PLDT Inc (PHI) 2008 Q3 法說會逐字稿

Good afternoon, everyone and welcome to the PLDT's conference call to discuss the Company's nine months 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 Melissa Vergel de Dios, Head of PLDT Investor Relations for the introductions. Please go ahead, thank you.

Good afternoon. Thank you for joining us today to discuss PLDT's nine months 2008 financial and operating results conference call. 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; Napoleon L. Nazareno, President and Chief Executive Officer for PLDT and Smart; Christopher Young, Chief Financial Advisor of PLDT; Annabelle Chua, PLDT Treasurer 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. Napoleon Nazareno for the presentation.

Good afternoon and thank you for joining us this afternoon. Normally we only hold a conference call to announce our third quarter results. However given -- I mean we don't normally hold a conference call to announce our third quarter results. However, given the volatile market situation, we decided to hold an investors briefing as a way of assuring our investors and providing an opportunity for face to face discussions with you.

Allow me now to present to you PLDT's operating and financial results for the first nine months of '08. Despite the third quarter being seasonally weak and given current business conditions, PLDT continued to post favorable results for the first nine months of 2008.

Service revenues were up 5% to PHP105.6b from P100.6b for the same period last year. Wireless and Fixed Line service revenues posted 7% and 2% increases, respectively.

EBITDA grew by 6% to PHP65.6b from PHP62.2b last year with margin maintained at 62%. EBITDA for the Wireless business was up 6% and by 5% for the Fixed Line.

Income before tax increased by 3% to PHP41.4b compared with PHP40.2b for the same period last year. Provision for income tax stood at PHP14.6b, an increase of PHP1.5b over last year's PHP13.1b. Reported net income declined by 2% to PHP26.2b from PHP26.6b last year. However, core net income grew by 5% to PHP27.8b from PHP26.4b last year.

Core earnings per share increased from PHP137.91 for the first nine months of '07 to PHP145.7 for this year's first nine months, reflecting a 6% increase.

The peso/dollar exchange rate at the end of September 2008 stood at PHP47.264 compared with PHP44.974 last year. But the average peso/dollar exchange rate for the period was PHP43.221 compared to PHP46.184 last year.

Our third quarter 2008 results are worth highlighting as they were generally higher than 2007. This is an achievement given that 2007 was an election year and the current downbeat business environment.

Consolidated service revenues grew by 5% to PHP35.2b. Though the service revenues for the Fixed Line remained flat year-on-year, service revenues for the Wireless business grew by 9% year-on-year.

Consolidated EBITDA for the third quarter stood at PHP21.8b, reflecting an 8% increase year-on-year with similar growth in the EBITDA for the Wireless business. EBITDA for the Fixed Line grew by 10%. Consolidated EBITDA margin grew from 60% to 62%. Core net income was maintained at the PHP9.1b level.

Let me now provide more details to our financial highlights.

Core net income grew by PHP1.4b or 5% to PHP27.8b at the first nine months of '08. This was due to a 5% increase in service revenues, a 6% growth in EBITDA and a 13% decrease in financial costs -- financing costs.

Reported net income decreased by 2% to PHP26.2b due to ForEx losses partly offset by derivative gains. A more detailed explanation and sensitivity analysis has been attached in the appendix of the presentation.

On slide five, nine months '08 service revenues stood at PHP105.6b, reflecting a 5% increase year-on-year. Contributing to this increase was a 12% growth in data and ICT revenues, which accounted for 53% of total service revenues. The growth in data and ICT revenues included 48% increase in broadband revenues.

28% of our service revenues are US dollar denominated. Net of hedges only 13% [sic -- see press release] of our service revenues are exposed to the peso's movement. Had the peso remained stable service revenues would have grown by an additional PHP2b or 2%, resulting to a 7% growth year-on-year.

Third quarter '08 service revenues dipped slightly, quarter-on-quarter, reflecting seasonality but was 5% higher year-on-year. Third-quarter data and ICT revenues were 1% higher quarter-on-quarter and 9% higher year-on-year. On the other hand voice revenues were 2% lower but up 1% year-on-year.

EBITDA at the first nine months of this year stood at PHP65.6b, reflecting a 6% increase year-on-year. EBITDA margin remained stable at 62%.

On slide six the Company continues to generate a strong level of free cash flow. At the first nine months of this year, PLDT generated PHP39b of free cash flow. This is PHP3b higher than the PHP36b of free cash flow last year, despite the CapEx being higher by PHP2.3b at PHP16.8b.

In the light of current market conditions we have reviewed our CapEx plans for the rest of the year. As a result PHP1.5b of CapEx will be deferred to 2009, resulting in a reduced CapEx guidance for 2008 of PHP27b.

With free cash flows at these levels, PLDT is able to sustain its capital management initiatives. Dividends paid at nine months of this year totaled PHP37b compared to PHP28.4b last year. These amounts include the special dividends.

We affirm our commitment to pay regular dividends of 70% of earnings, with a look-back approach, to evaluate whether there is available cash for special dividends. To date we have bought back 1.96m PLDT shares at an average of PHP2,525 per share.

On slide seven, net debt for the Group stood at $900m, with net debt to EBITDA at 0.5 at the end of September 2008. Debt maturities are well spread out with the bulk of scheduled payments at 2012 and beyond. 2009 maturities include our $124m 2009 note due in April 2009.

For the first nine months of this year PLDT generated $677m in revenues. Net of dollar costs of $262m we have a net inflow of $415m.

In terms of our debt profile 89% of our debt is denominated in US dollars and 33% of total debt is hedged. Counting our US dollar holdings this hedge is effectively 43%. 69% of our debt are fixed rate loans.

Operating financing requirements can be covered by internally generated cash flows. Significant borrowing would be required only if we are to undertake a major acquisition or investment. In the meantime PLDT is taking advantage of domestic lending facilities, being made available by local banks who are prioritizing their lending to good credit such as PLDT.

Our cash and short term investments are largely in bank placements, [SDAs] with Bangko Sentral and Pilipinas Government Securities such as the ROP and the ROP linked notes with minimal investment in corporate bonds.

On slide eight, allow me now to discuss highlights of the individual business segments. The combined Smart and Talk N'Text subscriber base grew to 34.2m at the end of September '08, reflecting a 21% growth year-on-year.

Net adds for the first nine months of this year stood at 4.1m, 1% higher than the same period last year. Reflecting expanded seasonality and slightly higher churn, net adds for the third quarter was up 935,000. This is lower than the 1.5m to 1.6m net adds in the first two previous quarters.

Net blended ARPU decreased by 14% year-on-year to PHP216 but margins remained at 65%. Prepaid subscriber acquisition costs or SAC are recovered within a week's time with subscriber acquisition costs at approximately 23% of the net blended prepaid ARPU of PHP202.

On slide nine, Wireless service revenues increased by 7% to PHP68.8b and contributed 65% to total service revenues at nine months of '08. This was on account of an 8% increase in cellular data revenues, and a 94% growth in wireless broadband revenues. Despite a 16% [sic -- see press release] decline in blended ARPU, service revenue growth was achieved due to a 21% increase in subscriber base.

Data services contributed 55% of cellular service revenues at nine months of '08 compared with 53% for the same period last year. Reflecting increased consumer focus on affordability and budgets, bucket priced SMS packages now comprise 58% of total cellular data revenues.

EBITDA stood at PHP44.4b, representing a 6% improvement over nine months '07 while EBITDA margin remained stable at 65%.

Third quarter '08 Wireless service revenues were lower by 1% quarter-on-quarter, reflecting seasonality, but were 9% higher year-on-year. As mentioned earlier this 9% growth year-on-year was achieved despite weak market conditions and compared with '07, which benefited from elections.

Third quarter '08 EBITDA dipped by 3% quarter-on-quarter but increased by 8% year-on-year.

On slide ten, moving now to Fixed Line. The Fixed Line business sustained modest growth at the first nine months of this year, with 2% increase in service revenues to PHP36.7b compared with PHP35.8b last year. This growth is largely due to the 22% increase in corporate and DSL service revenues, which now comprise 37% of total Fixed Line service revenues.

Declines in the NLD and LEC or local exchange and international long distance revenues offset growth in data revenues. For ILD, the decrease was a result of the combined impact of the stronger peso, the reduction in average termination rates and the lower call volumes. Had the peso remained stable the Fixed Line would have grown by another PHP607m or 2% year-on-year.

EBITDA improved 5% to PHP20.5b in the first half -- at the first nine months of this year, due to higher revenues and a modest 1% decline [sic -- see press release] in cash operating expenses. EBITDA margin increased to 56% for the period.

On slide eleven focusing now on broadband, the PLDT Group continued to make headway in Broadband with combined Wireless and DSL subscribers now nearing 880,000 or a 51% increase from the end of '07. SmartBro had net adds of 171,000 and DSL with 124,000 for the first nine months of '08. Broadband service revenues grew by 48% to PHP7.9b, representing 8% of total service revenues.

Momentum in broadband take up continues, with the confluence of many factors, including the introduction of lower cost access device, and a strong acceptance of the prepaid sachet priced offerings, as evidenced by the 76,000 subscribers of our SmartBro Plug-It Prepaid as of the first nine months of '08.

This growth is underpinned by the Filipinos being internet savvy and internet hungry, with the most popular activities including downloading of music, social networking, email and chat. To support the growth in broadband we are launching an HSPA850 based service this quarter.

On slide twelve, PLDT is launching a HSPA850 as a complementary platform to deliver broadband in areas beyond the NGN, DSL and Canopy footprint. This will layered on to the Smart 2.1 3G network to provide wider coverage.

In assessing what technology to deploy to support broadband, we considered many factors in choosing HSPA850. Successful commercial rollouts of HSPA850 were undertaken by Telstra in Australia as well as in other countries. Relative to other technologies HSPA850 is already considered stable.

Part of HSPA850's successful rollout is the commercial availability of access devices at relatively affordable prices. Mindful that a huge portion of the Philippine market is prepaid, and sensitive to access device prices, availability and affordability of HSPA capable access devices will be a key factor to its success.

From a technology standpoint HSPA850's advantages include the ability to operate in dense areas with no line-of-sight requirement to the base stations. As it operates in a lower frequency wider reach is achieved.

On slide 13, moving now to our ICP business. ePLDT service revenues reached PHP7.6b for the first nine months of this year, contributing 7% to total PLDT service revenues. This reflects a 2% growth of service revenues compared with PHP7.4b as of the first nine months of last year.

The increase was attributable to a 6% increase in call center revenues, a 35% growth in data center revenues, offset by a 2% decline in BPO revenues. 84% of ePLDT's service revenues came from their call center and BPO operations.

Similar to previous quarters, the medical billing and publishing businesses continued to perform in line with expectations. On the other hand the healthcare and the legal verticals have continued to under-perform.

EBITDA for ePLDT declined to 9% for the first nine months of this year due to the negative impact of the peso appreciation on dollar service revenues, as well as the 3% increase in cash operating expenses, particularly costs for compensation and maintenance. EBITDA margins stood at 9% down from 11% year-on-year. Third quarter this year margin improved to 7% from 5% for the same quarter last year.

To help improve margins, rationalization of a number of sites and cost structures for the healthcare and legal verticals are being undertaken.

And now let me turn over the floor to our Chairman, Mr. Manuel Pangilinan. Thank you.

Thank you, [Poly] and good afternoon to everybody. I'd like to turn to chart number 15. Basically what we're doing here is to affirm the guidance numbers that we provided to all of you when we announced our first half results. With the exceptional service revenues, as well the growth rates you're seeing, that we anticipate for the full year, track the growth rates that we have shown or achieved for the first nine months of this year.

For our service revenues we have adjusted somewhat the forecast of the full year service revenues from the originally anticipated PHP145b to about PHP142b, a growth of PHP7b for the year of 5%.

We're maintaining our EBITDA numbers and EBITDA margins at 62%. The EBITDA is forecasted or anticipated to be around PHP87b, which is a 5% growth over 2007. So that demonstrates the continued strong cash flow performance of the Group as a whole.

In terms of net income, we are maintaining our guidance numbers of PHP37b of core. That's a 5% growth over 2007 or PHP1.8b over the PHP36.2b achieved -- PHP35.2b achieved in 2007.

The reported number is obviously more difficult to forecast because it's a function basically of the peso exchange rate. So far we were -- we've been behind for the first nine months by about PHP600m in terms of core. The ending exchange rate as of the end of September was PHP47.30. It has appreciated since then to about PHP48 plus as of today. So we have a slack of about PHP400m before we're able to match the reported net income last year which was about PHP36b.

CapEx, as Poly indicated we have shaved back by PHP1.5b, reflecting the poorer economic conditions and a softening demand for our products and services.

In terms of capital management we have bought back approximately 2m shares already, representing about 1% that's why core EPS are up -- is up by about 1% over the 5% growth in core net income.

Dividend payout we're maintaining our ratio of 70% on core with a look-back. If there are no significant investments or CapEx moving forward then we may decide to increase the dividend payout ratio for the year 2008.

That basically finishes our presentation and we'd like to move on to the Q&A.

We now would like to start the question and answer portion. We are now opening the floor for questions. We'll take questions first from those who are joining us via the conference call. Operator?

Thank you. (Operator Instructions). Our first question will be coming from the line of Mr. Luis Hilado. Please go ahead.

Hi, good afternoon and thanks for the call. I just had three questions. First of all I guess in terms of -- I just wanted to clarify on the derivatives losses in the third quarter.

What have you done going forward in this quarter in terms of the instruments behind those? Do you intend to sustain them in the view that things will stabilize or do you intend to change or restructure them?

The second question is with regards to the 2009 maturities. Do you think you will be refinancing them or would you rather just pay them down?

And the third question is related to the HSPA850. How does that relate to the -- given that the CapEx budget was cut for '08, what corners were cut? Or are you just refocusing on HSPA rather than the Canopy and the rest? Thanks.

Luis, I'll take the first question. I believe you have the presentation with you. In the Appendix slide 22 explains the results in terms of the derivatives for the nine months and also for the third quarter of '08.

So the -- I guess the -- as a general method derivatives gains or losses are affected by three factors, the movement in the dollar/peso exchange rates, movements in dollar interest rates and movements in peso interest rates. So in the third quarter I guess all kind of -- the interest rate movements were against us.

But having said that this relates to the principal only swap contract that we have, vis-a-vis our 2012 and 2017 [bonds], and our view is that those hedges will remain in place. And the volatility in the mark to market will reduce as you approach the maturity dates of these particular underlying debts that you have hedged.

In terms of the sensitivity to the movements, we've outlined that in that page in terms of how much derivative gains and losses, how much FX gains and losses for every change in PHP1 in the exchange rate for 10 basis points interest rate.

In terms of the second question about the 2009 maturities, I've highlighted that the maturities in 2009 amount to $316m with the only bulk maturity being the [Alpha 9] balance due in April of about $124m. So those maturities can be handled by the free cash flow that the Company generates.

And on the other hand I guess we are also taking advantage of opportunistically some peso financings that are available in the market today. So that would also allow us to build up some cash relative to the April '09 maturity.

Thanks. Just to follow up on that. If you did go into a peso transaction any rough indication of what the cost would be?

In terms of, I guess -- indicatively for peso long-term financing, we are still able to attract -- to access funding at relatively attractive rates as some bankers in this room are. So the latest loans we have, five-year amortizing peso loans, we're able to get them at floating rate, three month periods, PBS [DF] plus 100 to [160] basis points. I think relative to what I guess probably other corporates are paying, that's still quite attractive.

Thanks.

With regards to the third question Luis on HSPA, the rollout on HSPA has already been achieved as we speak when it comes to primary urban areas. And that is the target that we have had. We wanted to cover some secondary urban areas. But that is the one that we are deferring to the first quarter of '09.

Great. Thanks a lot.

Thank you. Our next question will be coming from Mr. Arthur Pineda from ABN Amro. Please go ahead.

Hi. Thank you for the call. I have three questions. Firstly on ePLDT, it appears to be struggling with both soft top line and declining margin trends. Could you just provide a little more color on what exactly is happening with this business and what your expectations are in the fourth quarter and in FY '09? It seems that the [collars] are more than just the FX, and I was wondering if you need to engage in any asset impairments on this side in the fourth quarter or in 2009.

The second question I have is with regard to broadband. It seems to be accelerating quarter-on-quarter. I was just wondering why there is a decision to hold back on the CapEx. Is it a slowdown that we would see in the fourth quarter period, or are you just really reallocating CapEx to 2009?

The third question I had is with regard to your HSPA business. How will this be positioned against your existing Canopy product? Is it to replace your Canopy product or is it more as a premium offer? Thank you.

On the first question, on the outsourcing business itself, the bulk of the business of ePLDT, the main drag or problem as you know really are two verticals of SPi, mainly the legal support vertical and the medical transcription vertical. The other verticals, medical billing and publishing are doing very well. And they're on track to [beat] their respective budgets.

And the call center, which is the other side of our outsourcing business, is doing relatively well. Although we have seen some slowdown in take up mainly in terms of the expansion of our customers, we do still see a good pipeline for the third quarter and going into next year.

Now based on the revenue mix of our portfolio, [77%] of our revenues are accounted for by our outsourcing business. And of that pie, 18% actually is contributed by the two ailing businesses. So despite the fact that it only represents -- they only represent 18% of revenues, they do have significant margin and profitability challenges.

On the legal support side of the business, the business is more upscale in terms of the breadth of the customer base. Today SPi's legal is geared towards the law firms -- meaning to say providing legal support to law firms.

They do have to increase their footprint in the other, larger area for legal support, which is the large corporate law departments, which have the same requirements as law firms. So directionally the SPi management team has been asked basically to focus on expanding that particular customer base.

The case about legal support is that it's a project-based business actually. It depends on the volume of litigation in the US and the need of law firms and law departments for litigation support. So you need to have a much broader and wider customer base to be able to get a fair share of project-based litigation support. And therefore achieve some sustainable recurring base of revenues based on the volume of work that you do. So that is something that SPi is currently struggling with.

And this is exacerbated by the fact that you do have a relatively high fixed cost base in the US, because legal support requires not simply or ordinary call center agents, they require quite a highly valued talent pool that you have to maintain in the US. And plus you have to maintain a large data center for all of the data work that you have to compile.

So there are certain measures that have been discussed at the management level, which in the next week or so will be presented to the senior management, so that we can help address the issues plaguing the legal support business.

In terms of medical transcription, the problem largely remains in our ability to quickly offshore to the Philippines the bulk of the transcription work being done in the US. We may have underestimated the speed or the degree of difficulty, or degree of ease by which this can be done.

It takes quite a lot of time to train a medical transcriptionist to reach a certain level of proficiency. And notwithstanding that they may have reached that level of proficiency, you have to bring them up to a proficiency where it makes economic sense to offshore the work to the Philippines and get the benefit of the lower cost.

Most of our MTs, today we have only offshored 50% of our lines to the Philippines. But there still remains around 50% to be offshored. To be able to offshore the balance of the work, or the bulk of that work, requires us to build and maintain an infrastructure, both physical and the human resource side.

On the human resource side it's the training that takes a lot of time, and bringing them to a proficiency level of around 750 to 800 lines per day, to make it economical for us to offshore the work here.

The comparison really is in the US, the medical transcriptionists in the US have about 15 to 20 years of experience behind them. And their proficiency level is around 1,000 to 1,200 lines. So you need to make the Philippino transcriptionists quite proficient initially, and then work their way up to the same proficiency level as their US counterparts for that off-shoring to become effective and profitable.

Now what we've done in order to address, in the short term, the profitability issues of health -- of medical transcription is we've downsized or rightsizing that business, in the sense we're not expanding facilities, we're not expanding people. We are basically maintaining the necessary number required to support the current customer base. And from there develop a center of excellence around quality with a view of basically engaging the existing customers to increase their offshore -- their outsourcing work to us.

And once a certain critical mass is built, and medical transcription becomes profitable on the basis of that strategy, that would be the only time that we would expand facilities and expand our human resource requirements.

On the second question regarding broadband CapEx, you're absolutely right. We have no intention of slowing down CapEx on broadband considering that the demand quarter-on-quarter has been quite favorable and growing tremendously.

What I would like to point out is that it took us nine months to spend PHP17b in CapEx. We have brought down the estimate for the year from PHP28.5b to PHP27b, which meant that we have to spend PHP10b on the fourth quarter alone. And that is quite a huge amount compared to what we have spent in the last three quarters. So we really don't have the intention of slowing down.

A major portion of the PHP10b that we are spending, which is roughly about PHP6.5b, is related to wireless broadband. And also a major portion of the fixed part of the PHP10b, or the remaining PHP3.5b of CapEx, is largely related to DSL expansion too. So we are moving quite aggressively on broadband expansion.

Whether HSPA would replace Canopy?

We intend to maximize the advantages of both. Canopy to a certain extent is useful at the outskirts. And HSPA in the long run is going to be a major provider for us because of the speeds that we are getting on the latest tests that we have held.

Right now we have gotten speeds of about 5.7 megabits per second already on HSPA, which is a wireless mode of delivery. And we're very excited with the HSPA850 actually, because the frequency that it is latched on is a lower frequency, therefore having a wider reach.

That's very clear. Thank you very much.

Thank you. Our next question will be coming from the line of Tien Doe from GIC. Please go ahead.

Hi. Good afternoon, everyone. I've got some more questions on HSPA as well. You mentioned that the primary urban areas you'll be rolling out HSPA, what would be the population coverage that you would hope to cover by the end of 2008? And then once you do the secondary urban areas, what is the population coverage once you've done that.

Second question is just on the practical speeds you would hope for on the upload and the download the link once you have loaded the network.

And the third question is the handset costs, what is the cheapest handset that you would hope to launch with? Thank you.

The first question was the population coverage. With the primary urban centers already covered -- actually as I speak it's already rolled out on the primary urban centers. The resulting coverage would be approximately 60% of the population -- of the country, the total population of the country.

Second question, practical speeds.

The tests that we have made is giving us, as I said, 5.7 but the range actually is from 3.86 to 5.7. So depending on the number of users simultaneously using within the periphery of the base station concerned that our -- the speeds will be affected. But I don't think it would be difficult, given the normal load in a dense area, to reach between 1 to 2 megabits per second.

Last question was on handset costs.

(Inaudible).

We are looking at many types of handsets already available. As you know this has been fully launched in Australia already by Telstra. They have 99% coverage there. And the cheapest handsets that we can find at this point is about PHP6,500 per handset, or roughly $120.

Okay, great. Thank you.

Thank you. Our next question will be coming from the line of Rama Maruvada from Macquarie. Please go ahead.

Yes. Good afternoon, everyone. I have two questions. Firstly with regards to the tax rate for this quarter, it seems to be north of 37%. So my question here is how do you want us to think about it in light of derivative and ForEx movements that you may see going forward. Is this a way that this will be north of 35%, or will that then trend towards that maybe in the next couple of quarters.

The second one is with regards to your short-term investments. What percentage of this is actually in the corporate debt market?

I'll answer the second one first, so only 1% is in corporate debt.

Okay, great.

I guess our expectations are, Rama, for tax rate effectively close to the statutory tax rate. So around --, which is 35% so we would get around 34% effective tax rate or somewhere there.

Okay. So basically the ForEx transactions do not have a big impact on what your overall effective tax rate is going to be, is it?

There is deferred tax accounting on those ForEx gains and losses. Therefore next year, Rama, just to clarify, the corporate tax rate in the Philippines is going down from 35% to 30% next year.

Yes, understood. Thank you.

Thank you. Our next question will be coming from the line of Sachin Salgaonkar from Morgan Stanley. Please go ahead.

Hi. Thank you. I have three questions. First can you share with us your thoughts on the outlook for 2009, any guidance you could provide on the revenue and EBITDA growth?

Second, with less than two months left 'til the year end, can we assume a higher probability of special dividend rather than acquisition?

And thirdly, is it possible to give the info on estimated benefits that we could see to PLDT, which are coming from the revenue share change between Piltel and Smart from 80/20 to 70/30? Thanks. Hello?

Outlook?

Hello?

(Inaudible) In reverse order. Yes. PHP130m for the year right?

That's for the year, for the 12 months.

Yes. On the Piltel Smart variation the basic rationale for that is given the increased, much increased size of the Piltel subscriber base, the cost to service the Piltel subscriber base has actually gone up from the Smart perspective, because of the need for a more -- for a fairer and more equitable arrangement between the two companies.

If you recall the Talk 'N Text brand was launched about eight years ago, in the year 2000. And Piltel had no -- zero subscriber base. At that time, it was [admitted] in 2004 it would affect the 80/20 arrangements between the two. And now Piltel's got more than 30m subs. So it's nearly a 10% adjustment down from 80% to 70% in favor of Smart, merely reflects the increased cost of servicing the much bigger subscriber base of Piltel. The impact on Piltel is roughly PHP150m, PHP160m for the year -- PHP130m for the --

PHP150m. (Inaudible).

Yes. So it's not significant from a Piltel perspective. Yes.

Alright. Just to clarify the impact on Piltel is about PHP150m per month. So if you kind of get the 8%, [because this] question -- the impact on PLDT is 8% of the PHP150m.

Yes. It's not very -- because you already consolidated --

Yes.

PLDT. So it's really the minorities that gets reflected in the books from a (inaudible) standpoint. Second question?

Second question is on special dividends.

Yes. It relates -- I think you had a question about whether we'll make any acquisitions between now and the end of the year. That's unlikely. There's no -- there are no investment opportunities that we're looking at in a very serious basis that will allow us to close a transaction by year end.

So I think we just have to assess the situation sometime towards the end of the first quarter, especially when we announce the results. Yes so we'll just have to look back at that. I think it's unlikely that we would have any significant investments that will close by the time we make our full year results announcement in early March.

Outlook for '09, well I think it's going to be a more challenging year than '08. At least we've had the benefit of a rather benign first half '08. And for '09 we should have a much tougher year, no?

So I think, for the many reasons you are already aware of, which I don't have to repeat, and it's also encapsulated in the chart number 14, which represents our view.

That said the final numbers are still being prepared with respect to the budget for '09. But we would like to think that, as has been the practice of the Group, we will continue to push revenues forward. And it's imperative that we contain our costs.

With respect to CapEx we will certainly review that from time to time. We will have to be more prudent, more judicious in the use of CapEx moving forward given the tough times.

If you do a scan of the various businesses of the Group, we continue to be sanguine about prospects for broadband, both fixed line and wireless, moving forward in the year 2009.

The corporate business, both large and SMEs, continue to be sanguine for us. So those would be two growth drivers for the Group as a whole. And hopefully the HSPA, which we should launch very soon in any event before the year-end 2008, should impact somewhat revenues on the mobile side.

The issues surrounding the two verticals, that Ray alluded to is in front of our face. And that's an issue that we have to address very firmly in 2009. The rest of the verticals appear to be performing increasingly well. The data center is doing very well. And the call center continues to perform satisfactorily from our perspective.

I think the last item relates really to the mobile side of the business. I think our view is that for the years 2007, 2008 we have -- Smart has produced record numbers of net-adds. I think it will get tempered in the year 2009. We will show less than 5m net adds for 2009.

On the face of that as well we anticipate -- historically our ARPUs have been declining, so we anticipate ARPUs to continue to decline, aided by poor economic conditions in 2009. So the challenge for Smart will be new products and services, containing costs and ensuring that the CapEx spend will reintroduce the kind of revenues in the year 2009.

So all in all we will -- our numbers will get helped by what Annabelle said, the reduction in corporate tax rate by 5%. That translates into approximately PHP3b of profits down to the bottom line. And our job is to produce core income that is higher than the PHP37b we are showing for -- we will show for the year 2008. Now reported income is altogether a different item.

Great. Thanks a lot.

Thank you. Next question will be coming from Kathy Chen. Please go ahead.

Hi. Thanks for the call. I have three questions. Firstly, could you talk a bit more about what kind of cost pressures you are seeing, particularly on the fixed and mobile side, given that you have already talked about the ICT side? It looks like in the third quarter, fixed line margins were pretty strong. Do you expect this 56% level to be sustainable going forward?

My second question is regarding the churn during the third quarter for Piltel. It looks like there was a pretty substantial increase year-on-year and quarter-on-quarter. Could you give us some color on what's happening there, as well as any update on any changes in the market competition?

And then last question is just if you could share an update with us on the interconnection issue that was discussed a few months ago? It's been pretty quiet since then. Thanks.

We start with the first question on fixed and mobile.

Christopher Young Napoleon L. Nazareno: Kathy I think if you look at the fixed, you're right the margins did improve a bit in the third quarter. I guess we are feeling some cost pressures where you would expect I guess. I think we also feel that it might feed through a little bit in terms of compensation expenses as we go through the year.

One thing that's probably worth highlighting is that in terms of that line, both on the fixed and on the mobile, I think you are aware we have to make it an accrual for our long term incentive plan. And that accrual is partly driven by what happens with the share price.

So given where it is at the moment, and where it was at the end of the third quarter, that actually has cushioned us a little bit from the impact of the general price -- general cost pressures that we've seen both on the fixed and the mobile.

So going forward, we are spending quite a bit of time and effort in reviewing costs quite closely for the balance of the year. And it's been a major focus for us as we've gone into the budgeting session for 2009.

In terms of margins, I think broadly we are expecting the mobile margins to stay where we've seen them this year. I think it's probably fair to say that there will be some pressure on the fixed margin for the balance of the year, and as we go into 2009, maybe falling by maybe 1% to 2% as we go into 2009.

Second question was on the churn.

I believe Kathy you were referring to the churn on Piltel for the third quarter, which has increased. As you may know, traditionally the third quarter is a soft quarter, mainly because it's school opening and typhoon season. So that's one of the reasons.

The other reason is that this might be already a start of the sign of us being affected by the economic slowdown to a certain extent, which meant that there were people who may not be able to afford to top up at that particular time.

Let me emphasize though that the gross adds, as far as Piltel is concerned, has remained high. And so, therefore, we are not lacking in people entering the service, but simply people who were not able to top up on time and therefore would churn up.

The other question on competition?

Which one?

Market competition in relation to whether that's causing churn.

No. That is the general -- more the general economic conditions and people not being able to --. We are also seeing some kind of a shift, more of bucket price products being availed of by especially the Talk 'N Text subscribers, which meant that they are also under pressure financially.

The last one is an update on interconnection. Interconnection and the access --

The issues on interconnection and access charges have died down already. We have made our response to the House of Representatives and to the NTC. And it seems that we've addressed that fully, given that, as Poly averted to, a lot -- the bulk of the revenues now of Smart, are indeed from the bucket priced SMS packages which seems to respond to the thinking that SMS should be lower -- should be priced much lower than the headline number of PHP1. PHP1 is no longer really the effective rate for the bulk of the SMS charges today.

Okay. Thank you.

Thank you. There's a follow up question coming from the line of Arthur Pineda, ABN Amro. Please go ahead.

Hi. Sorry for a follow-up question. You mentioned that the economy is going down in terms of revenues for the third and fourth quarter. I was just wondering if you could give us any indicators on how it's actually impacting the Company. Because I see your quarterly revenues year-on-year growth rates have actually been more or less stable over the last three quarters.

Now is this slowdown more evident in the fourth quarter? Or are you seeing usage levels decline towards the tail part of the third quarter extending into the fourth quarter? Thank you.

Is this on the mobile side?

When I look at your consolidated revenues on a quarterly basis, year-on-year, it seems like the growth rates are pretty much stable, adjusting for the election effect in 2Q. I was wondering how it's actually impacting the Company in both the mobile and fixed line side. Because I'm not so -- I don't quite have a good grasp on how it's affecting it yet, as you said, in the third quarter.

On the revenue side, I agree with you, there is not too much effect. But what is happening is that in terms of net-adds there has been a little bit of a slowdown in the third quarter, which reflected -- I think the net-adds for Smart totally was about 935,000. And if you compare that to last year, it was over 1m last year. Although last year we had the benefit of election spending on the second quarter, with most probably a spillover on the third.

So based on that, and based on the trending in '06 and '05, we are really seeing that the drop on the third quarter due to seasonality, for this year is within the range of the drop in '05 and in '06.

Okay. Thank you.

Thank you. That was the last question coming from the audio participants' side. Sir, please.

Right. We'll open the floor to people who are here at the venue. If there are any questions, there are microphones.

What's your assessment with regard to the FX risk that you've taken going forward in the fourth quarter, considering that the peso has reversed from appreciation to depreciation, and given that the bulk of -- you have an open position on your FX dollar denominated revenue of 12% net of hedges, on the debt side about, I think, half. What's your -- is there an upside or a downside that you see given the weakening of the peso. That's question number one.

And then, given that your CapEx is highly concentrated on the wireless, and there's a lot of growth [accessing] broadband and outsourcing, what's your expected share of these two businesses to overall revenues three years down the road?

And also on your debt, most of it are in fixed rate. With loan rates going down, do you expect some modification on the terms of the fixed rate loans?

The fourth one would be, the ARPUs have historically dropped, but your margins have stayed healthy, about 64%. Do you see for you -- see some inflection point there where competition is going to cut down this margin at that point. (Technical difficulty).

I'll take the FX question. There's information on the slide (technical difficulty) from a balance sheet standpoint, have (technical difficulty) 90% of the debt are in foreign currency, in US dollars and net of the cash (technical difficulty). So it's approximately $1.3b in terms of net foreign currency liability.

We have certain hedges with respect to our 2012 and 2017 bonds. The amount of which are -- these are principal-only swaps for $480m. So, on the balance sheet side the net liability of $1.3b, then there's a hedge of $480m against that. And that balance sheet position is of course revalued every month end, vis-a-vis the prevailing exchange rate at that time, with the gain or loss booked through the P&L.

From a P&L standpoint, the Company does generate certain US dollar -- denominated in US dollar link revenues, we do have some US dollar expenses including interest cost. From a net sort of position, there is a net -- the US dollar revenues versus the US dollar expense, roughly about $550m in terms of net dollars in flow, so that's [pre-tax].

So if you think about it vis-a-vis the foreign currency liability position, it's about two years or two years or so in terms of flow it's enough to cover your foreign currency liability.

I guess, the other question was on the fixed rate debt, I guess, the more fixed rate that's principally because of the fixed rate bonds that we have. All the US dollar bonds that are issued in the public market are fixed rate, so that is why the proportion of the liabilities is more fixed-rate in nature. So as those bonds mature, then the skew will be towards more floating versus fixed.

So (inaudible) refer to other question, a review of the share of the fixed [business into broadband].

Is it broadband? On the growth of broadband, it is roughly -- roughly about 48% on the first nine months of this year versus last year. And if you look at wireless broadband, it has grown over 90%. So it will consistently become a more important part of our revenue base.

Having said that, the entire traditional mobile services is roughly about 60% to 65% of our total revenues. And that is growing about 7% to 8%. And so therefore, that will also take the lead as far as the overall growth of the revenues are concerned, because fixed is growing roughly between 2% to 4%. Well, this year, it has grown and hopefully, we intend to grow fixed line revenues too in the next two to three years.

(Technical difficulty).

Of broadband? Broadband share of total revenue is about over 7%.

(Technical difficulty).

At the rate it is growing, assuming it is growing between 30% to 35% a year, we estimate that in 2-3 years, that should constitute about 25% to 30% of the total revenues.

And the last question was whether there was an [inflection point] with respect to margins (inaudible).

Well, we hope not. Our ARPUs are going down, mainly because we're mining the low end of the market, plus there is a shift in the usage pattern shifting from more towards the bucket priced products that we are offering in the market. So the yields there for example on SMS bucket are lower than the normal.

And today, in terms of the data, total data revenue for example, with the wireless, the share of bucket price revenues is at already 58% and as I said earlier, this came from 40% to 45% last year.

And so the ARPUs are going down, we expect that to go down. But the good news is that the subscriber acquisition cost is going down faster than the ARPUs and that's why our margins are maintained at 65%.

Question from the gentleman.

Good afternoon. I'm [Jun Carabago] from ING. First of all, congratulations on the relatively resilient operating results. Our question is more on your listed subsidiary, Piltel. We appreciate, I think it was well explained how the -- I mean with regard to the rationale behind the shift in revenue sharing from 80/20 to 70/30.

However, given a company with a strong reputation for employing strong corporate governance practices, what is the plan to protect or safeguard the interests of minority shareholders for Piltel?

For the newest revenue share, the Board has agreed that they will appoint the committee composed of the independent directors to evaluate, and sort of become the steering committee, for us to get an outside entity, a third party to validate whatever the 70/30 sharing proposal, so in a way that protects the minority shareholder.

So shareholders have the assurance that their interests will be protected, of course.

Yes, it has always been because the last time we set the revenue sharing rates, this was confirmed by Beam Consultancy for us, which was ratified also by the independent directors of the Board.

Thank you very much.

But that that said, we did make an announcement that this then would be subject to the [sharing] arrangement is subject to review once every [two] years. And that the independent members of the Board will be the ones to consider the recommendation of an independent advisor as to how from time to time, the sharing arrangements have got to be modified or not as the case may be.

Now that said, the group is involved in MVNO operations outside the Philippines in Italy, Hong Kong, and Singapore, and the kind of margins you're seeing there are nowhere near the margins that Piltel enjoys. I think that is just a reminder for everybody. I think the margins' 20% EBITDA, something like that, 20% 25%, where you don't have a network and so forth, you have to depend on others to provide the service to you.

Thanks.

Another question?

Jody Santiago, UBS. My first question is on the revenue outlook. When do you think we hit the wall on penetration? And if we are near that wall, do you think there's scope for CapEx reduction?

And then secondly, we've seen strong net adds from the third layer, Digitel has been adding I think 500,000 subs a month. We have seen their share of the revenue pie grow gradually. Is that a concern for the group, especially as we see the entire revenue pie just growing very gradually? Thank you.

With regards to -- the first question is on penetration rates, right? Right now, the penetration rate for the industry is about 68%. And that includes multiple SIM ownership. So roughly, if you net out the multiple SIMs that should go down to between 60% to 62%.

What we are seeing is that in terms of net adds, as you may know, in the last two years, we have had record net adds. Something like 6.1m -- 5.6m in '07 and another similar figure headed for '08. So these net adds are therefore at a level that we feel might slow down next year because of the economic conditions.

But over the long haul will still continue, because the reason why we feel so is because in the outside provinces, for example, where penetration rates are lower than the national average, there is still opportunity for growth when it comes to subscriber base. And we feel that roughly, it should hit about 80% to 85% in three years.

A question of [whether] CapEx (technical difficulty) assumption versus the penetration (inaudible).

Our networks are quite mature already, our coverage is 99%. Our backhaul is complete with the fiber and transmission investments are in place. And therefore, fundamentally, we can -- our CapEx is what we call scalable already depending on demand.

And therefore, we are flexible to increase the CapEx depending on how the demand moves and respond to it on a timely manner. So there is -- we will of course, calibrate CapEx depending on demand, and we are in a position to do so at this point in time already.

The last one was whether there was cause for concern with growing market share (technical difficulty).

Our market share has stayed between 57% to 59% over the last two and a half years. Our share on the first nine months, our revenue share -- estimated revenue share in the first nine months, the figures on the other side have not come out yet, but we estimate about 58%. So it is still there.

We are seeing that the subscriber base is growing, and that's where they are eating up in terms of share. But the revenue share has increased from maybe about 3% to 4% as of the -- from 3% to 4% as of the first half of this year.

And so therefore, -- that of course, we are closely monitoring. And while we are not being affected, we are closely studying the situation. And we will respond accordingly once we feel the need is there already.

Any further question? We can take one or two more.

Hello, good afternoon. I'm [Francis Ang] from Banco De Oro. It was mentioned in the slides that you have some 76,000 Plug-It prepaid subscribers for SmartBro prepaid. Is this really the numbers that you are expecting at this time of the year, these many subscribers?

How much of SmartBro's revenue comes from Plug-It prepaid modems services? And that there are concerns that the prepaid SmartBro modems tend to be slower and most of the time, revert to -- instead of (inaudible) or accessing via HSDPA it tends to go so much towards 3G and then to GPRS. What are you doing about this?

Our HSDPA network has been rolled out but it is not yet in place. You will begin to feel that maybe roughly towards the end of this month or beginning next month.

The 76,000 prepaid Plug-It, what is the expectation?

Well it is the first -- the prepaid wireless Plug-IT product is performing quite well and beyond our expectations in fact. It is the fastest growing segment in our broadband subscriber base. We have close to 880,000 already and already 76,000 of that comes from Plug-It, and Plug-It was just launched I think in April this year. So you can see the growth is really exponential in that segment.

As far as the HSDPA is concerned, you will feel that later. But the Plug-It really is actually -- can be served by GPRS and 3G. And right now, our 3G coverage is more that 1,300 base stations all over the country, which means at the urban centers, we are pretty well-covered on 3G.

The HSDPA will be rolled out in the major urban centers. That will enhance the speeds. From the tests that we have performed, we feel that HSDPA will dramatically enhance the consumer experience as far as throughput is concerned.

We have time for one more question. No other questions. Operator, would you like to give us the replay details?

That concludes the question and answer session. Before it turn the conference back over to Mr. Pangilinan, I would like give everyone the instant replay information of today's call.

This conference will be available on a 24-hour instant replay starting today, daily on through December 18, 2008 replay information 3pm call. International caller number 852-2802-5151, US toll free number 1-888-485-2360. The pass code is 782-960. Conference leader is Melissa Vergel de Dios.

I shall now turn the conference back to Mr. Pangilinan for any additional or closing remarks. Sir, please.

let me just reiterate what Poly indicated when he made his presentation, indeed that we usually don't speak to you with the sector quarterly results. But since these are exceptional times, we thought it best that we have a dialogue with the banking community and the investment community as such.

So we wish to just reassure you that management continues to be focused on the business at hand and producing the kind of revenues and profits that are expected of us. Conditions are getting tougher, particularly in the year 2009. And as well, to assure you that the cash is safely placed, and no investments in the names that are already well-known to all of you.

So thank you for joining us this afternoon. And we look forward to some time in March -- early March, not so much with the expected '08 results but for our own outlook for the year 2009. Thank you.

That concludes today's conference. Thank you for your participation, you may disconnect your line in your own time. Good day to you all. Thank you.