to you all. Thank you.