PLDT Inc (PHI) 2009 Q2 法說會逐字稿

Good afternoon everyone and welcome to the Philippine Long Distance Telephone Company's conference call to discuss the first half 2009 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 PLDT Investor Relations for the introductions. Please go ahead. Thank you.

Good afternoon and thank you for joining us today to discuss PLDT's first half 2009 financial and operating results. As mentioned in the conference call invitation, today's presentation is posted at our website. For those of you 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. Napoleon Nazareno, President and Chief Executive Officer of PLDT and Smart, Mr. Christopher Young, Chief Financial Advisor of PLDT, Anabelle Lim Chua, Treasurer of PLDT and Chief Financial Officer of Smart. And from ePLDT we have attending Mr. Ray Espinosa, President and CEO. Our Chairman is not able to join us today as he needed to be at the Manila Cathedral this afternoon. At this point let me turn the call over to Mr. Poly Nazareno for the presentation.

Thank you Melissa. Good afternoon. I am pleased to share with you PLDT's first half 2009 financial and operating results. Notwithstanding the challenging backdrop, PLDT's first half results reflected the Company's strong underlying performance.

For the first half of 2009 service revenues for the Group registered a 4% or PHP2.5b increase to PHP72.9b compared to PHP70.3b in '08. EBITDA was stable year-on-year at PHP44.1b with EBITDA margin at 60%. Reported net income registered a modest 2% increase of PHP450m to PHP19.7b. Net of the impact of ForEx and derivatives, core income after tax grew by 11% to PHP20.8b for the first half of the year, or an earnings per share of PHP110.20, 13% higher compared to the same period last year.

The peso depreciated by 7% from PHP44.90 in June '08 to PHP48.16 at the end of the first half of this year. The average/peso dollar exchange rate for the first semester this year stood at PHP47.83, a 14% depreciation from PHP42 last year.

This slide shows our second quarter performance relative to the previous quarter and the same quarter last year. Service revenues for the second quarter remained steady compared to the first quarter, but grew 3% compared to the same period last year. The Wireless and Fixed Line segments registered 4% and 3% growth respectively compared to the second quarter last year. Compared with the first quarter, Wireless showed a 1% increase while the Fixed Line decreased by 1%.

Consolidated EBITDA grew by 2% versus the previous quarter and 1% versus the same period last year. EBITDA (sic -- see presentation) improved to 61% from 60% in the first quarter, but showed a slight decline from 62% compared to the second quarter last year. Reported income for the second quarter increased by 6% compared to the first quarter of '09 and rose 15% versus the second quarter '08 respectively. Core income increased by 4% to PHP10.6b from the first quarter of '09 and registered a PHP1.3b or 13% increase compared to the second quarter of '08.

The next slide, core net income for the first half grew by PHP2.1b, or 11% year-on-year, to PHP20.8b as a result of a 4% rise in service revenues, a reduction in the provision of income tax, principally due to the lower corporate tax rate and an 8% increase in cash OpEx. Reported net income increased by 2%, or PHP450m, to PHP19.7b as of June 2009. This half's results reflected the higher recurring net income, the impact of net losses from the ForEx revaluation of our financial assets and liabilities and derivatives compared to a net gain in the first half last year, and the lower statutory tax rate.

Slide five shows our consolidated service revenues which increased by PHP2.5b or 4% to PHP72.9b. Part of this increase was due to the 6% growth in Data and ICT revenues which included a 27% increase in Broadband revenues. Data and ICT revenues now account for 54% of total service revenues.

Consolidated EBITDA for the first half remained steady at PHP44.1b. While the EBITDA margin declined to 60% compared to 62% in the first half '08 and 61% for full year of '08. Wireless margins remained strong at 63%, the Fixed Line at 52% and ICT at 10%.

Second quarter consolidated service revenues grew by 3% to PHP36.5b from PHP35.4b in the same period last year. Second quarter EBITDA improved by 1% to PHP22.2b compared to the second quarter of '08. Approximately 29% of our first half '09 consolidated revenues are linked to or denominated in US dollars.

Consistent with the committed 70% dividend payout ratio, PLDT today declared an interim cash dividend of PHP77 per share representing 10% increase over the interim dividend of PHP70 in 2008. The interim dividend will be payable on September 22 to stockholders of record as of August 20. As part of our capital management initiative, PLDT may acquire up to an additional 2.3m shares on an opportunistic basis under the approved share buyback program.

We affirm our CapEx guidance of PHP27b for 2009. As at June 2009 CapEx amounted to PHP10.7b, of which PHP5.1b is CapEx for the Fixed Line, largely investments in NGN and outside plant rehab. At the end of the first half we had 5,433 GSM cell sites and 8,742 base stations. These include 1,370 3G 2.1 Nodes On-Air with HSDPA, 750 3G 850 Nodes On-Air and 1, 999 Canopy base stations. We are investing in a multi-platform network which includes the HSPA rollout and WiMAX for trials -- for which trials are presently ongoing.

Free cash flow of PHP31.6b was generated in the first half of the year. This is PHP3.4b higher than the PHP28.2b in the same period last year. An additional PHP7.1b in cash was provided from net borrowings. While the usage of free cash included common dividend payment, the buyback of shares and an advance to the PLDT retirement fund for the purchase of the 10.17% Meralco stake. Note that in July Piltel made full payment of PHP20b for the 20% interest in Meralco.

Slide eight discusses our debt profile. At the end of June 2009 total Group debt amounted to $1.8b compared to the $1.6b last year. US dollar denominated debt declined to 63% of total debt. Considering our peso borrowings, our long-dated hedges of $421m and our US dollar cash holdings only 27% of our outstanding debt remained unhedged. Two-thirds of our loans are fixed rate loans while one-third are floating rate loans. Debt maturities continue to be well spread out, with the bulk maturing 2013 onward. Net debt stood at $900m at the end of the first half, with net debt to EBITDA at 0.5 times.

For 2009, the planned gross borrowings for the Group are estimated at PHP38b. At the end of this semester PHP33b of new loans have already been put in place, of which PHP19b has been drawn. The additional debt will be used for CapEx and to support investments including the 20% in Meralco. Net borrowing for the year is projected at PHP20b, resulting in a net debt to EBITDA at year end of about 0.9 times.

Slide nine recaps the segment highlights of the first half of '09. Both our cellular and Broadband subscriber bases registered increases, reaching 38.5m and 1.2m respectively as of June 2009. All segments showed increases in service revenues for the first half compared to the same period last year. Broadband service revenues grew 27% year-on-year. The Wireless business registered 5% rise in service revenues, the Fixed Line business a 3% and ePLDT a 5% increase.

Let me now take you through the different segments in greater detail. As of June 2009 the combined Smart and TNT subscriber base stood at 38.5m, registering a 16% growth year-on-year. The 3.3m net additions in the first half of '09 were 3% greater than the 3.2m added in the same period last year. Growth in net adds continues to come principally from Talk 'N Text which added 2.3m in the first semester. In line with the approved consolidation of the Wireless business within Smart, the Talk 'N Text subscriber base will be transferred to Smart in the third quarter of this year.

Net blended ARPU declined by 11% year-on-year to PHP195. Margins remained above 60% and subscriber acquisition costs have continued to be tightly managed, resulting in subscriber acquisition costs, or SAC, recovered by a week's ARPU. Cellular penetration is approaching the 80% level, counting multiple SIM ownerships. Though there is still some growth that can be expected, increases in overall subscriber numbers will be slower with new subscribers coming from the lower market segment contributing lower ARPU.

Service revenues for the Wireless business in the first half of '09 are up 5% to PHP48.1b. Revenues increased due to 16% growth in subscribers, mitigating the 11% decline in net blended ARPU. Growth was driven by a 29% increase in wireless broadband revenues, a 5% growth in cellular voice revenues and a 2% rise in cellular data revenues. Data services accounted for 54% of total cellular service revenues in the first half of '09 with bucket-priced SMS packages now comprising 57% of the total cellular data revenues.

EBITDA in the first half of '09 improved by 2% year-on-year to PHP30.2b. EBITDA margin declined to 63% compared to 65% in the first half of '08. Compared to the same quarter last year service revenues for the second quarter grew by 4% to PHP24.2b, while EBITDA remained stable at PHP15.2b.

Slide 12 shows initiatives being undertaken by Smart to enhance revenue generation. Efforts in the voice segment are being intensified with multiple offerings which include unlimited and bucket types. Data usage is being stimulated by an all-in-one platform that unites social networking, music and video downloads and online shopping. Broadband activations are to be expanded using customized university modems, partnerships with top PC vendors and per minute charging. Tipid sulit promotion will be reinforced with a nationwide advocacy thematic campaign. Smart continues to identify subscriber needs and market trends and then find ways, innovative ways of addressing these via new offers.

Moving on to slide 13, compared to the same period last year Fixed Line service revenues grew by 3% to PHP25.4b. The growth in corporate and DSL service revenues more than offset declines in revenues from our local exchange, national long distance and international long distance businesses. Corporate data and DSL improved by 17% year-on-year now accounting for 41% of total Fixed Line revenue. International long distance revenues continued to decline due to lower call volumes, the shift to cellular and the use of alternatives such as VoIP and emails.

EBITDA in the first half declined by 3% to PHP13.3b due to a 13% increase in cash OpEx largely on account of higher provisions for LTIP and pension costs and higher rental expenses for international leased circuits. Increases for these items are expected to be much lower in the second half. EBITDA margin stood at 52%, similar to the full year 2008 margin, but declined from 56% in the first half of '08.

In the next slide the Fixed Line business continues to pursue initiatives aimed at tapping new markets and generating higher ARPU. These initiatives leverage on both the Fixed and Wireless networks. Our expanded Fixed Line offers include PLDT landlineplus and Callall, fixed wireless landline services that allow free landline calls within the same calling area. Small and medium enterprises or SMEs are offered bundles that include hardware and connectivity that address their voice and broadband needs.

Among products currently available are Watcher, Negosyo Boost, and MyDSL Biz. We also have a ready to use broadband package called Qik. We are preparing to offer fiber to home positioned as a premium broadband product. Plans to offer the download of TV content and movies are also being finalized. All these will contribute to the Fixed Line being able to sustain growth moving forward.

Broadband continued to scale new heights with our combined broadband subscribers now at 1.2m. This is an increase of 219,000 or a 22% growth from end of '08. DSL added 77,000 subscribers while SmartBro added more than 142,000. We now have 689,000 wireless broadband subscribers, of which 428,000 are post paid while 261,000 are pre-paid. Total service revenues from the Broadband in the first half '09 stood at PHP6.5b, or an increase of 27% compared to the same period last year. Second quarter Broadband service revenues grew by 24% to PHP3.3b compared to the same quarter last year. Broadband and Internet revenues now contribute 9% of total service revenues.

We are making available the widest array of broadband offerings to address customers' varied budgets, uses and preferences. To do this we are positioned to deliver broadband using multiple platforms. This includes the use of our copper network for DSL, the fiber and NGN network for fiber-to-the-home, Motorola Canopy and WiMAX for fixed wireless broadband, and HSPA850 for mobile broadband.

Service revenues of ePLDT, our ICP business, grew by 5% to PHP5.2b contributing 7% of total PLDT Group service revenues. The growth in ePLDT's service revenues can be attributed to a 59% increase in Vitro or data center revenues and a 2% growth in Ventus or call centre revenues. These increases were offset by a 1% decline in SPi or BPO revenues reflecting residual effects of the winding down of the electronic data discovery operations.

Of total ePLDT revenues, 81% were accounted for by Ventus and SPi. Contributions from the different verticals were as follows. Call centers 40%, 26% from content and publishing, 24% from medical billing and 11% from healthcare. The BPO operations are beginning to register improvements. The verticals are focusing on generating new leads, converting prospects to sales and managing their costs in order to preserve margins.

ePLDT's EBITDA for the first half increased by 4% to PHP511m while margin remains stable at 10%. The increase was aided by the positive impact of the peso's depreciation on ePLDT's dollar revenues, offset by increases in compensation, maintenance and cost of sales expenses. Second quarter 2009 service revenues improved by 9% compared to the second quarter last year, with EBITDA PHP308m or a growth of 166%.

Slide 17 provides updates on our investments in Meralco and related transactions. On July 14 Piltel made full payment of PHP20b for 20% of Meralco. As such, our third quarter results will include Meralco's financial results, using equity accounting. Three PLDT nominees were elected to the Meralco Board at the May 26 stockholders meeting. In addition our nominee Ms. Betty Sy assumed the position of Chief Financial Officer of Meralco on July 1.

In line with the plan of consolidating our wireless businesses under Smart, Piltel will transfer to Smart the Talk N' Text brand, the Talk N' Text subscriber base and its fixed assets for a total consideration of approximately PHP11.5b. Piltel shareholders approval for this was secured on June 30, 2009. And target date of transfer is August, 2009. As a result of the transfer, Piltel's primary assets and source of income will be its investment in Meralco.

Because of the resultant change in the nature of Piltel's business, Smart made a tender offer to Piltel's minority shareholders to give them an exit opportunity. 93% of the minority shareholders accepted Smart's offer. With this Smart will now own 99.5% of Piltel.

The PLDT Beneficial Trust Fund, or BTF, and Metro Pacific Investments, or MPIC, have also announced their agreement covering the BTF's 10.17% stake in Meralco. MPIC would acquire the Meralco shares at PHP126 per share, equivalent to PHP14.3b. At the same time the BTF would subscribe to 2.7b shares of MPIC at PHP3.50 per share for a total amount of PHP9.5b. The balance of PHP4.8b would be paid by MPIC to the BTF in cash.

Synergy teams with the members from PLDT and Meralco have been formed and have begun to meet. Their primary objectives will be to determine how to operationalize the identified synergies and work out implementation timetables. Among the identified quick wins or priorities are co-location of facilities, the Joint Pole Agreements, the use of e-Meralco's fiber optic network and cross marketing to each of others' subscriber base. Medium-term projects include prepaid metering and Broadband over Powerline for which there is a planned pilot in Malabon.

There has been a lot of news lately on regulatory matters. Slide 18 highlights two of the memorandum circulars recently issued by the National Telecommunications Commission, or NTC, impacting our cellular business. The first memorandum circular extended the validity of prepaid loads to up to three times the original term. The MC took effect on July 19 and covers standard plans. We estimate that this will have limited impact on our revenues, as the MC does not cover bucket plans which constitute nearly 60% of total cellular revenue. In addition, based on analyses of subscriber behaviors, loads are normally consumed within the first two days of purchase. So the amount of unconsumed load is not that significant.

The second MC directs the telcos to adopt a per pulse billing where each pulse is reduced from one minute to a maximum of six seconds. Exemptions include international calls, bucket plans and instances where the subscriber opts to be billed on a per minute basis. The MC allows the telcos to charge a 'flag-down' rate to cover call set up costs. Tariff tables for the approval of the regulator are being prepared. A better estimate of the impact on our financials is being determined accordingly.

On page 19 we recap our guidance for 2009 as follows. We are tempering our service revenue guidance to a 4% growth to PHP148b given the cautious outlook for the second half. Despite the reduced service revenue guidance, we are maintaining our EBITDA guidance at PHP90b for an increase of 3%, with margin at about 61% as we expect lower increase in cash OpEx in the second half. We are upgrading our core income guidance to PHP41b, an 8% increase over last year boosted largely by the change in the statutory tax rate.

PLDT remains committed to its dividend payout of 70% of core earnings per share. Pursuant also to the dividend policy, we will look back at the end of the year to evaluate whether special dividends can be declared after considering the Company's performance during the year, investment plans and availability of credit, and outlook for 2010. As part of our capital management we will continue to buy back our shares from the market on an opportunistic basis. We affirm our CapEx for 2009 at PHP27b or 18% of projected service revenues.

While the first half performance remained robust, we are cautious about what the second semester may bring. The third quarter is traditionally the slowest one in the year. And we are concerned that the adverse effects of the global economic crisis may have a lag effect on our economy. We are seeing some signs that consumers may be worried about spending or committing to spend. Nonetheless we remain confident that the PLDT Group is up to the challenge. We have faced tough times before and have come out stronger and better Company.

That concludes my report. We are now ready to take your questions. Thanks.

We are now ready for the Q&A. We will first take questions from the floor --- from those who joined us via conference call. After which we will take questions from the floor. Operator.

Thank you. The floor is now open for your questions. (Operator Instructions). Our first question is coming from the line of Karen Ang calling from Citigroup. Please go ahead.

Hi. Thanks for the call. I have three questions. The first is on the unlimited voice promotion that you're pushing lately. Based on early observations what do you anticipate would be the impact of these voice buckets to overall revenues? Do you see an opportunity for this to increase usage and revenues or do you anticipate a redistribution of usage, let's say, from SMS to voice?

The second question has to do with the regulatory environment, particularly what should we expect from here in terms of further initiatives from the NTC.

And the third question is more on housekeeping relating to the Meralco acquisition. What should we expect in terms of goodwill amortization from this acquisition? Thank you.

The unlimited voice offering is purely a defensive move on our part. And right now we are capping that subscriber base to about 350,000. And it is a service that we feel that upon we are ready with the innovative things that we are doing in our network, that we'll be -- we are ready to expand that base. But at this point it's still at 350,000. So the impact revenue-wise is still negligible at this point in time.

The regulatory environment, these initiatives right now has been really politically motivated. It is basically a response of NTC with some pressures from the political sector. And we feel that after these Memorandum Circulars are dealt with, and we are able to conclude per pulse charging on voice ,and at the same time we have extended the load already to the satisfaction of the senators, I think that this kind of pressure will ease up by next year. Besides everybody will be busy with the Presidential election next year.

On the Meralco goodwill, we are actually just beginning that exercise at the moment. With the acquisition completing in the middle of July, there is no impact on the results to the end of June. However we will begin to equity account from the middle of July so it will impact our third quarter results for about two and half months.

As I say the exercise is just underway. Our initial thought is that the principal amount of the intangible -- the total amount -- the total difference is goodwill. The bit that is amortized through the P&L relates to the intangible.

Our initial thought is that the majority of the intangible relates to the customer base of Meralco. The amortization period normally ease off the churn from the subscriber or customer. So given in Meralco's case the churn is very low, we would expect the amortization period to be fairly lengthy. But I think we can give you a more definitive answer when we come out with the third quarter results. But we -- it will be there. There will be an amount for intangibles but, as I say, it's likely to be amortized over a fairly lengthy period of time.

Thank you.

Thank you ma'am. Our next question is coming from the line of Arthur Pineda calling from RBS. Please go ahead.

Hi. Thanks for the call. I have four questions. Firstly I read in the press that June and July were tough months for you in terms of net subscriber adds. Is this something born by competition, or do you feel it is an industry occurrence as a whole?

Secondly can you remind us of the cash implications of the Piltel tender offer based on the take up?

Thirdly what would be the cash and accounting implications of ProtoStar's bankruptcy filing? Aside from potential write-downs would you need to invest in a new satellite project?

And lastly with regard to your cash, based on your guidance, net debt will rise by around PHP20b. It appears to be that there's a lot of latitude for the Company to utilize excess cash as this basically covers your Meralco related investments. What would you intend to do with this cash at hand? Thank you.

Let me try to answer your first question. And the other questions will be answered by Chris and Annabel. In terms -- the question is about the net add in June and July. Normally the third quarter is a low quarter. It's the lowest quarter in the year traditionally. And the reason for that is because it's school opening. And it's generally the weather, it's rainy season. And traditionally that is a low quarter.

What we have noticed towards the end of June and for the month of July, the softening of the market has been unusually low, lower than we expected. But again the weather, we have had several rainy days of which resulted two holidays. And the other factor of H1N1 virus scare which also resulted to several holidays. We are seeing that maybe that's one of the reasons.

The other is that, when we look at the other fast food consumer, or fast moving consumer companies, they are also noticing that their end of June and July take-up has been unusually low. So we are seeing that maybe this is a lag effect of the slower growth, such that people are beginning to hold on to the money that they have rather than spending.

Having said that, we are looking -- we are approaching to a presidential election in May next year. And traditionally towards the end, apart from the boost of the normal holiday season, our revenues would go up because of election spending. And we're hoping that the fourth quarter would more than offset the low trend that we are seeing in the first month of the third quarter.

On the question of how much cash requirement for the Piltel tender offer base. And 93% of minorities having tendered, we estimate roughly about cash-out of about PHP6.7b. So that's part of what we are funding with respect to the PHP20b net borrowing for the year.

Regarding Mabuhay and ProtoStar, there are really two parts of that transaction. One was the sale of our interest in Mabuhay to ProtoStar. We'd had some thought that ProtoStar might have difficulties given the difficult financial climate and its need to refinance. So in fact we have already unwound that part of the transaction and we've taken back ownership of Mabuhay. So we will now operate Mabuhay through to end of life, which will be 2012, and Mabuhay provides us the C-band requirements of the Group.

The matter which is of more concern to us relates to a transaction where we took an option over ProtoStar shares, but with the ability to switch that into a prepayment for transponder capacity on their first satellite, which is called ProtoStar 1. We, again anticipating that they might have difficulties this year, we exercised the option to take ownership in the transponders in PS 1, five transponders for C and one extended C transponder which are required for PLDT and Smart's use.

Now whether we need to make these provisions or not really depends on what happens in the bankruptcy court. We think we have a genuine claim over these five transponders. However, once you are in the Chapter 11 system in the US, it really depends on the judge and the view that he takes, in balancing the claims of secured creditors, unsecured creditors and creditors like ourselves, which are something between the two in that we have a claim under the contract. The filing was only July 29 and the first meeting of the creditors with the judge is next Monday.

So at this stage it's uncertain as to what the position is. Our view, as I say, is that we have a genuine interest in the four transponders -- the five transponders and that would support our claim. The total amount that we prepaid for the transponders is $27.5m. Should everything go against us then we would obviously have to provide against that amount. So I guess in gross terms that would be about PHP1.5b. Net of tax, it would be about PHP1b. However, we don't anticipate that worst case position coming out.

So I guess we will again be able to give more information when we come out with the third quarter results, after we've been through, after we hear from the judge in the Chapter 11 filing.

Got it. Chris, just to follow up, with regard to additional cash costs. Assuming that it does go south with regard to ProtoStar and you have to extend your deal with Mabuhay, what cash cost would that entail for PLDT?

No, Mabuhay doesn't come to end of life until 2012. So there's no additional cost. The transponder prepayment relates to transponders where the payments start some time after the end of life of Mabuhay which will be in 2012. So there's no cash cost to the Company, until say mid 2012.

Even then there are a number of strategies that we could take if we choose to extend the life of Mabuhay. You can incline the satellite and by inclining the satellite it's not as efficient as it was when it's in the position that it was put in when it was put in orbit. But it can extend the life of the satellite for a few more years. So there's no immediate cash cost of this situation. I'd say we'll continue to rely on Mabuhay which is providing the connectivity to PLDT and Smart at the moment.

Got it, thank you.

I'm not sure we caught the last question.

What do we do with excess cash?

I guess we've been fairly clear in the presentation that in terms of capital management initiatives it broadly remains the same. We're sticking to the 70% payout and as you know the payout feeds off the core recurring earnings. So at the half year, even though the reported earnings are only up 2%, the dividend has increased from PHP70 a share to PHP77 a share. So there's a 10% increase. But that is the regular dividend.

We maintain our position that we'll get to the end of the year, we'll look at how the year completed, if the weakness that maybe we saw in June and July continues or does it pick up as Poly suggested, what is the impact of the election spending and what is the broad financial and business outlook going into 2010.

At that stage, as we've said in the last two to three years, it's not our intention to sit on cash just for the sake of sitting on the cash. If there is the opportunity to pay a dividend beyond 70%, a special dividend we would be inclined to do that. But I guess at this stage we would say the best way to approach this is to wait and see where we are December/January and then make a recommendation to the Board in February next year.

Got it, thank you very much.

Thank you, sir. Our next question is coming from the line of Brian Wee calling from Goldman Sachs. Please go ahead.

Hi, thank you for the conference call. I have two questions. Could you give us some color on the proportion of your CapEx coming from the cellular CapEx versus Wireless Broadband CapEx? And given the low penetration and the relatively high growth vis-a-vis the rising competitive interest in this area, do you think you would step up Broadband investment in this in the near term?

The second question I have is related to Meralco. You had previously said that PLDT will not acquire more than 20% of Meralco. Are you still maintaining this guidance and is this cap applicable to the PLDT Beneficiary Trust?

Brian, can we just confirm that your first question is to add color on Broadband CapEx versus -- what was it?

The proportion of your CapEx between cellular and Broadband.

Between cellular and Broadband.

And whether you might step up the Broadband investments in the near term?

Whether we would -- can you speak up a bit?

Whether you would step up the Broadband investment in the near term, given the low penetration and high growth vis-a-vis the rising competitive interest?

Okay, whether we would step up Broadband investment given low penetration in Broadband. Is that correct?

Given the high growth vis-a-vis the rising competitive interest.

Brian, could you just speak a little louder? The reception is really bad.

Okay, yes.

The first question I have is whether you could give us some color on the proportion of your CapEx coming from cellular versus Wireless Broadband, and whether you would step up your Broadband investment in the near term, given the low penetration and high growth vis-a-vis the rising competitive interest.

Well, let me start with the CapEx, Brian. The estimate for the year is about PHP27b and roughly PHP16b of that or PHP15.8b will be spent by the Wireless, PHP10.2b will be spent at the Fixed Line level and ICT will handle the rest which is PHP1b.

Of the close to PHP16b that will be spent on Wireless, that's largely because of Broadband. Although the CapEx will be related to overall network expansion but mostly that is predominantly expansion of Broadband. So I don't think we are slowing down. We are in fact intensifying Broadband investment because we are seeing that the penetration rates are lower and the Filipinos in general are Internet hungry. And so therefore we are moving forward very aggressively on Broadband.

And on the Fixed CapEx on the PHP10.2b, a large portion of that is on the outside plants we have and also the next generation network CapEx. And all of these are also -- can be traced back to our intention of intensifying Broadband, because to be able to be efficient in the Broadband offering of Fixed, we need to fix our outside plants and at the same time switch to NGN.

The second question Brian, had to do with Meralco. Could you repeat that as well?

Sure. You had previously said that you would not invest more than 20% in Meralco at the PLDT level. I'm just trying to confirm whether you're maintaining this guidance and whether this cap is applicable to the PLDT Beneficiary Trust as well.

Brian, we confirm that PLDT has stated that its investment in Meralco will be capped at 20%. The investment by the Beneficial Trust Fund is separate from that 20%. The BTF has invested 10% in Meralco. But there has been an announcement where the BTF will sell those Meralco shares to MPIC for PHP126 per share, which was based on 60-day VWAP at the time the transaction was entered into. There's a 90 day period for the completion of that sale transaction. At the same time the BTF will be subscribing to 2.7b of Metro -- MPIC shares and then there will be a residual portion equivalent to about PHP4.8b of cash that the BTF will receive at the end of the day.

Okay, thank you.

Thank you, sir. Our next question is coming from the line of Tim Storey, calling from JP Morgan. Please go ahead.

Yes, thank you. Thank you for the call this afternoon. Just follow up questions on your Broadband strategy. First of all, technology. You have a number of platforms DSL, HSPA, WiMAX, Canopy. I'm wondering to what extent do you feel the need to be a little more focused, if at all, in terms of your technology strategy for capturing Broadband demand in the market?

And secondly, can you talk a little bit about profitability on the Broadband business? And I guess I'm interested in terms of what you're having to spend to get new Broadband customers on board, notably in terms of things like subsidies for computers for example.

So let me just confirm the first question is about the multiple platforms in Broadband?

Yes, I'm just wondering if you could talk about your strategy and whether or not you might be simplifying or narrowing down the number of technology choices you've adopted so far, because you are using I believe four different platforms today. Whether that's going to be ongoing strategy or whether you might focus specifically on one or two technologies?

Yes, firstly we are committed to the GSM and the Evolution technology out of the GSM pack and that is the 2G going to 3G and together with that HSPA, HSDPA and moving on LTE which is really the highest speed or ultra high speed for Broadband.

What we are doing is we are also securing our long term plan for the Fixed Wireless setup which is -- actually a great deal of the growth that we are seeing now, when it comes to Fixed Wireless Broadband is on prepaid. And with that we are right now under HSPA and HSDPA and 3G. But we are looking at for the rural areas, deploying WiMAX which would be more efficient compared to HSPA. HSPA really is for Mobile Broadband. While it can be used with Fixed Wireless, we are seeing that WiMAX might be more efficient. So we are experimenting also on the WiMAX technology.

I can agree with you that it might be good just to focus. But at this point in time we need to be able to handle also the Fixed Wireless demand and that is what we are focusing on. So right now, we are servicing that requirement on a substantial basis, with the Canopy technology which has visibly been enhanced by Motorola. So we are delivering now about 1 megabit per second. So with that speed our subscribers have actually been quite happy with their Canopy setup.

However, that requires a Near Line-of-Sight. So we need a solution that would not require a Near Line-of-Sight and we are therefore experimenting on WiMAX. So all of these have reasons and we feel that by covering the entire footprint of technology platforms we should be able to accelerate and intensify our Broadband products.

Can you also just comment on the strategy for Fixed infrastructure versus Wireless infrastructure, for Broadband? Are you seeing that there might be more demand in one versus the other, i.e. do you expect more of your future Broadband customers are going to want to use for example, LTE or HSPA or is it going to be equal with DSL?

It really depends on the market and how it's evolving. And of course you have to look at the cost of entry or the terminal costs. As this is going down, the demand is of course going to be greater on the Fixed Wireless setup.

However, in an economy like ours, the approach of also extending that access to Mobile, to the Mobile arena, is something that can maybe shortcut that growth and therefore be able to stimulate it and the demand would even be better. So for us that is the part we are moving into. We're very aggressive on both Mobile and Fixed Wireless Broadband. As well as DSL, of course, we're very aggressive also on DSL.

But everything is on -- everything is focused on Broadband because that is the growth market that we are in. Right now our Broadband revenues is about 9% to total revenues and it is growing at a clip of about 27% or thereabouts. And the subscriber base is growing at about 22%.

The second question was on the profitability of the Broadband business. What kind of spend do you undertake to get new subs on board and whether there are any subsidies?

Yes, I was just going to add on Poly's comment there. Also on the Fixed I think you have to look increasingly where the revenues are generated. And it's increasingly coming from the corporate and the SME area. And there, what we're seeing there is that their Broadband requirements really still require Fixed Line connectivity at the moment. So the whole upgrade to NGN and the continued investment there to provide a quality Broadband product I think is something which will be important in servicing both the higher end corporate sector and the fast growing SME sector as well, which is very important for us now on the Fixed.

In terms of profitability at the moment we are not yet subsidizing in any significant way, the access devices. That's not to say that -- that's something that may happen going forward, but it's not the case at the moment. The issue I guess in terms of profitability is that we're finding particularly in terms of international connectivity, given that a lot of contact which is accessed is actually outside the country, that for a Broadband subscriber even on the retail side we have to provide a greater investment in that area.

So at the moment, the business is becoming more profitable as it grows. But we are anticipating that it's probably 3% to 4% lower in terms of EBITDA contribution than maybe some of the traditional businesses that we've reported so far.

Great, thank you very much.

Thank you, sir. Our next question is coming from the line of Lei Tang, calling in from Nomura. Please go ahead.

Hi, thanks very much for the call. I just have a question on the full year guidance. I notice that the service revenue guidance has become lower as well as EBITDA to the lower end. And I just wonder if you can give us more color on a segment by segment basis as to what we should expect for the second half of this year?

In terms of the, you're right, in terms of the revenue guidance we've tempered it a bit basically to reflect 4% year-on-year growth partly because we're getting to the third quarter which traditionally for our cellular business in particular is a soft quarter. So that softness is effectively reflected in that revenue guidance.

In terms of the EBITDA guidance, we've actually maintained the PHP90b. So we're saying that we're expecting the lower revenues will keep the 61% EBITDA margin and protect the EBITDA guidance of PHP90b. And in terms of the core income there's an uplift of PHP1b in terms of the core income guidance from PHP40b to PHP41b.

So the major area with weaker outlook is the Wireless segment.

Overall it's kind of just looking at overall business climate and how I guess the third quarter we'll have to see how that pans out. So there's an element of caution I guess in terms of the guidance. The other qualification in terms of the guidance is that we still exclude any impact from the Meralco investment. We've indicated that we will equity account for the five and half months beginning July 16, but since Meralco has now official guidance in the market we've not reflected any impact of the Meralco investment in our own guidance.

Okay, thank you.

Thank you ma'am. We now have two questions remaining in the queue. The first of which is coming from the line of Rama Maruvada calling in from Macquarie Securities. Please go ahead.

Yes, good afternoon everyone. I have two questions. Firstly, if you could talk a bit more about the compensation expenses. What is the outlook here on both an absolute as well as relative to sales basis going forward? That'll be good.

The second question is with regards to your texting revenues and the volume for the standard messages. I notice on page six and seven of the MD&A, that the volume of the standard texts are actually going down about 20% year-on-year but revenues have been going up 3% year-on-year. So I'm just wondering if there's anything to read into this with regards to yield improvement.

Maybe I'll try the first one on the compensation expenses. I think Rama, as we've discussed, the increase in the first half, particularly relative to the last year is really driven by two things.

One is the accrual for the long term incentive plan and the way that that is calculated it's effectively an option pricing model. So that includes things such as the volatility of the share price, where the risk (inaudible) is, dividend yield, share price, etc. etc. So it's quite difficult to give an estimate of that for the full year. But it does explain the increase in the cash OpEx for the year to date.

I think if you go to that note, you'll see that this year there's an accrual of close PHP900m for the first half. Against that last year, just because of the way option pricing model worked, there was a reversal of about PHP500m in what we had previously accrued. So year-on-year that's a swing of about PHP1.4b. And that to some extent or in fact to a large extent explains the slightly lower EBITDA number in the first half, compared to what we experienced in the full.

We would expect the share price stays where it is or improves from there and that there would be an accrual in the second half of the year, but probably not as high as we experienced in the first half. However, as I say, it really is a matter of feeding in the variables to that option pricing model so it's quite difficult to give a firm forecast of where that might come out for the year. Just as guidance, I think we used the share price of [PHP2,395] at the end of June. So that might help you make an estimate.

With regards to SMS you're right. The trend towards bucket price SM, the trend is really going towards the bucket price SMS, which means that the revenue yields would be less on a per message basis. But the fact that we are moving into an all IP network would mean that hopefully what we're seeing is that margins would be maintained.

Okay. If I can just follow up a bit more on the compensation expenses and then clarify on the guidance part of it. Firstly on the revenue softening part of it, is it purely because of caution or is it something that you're seeing in the July numbers that made you change or tamper your -- temper your revenue expectations for the next half?

As I said earlier, the -- traditionally July is a low month because it's school opening and rainy season etc. And what we're seeing is unusually low but based on the benchmark of other fast moving consumer goods companies, we are also seeing the same behavior. So we're feeling that -- we're signaling to the market therefore that we need to be cautious and therefore we slightly brought the revenues down.

Having said that we have not factored in because the fourth quarter is normally quite up and traditionally offsets the third quarter drop because of the holiday season. But given that the elections are also coming and election spending will be forthcoming too, we feel that -- we're hoping that we could be proven wrong actually.

Okay, thank you very much.

Thank you, sir. And now moving on to our final question from the audio participants. It's coming from the line of [Chate Bencha] calling from Credit Suisse Securities.

Hi, good afternoon and thank you so much for the call. I have three questions. The first question is regarding your WiMAX investment. What's the situation on your WiMAX trial now and when should we expect you to actually start the service commercially?

And the second question, given the opportunity you see in the Wireless Broadband segment, why can't just another competitor or well-capitalized player just come in and enjoy that opportunity as well and what PLDT has to fend off that competition?

And my third question is regarding the regulatory change. Another issue that has been talked about in the press is the lower interconnection rate. Would that materially affect your numbers and what's your view on that? That's my two questions, thank you.

Just on the regulatory, on the interconnection rate, we're seeing no pressure now to bring them down. There was talk before about bringing them down but no government initiatives at the regulatory level have taken place. So we don't expect them to come up short-term for us or in the next (technical difficulty).

On WiMAX we are -- we have been undergoing trials and a few base stations have been set up and right now that is where we are in the process. It is also for us to be able to be -- to familiarize ourselves with the technology and its capabilities and its -- the unique requirements for it when it comes to backhaul etc. So that is what we are in the process of looking at right now. So we can't tell you whether we will go full blast on WiMAX or stick to the HSPA and LTE plan.

I think the last question had to do with competition in the Wireless Broadband space. Is that correct?

Yes, that's correct.

Competition in the Wireless Broadband. If a well-capitalized player just comes in.

Right now our market share there is about 70% and we're just moving ahead without looking back. Our campaigns are intensive and we just launched a unified platform called -- a portal called Sandbox, which hopefully will enhance the demand for our Broadband, both Mobile and the Fixed Wireless or even the Fixed. So that is the way we are moving and a competitor to come in will have to have the necessary backbone and transmission which as you know is a huge undertaking and which takes time.

Operator, are there no more questions from the conference call?

No ma'am, we have no further questions.

We're ready to take some questions from the floor. There are microphones that you can move up to. Any questions from --

Good afternoon, thank you for the briefing. I have three questions. The first one is on the various Voice offerings that you will be implementing. Would be there be CapEx implications of these offerings?

Secondly, we saw the peso appreciate -- sorry, devalue by 40% year-on-year, H1 '08 versus H1 '09. How did that affect your service revenues in the first half '09?

And then thirdly on WiMAX, if you do decide -- I'm sure that when you're doing your testing now, you evaluate the CapEx implications of WiMAX. What do you think would be the implications of implementing WiMAX if you do decide to implement?

With regard to the Voice offerings, we are doing that taking advantage of the buffer that we have in terms of network capacity. And that's the reason why I mentioned that we're capping the subscriber base until we are able to implement the initiatives we're doing on the network side, which is basically not CapEx, no CapEx requirement. It's a software change.

And so therefore, we're very careful that any of these unlimited offers we are introducing some new CapEx requirements. So right now we're looking at PHP27b. Having said that, PHP16b of that is CapEx that will be on the Wireless side. And that already includes enhancements and -- both on coverage and on the backroom and also on the IT side. So we will have a more robust network to begin with in the beginning of next year.

The second question, Anabelle.

The question was about the impact of the FX appreciation on revenue, right? In terms of our revenue about 29% are dollar linked. So with the peso having depreciated it's about PHP2b uplift from H1 '08.

With regards to WiMAX our basic network is already there. As you know what is really crucial and what is CapEx intensive is the transmission and the fiber backbone. And that's already there.

In terms of the framework or the network itself, we are still evaluating but we feel that it could be complementary on the rural side of the rollout that we are doing. So basically it will substitute existing CapEx of the other technologies that we are looking at. So we don't feel there is much incremental CapEx for WiMAX really because we will decide moving forward as to which one will be dominant on the rural side.

Any other questions?

Operator, if there are no other questions on the conference call, we'll conclude.

Thank you ma'am. That concludes the question and answer session. Before I turn the conference back over to Mr. Nazareno, I would like to 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 August 18, 2009. International caller number, country code 852 and then 2802-5151. US toll-free 1-800-395-7871. The pass code is 715230.

I shall now turn the conference back to Mr. Nazareno for any additional or closing remarks. Thank you.

On behalf of my colleagues I wish to thank you so much for joining us today. We look forward to talking to you again sometime in November when we will be releasing our third quarter results. Thank you.