PLDT Inc (PHI) 2009 Q4 法說會逐字稿

Good afternoon everyone, and welcome to the PLDT conference call and analyst briefing to discuss the Company's full year 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. 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. Our Chairman, Mr. Manny Pangilinan, our President and CEO, Poly Nazareno, Mr. Christopher Young, Chief Financial Adviser, Ms Annabelle Lim Chua, Treasurer of PLDT and Chief Financial Officer of Smart, and from ePLDT we have Ray Espinosa who is President and CEO.

Today's presentation will cover the 2009 financial and operating highlights of PLDT presented by our CEO and then our Chairman will discuss guidance and the highlights of the Beacon Electric transaction. The Q&A will follow after the presentation.

At this point, let me turn over the floor to Mr. Nazareno for the presentation.

Thank you Melissa. Good afternoon, ladies and gentlemen, and thank you for joining us this afternoon. Allow me to present to you PLDT's 2009 full year financial and operating results.

2009 was a challenging year for the Philippine business, given the global financial crisis and as well as the severe typhoons that hit the country at the end of September last year. In spite of this, PLDT managed to post another year of strong financial and operating results.

Service revenues for the Group in 2009 grew by PHP2.8b or 2% to PHP145.6b compared to 2008. EBITDA for 2009 declined by 2% year on year, to PHP86.2b, with EBITDA margin lower at 59%. Reported net income increased by 15% to PHP39.8b year on year. Core net income grew by 8% to PHP41.1b, from PHP38.1b in '08. This translates to earnings per share of PHP218 for 2009 compared to PHP200 per share in 2008.

The peso closed at PHP46.43 against the US dollar at the end of 2009, compared to PHP47.65 in 2008 or a 3% appreciation year on year. However, the average peso/dollar exchange rate for the year was PHP47.64 or 7% higher than 2008.

Let us now go through these results in greater detail. Core net income for 2009 increased by PHP3b or 8% to PHP41.1b, compared to PHP38.1b in '08. The growth was largely on account of a 2% increase in service revenues, the lower corporate income tax rate and recognizing our share in the earnings of Meralco offset by a 7% increase in cash OpEx. Our reported income for '09 grew by 15% to PHP39.8b year on year.

Total exceptional items for '09 amounted to PHP1.4b, consisting of net ForEx gains of PHP500m relating to our foreign currency assets and liabilities, PHP600m tax effect on the exceptional items, and PHP1.9b in asset impairments, of which PHP1.3b pertained to the Mabuhay/Protostar transponder leases.

On the next slide, in line with our dividend policy, the Board today approved the payment of cash dividends of PHP141 per share, consisting of a final dividend for 2009 of PHP76 per share and a special dividend of PHP65 per share. Together with the interim dividend of PHP77 paid in September 2009, dividends for '09 total PHP218 per share, representing a 70% regular dividend payment and a special dividend payout of 30% for a total of 100%.

Record date for this declaration is March 17, while payment date is April 20. This year's 100% dividend payout follows the 100% dividend payout for 2007 and 2008, where dividends amounted to PHP184 and PHP200 per share repaid.

Consolidated service revenues registered a 2% growth to PHP145.6b in 2009, largely due to a 3% increase in data and ICT revenues which includes a 25% growth in Broadband and Internet revenues and steady voice revenues. Consolidated EBITDA decreased by 2% to PHP86.2b in '09, with margin declining to 59%. Wireless margin stood at 62%, Fixed line margin at 49% and ePLDT at 12%. Fourth quarter service revenues of PHP37.4b are historically the highest quarter revenues. EBITDA declined to PHP20.4b or by 7% due to higher cash OpEx.

On the next slide, total CapEx for '09 amounted to PHP28.1b or about 18% of total service revenues. This is a PHP2.9b increase year on year and is PHP1.1b higher than our guidance for the year as the Group accelerated its Broadband rollout while continuing to invest in additional cellular coverage and capacity.

Of this total CapEx, PHP16.3b, or 58%, was spent for the Wireless business, 40% for the Fixed line and 2% for ICT. Included in the CapEx spend in 2009 were PHP5.4b for 2G and 3G, PHP2.2b for Wireless Broadband, PHP4.2b for NGN and data network and PHP3.4b for upgrade of the Fixed line cables and wires.

Total CapEx spend from '06 to '09 amounted to nearly PHP100b. This investment allowed the Group to grow service revenues to -- of PHP121b in '05 to PHP146b today, Wireless subscribers from 20.4m in '05 to 41.3m today and core income from PHP31.3b to PHP41.1b today. Our sizeable investments in CapEx also manifests our long-term view of supporting Philippine telecommunications and our commitment to bring Broadband to all.

On the next slide, free cash flow of PHP44b in '09 was lower by PHP3.9b compared to PHP47.9b in the previous year, although in both years higher than the core income of the respective years. The decrease in cash flow for the year compared to previous year resulted from higher CapEx by PHP2.9b as well as higher net interest expense due to higher loan balances.

PHP44b in debt proceeds and PHP44b in free cash flow were used for loan repayments of PHP19.2b, dividend payments of PHP38.6b, share buybacks of PHP1.8b and investments of PHP26.6b for the Meralco stake and the tender offer to Piltel's minority shareholders.

On the next slide, the Group's net debt grew to $1.3b as of year end 2009, with net debt to EBITDA at 0.7. The increase resulted from higher borrowings by the Group to support CapEx and investment in Meralco. PLDT's debt profile remains healthy, with maturities well spread out.

Total dollar-denominated debt has declined to 48% from 79% last year, as we continued to tap the local credit market to reduce dollar-denominated debt. 18% of total debt is hedged and we take into -- as we take into account our dollar cash holdings, only 22% of the debt is un-hedged.

This slide summarizes segment highlights details which I will discuss more extensively.

Slide 10 focuses on Broadband, which continued to grow strongly in 2009. At the end of '09, PLDT Group's combined Broadband subscriber based reached 1.6m, of which over 1m are Wireless subscribers and 560,000 are DSL subscribers. This represents a combined market share of nearly 70% of the Broadband market. SmartBro added approximately 491,000 subscribers in '09 while DSL added 127,000 subscribers. Of our Wireless Broadband subscribers, 58% are on pre-paid. About [618,000] are Plug-it subscribers while the balance are on Canopy.

Total revenues for Broadband grew 25% year on year to PHP13.8b, which now accounts for 9% of total service revenues, up from 8% in 2008 and which accounts for approximately 80% of service revenue market share. To further strengthen our lead in the Broadband space, we will be introducing many more product offerings, including the expansion of subsidies to seed Broadband take up and growth.

On the next slide, PLDT's range of Broadband offerings, whether on line -- on Fixed line or Wireless, aims to fuel Broadband growth through a steady stream of product launches aimed at reaching its various target markets and leveraging on the combined network strength of the Group.

We recently launched our latest offering to capture a bigger share of the Broadband market, SmartBro SurfTV. With PC ownership being a key to growing Broadband, but where the relative high costs of PCs has prevented many from signing up for a Broadband subscription, we are now enabling access using the most common household appliance, the TV set. For PHP4,500 the subscriber gets a kit that has a USB modem, a keyboard, remote control that he could use with his TV set, which will then allow him to chat, email and surf the Internet. This world first embodies the innovation that Smart has always been known for.

On the next slide, the combined Smart and Talk-'N-Text subscriber base expanded to 41.3m at the end of '09, growing by 6.1m or 17% from 35.2m at the end of '08 and surpassing the 5.2m net adds for '08. Of the 6.1m net adds, 3.3m went to Buddy subscribers, while 2.7m are TNT. Combined Smart and TNT maintained market leadership in both subscriber and revenue terms at approximately 55% and 59% respectively.

Net blended ARPU declined by 13% year on year to PHP188. Prepaid subscriber acquisition costs, or SAC, are recovered within a week's time. Starting 2010, in line with the changing market dynamics, more aggressive initiatives in the voice space will be pursued.

Slide 13 discusses selected financials of the Wireless business for '09. Service revenues improved by 2% to PHP95.8b, contributing 66% to PLDT Group revenues. This growth was driven by a 24% increase in Wireless Broadband revenues and a 4% growth in cellular voice revenues, offset by a 1% decline in data and other service revenues.

Basic SMS continues to drive data services, comprising 53% of cellular service revenues. Bucket plans, which continued to gain traction with subscribers, now account for 57% of total cellular data revenues.

EBITDA for '09 decreased by 2% to PHP59.4b, compared to PHP60.7b in '08. Margin expectedly declined to 62% given the growing contribution of relatively lower-margin Wireless Broadband to total revenues.

On account of the residual impact of the strong typhoons and extensive flooding in the third quarter last year, fourth quarter '09 service revenues were softer compared to the same period last year, although 6% higher quarter on quarter. Fourth quarter EBITDA was 8% lower year on year due to a 22% increase in cash OpEx, which includes rent expenses and taxes and licenses as well as higher provision for doubtful accounts.

On the next slide, Fixed line service revenues grew by 4% to PHP51.1b at the end of '09, resulting from the growth in corporate data and DSL revenues which offset net declines in ILD, NLD and LEC revenues.

Revenues from corporate data and DSL now account for 42% of the total Fixed line service revenues, compared to only 38% last year. The growing contribution of DSL to total service revenues is manifested in the lower EBITDA for '09 which declined by 2% to PHP25.2b in '09, year on year, largely on account of a 7% increase in cash OpEx which includes rent expenses for international leased circuits. Fixed line margin for '09 was lower, at 49%.

Fourth quarter Fixed line revenues were up 3%. EBITDA was 7% lower for the quarter with the impact of higher provisioning for doubtful accounts, arising from lower collection rates related to the implementation of a new billing system.

On slide 15, ePLDT, our ICT business, continued to show growth with service revenues for '09 higher by 5%, at PHP10.9b, and now accounts for 8% of total PLDT Group service revenues. The data center business registered a 67% growth year on year, with increases in contracts for co-location and service hosting -- and server hosting, disaster recovery and business continuity services. Both the call center and the BPO operations registered declines in service revenues given the impact of global business conditions on their client base.

ePLDT's EBITDA of PHP1.3b is a 26% increase over '08. EBITDA margin improved to 12% in '09 due to the impact of the peso depreciation, offset by higher compensation and maintenance and rent costs. Encouragingly, fourth quarter '09 EBITDA improved 44% quarter on quarter and 32% year on year. Fourth quarter '09 EBITDA margin likewise improved to 16% in fourth quarter '09, from 13% in fourth quarter '08 and 12% in third quarter '09.

We are pursuing a reorganization of the BPO businesses, with a plan to combine our voice and non-voice operations to allow greater focus.

And now for a few highlights on Meralco. Meralco's net income from July 15 to December 31 last year amounted to approximately PHP2.5b, of which our 20% equity share is PHP498m. We booked adjustments amounting to PHP100m for amortization of acquisition-related fair value adjustments, thus resulting in net equity in earnings of PHP398m for the Meralco investment. We also booked a PHP1.2b derivative gain arising from the PHP2b exchangeable note issued by First Philippine Utilities Corporation as part of Piltel's acquisition.

On Meralco's full year results, its revenues declined by 4% due to lower generation and transmission charges, offset by a slight increase in energy sales and the impact of the PBR approval effective May 2009. Meralco's core income grew 169% to PHP7b compared to previous year, while reported income increased by 114% to PHP6b year on year.

The Energy Regulatory Commission, or ERC, approved another rate hike of PHP0.27 per kilowatt hour effective January 2010, the implementation of which was voluntarily deferred by Meralco pending the resolution of some issues raised by some groups.

Meralco's subscriber base grew to 4.7m at the end of '09. For the second consecutive year Meralco's system loss performance is below the 9.5% system loss cap.

In its last Board meeting, the Meralco approved a dividend policy where 50% of core earnings would be declared as regular dividends. In addition, a look-back approach at the end of the year will determine the possibility of special dividends.

The prospects of our investment in Meralco continue to look brighter and our joint teams continue to work on harnessing synergies from both businesses. Later our Chairman will discuss in detail the latest initiatives to strengthen our hold in Meralco.

Let me now turn the floor over to our Chairman, Mr. Manny Pangilinan, to discuss our guidance for 2010.

Thank you, Poly. And good afternoon to all of you. Thank you so much for joining us in presenting the 2009 results and outlook for 2010.

There are just two parts to these closing remarks. The first part deals with a summary of what we announced last night with respect to the consolidation of the Group's shareholdings in Meralco through Beacon Electric Asset Holdings Inc. And of course the last -- the second and last part deals with the aspects of guidance numbers for the year 2010, how it looks like from the early part of this year.

The basic rationale for the aggregation of the Group's shareholdings is what Poly indicated earlier. Number one is we want to be a bit more transparent, more clear as to the amount of shareholding we have in Meralco, the extent to which we could exercise significant control or influence over the affairs of Meralco and as well to strengthen the security of the investment of the Group in Meralco, in effect to forge a collective security over the joint shareholding of the various Group companies in Meralco itself. As well we feel that Beacon Electric, to the extent that the shares are being put together, will provide a more effective financing vehicle in the event that there is a need to acquire more Meralco shares for the Group.

Now in the design of Beacon Electric, there are three basic considerations that went into that overall design. The first is the express desire of Metro Pacific to inject all of its existing shares acquired from the market which, is 163.6m Meralco shares, equivalent to about 14.5% of Meralco.

Number two is the general regulatory regime, takeover regime here in the Philippines, which essentially says that if a single entity or individual or a concerned party group were to acquire publicly listed shares in any 12-month period, to the extent of that single entity or concerned parties breaching the 35% rule within that 12-month period, then you're required to make a general offer. So we have to bear that in mind as the second feature in the design of Beacon Electric.

And the third is the call option arrangements with respect to the 6.6% or half of the remaining 13.2% stake of the Lopez family in Meralco. If you recall, Metro Pacific has entered into a call agreement, call option agreement with respect to half of the 13.2% for a price of PHP300, equivalent to approximately PHP22.4b.

So step one is MPIC injecting the 14.5% into Meralco -- into Beacon and cash to be provided by First Pacific Philippine affiliate of PHP6.6b into Beacon. We will get into that later as to why there's a need for cash. And for which MPIC will get 50% -- initially 100%, but thereafter 50% of the Beacon Electric, because Beacon Electric has been designed as a [deadlock] company, a 50/50 deadlock company between PLDT/Piltel on the one hand and MPIC on the other hand, and 8b of preferred shares of Beacon Electric.

Now in order to fall within the 35% rule, takeover rule here, Piltel will have to inject the relevant number of Meralco shares, such that when aggregated with the 14.5% and the potential purchase or exercise of the call option on the 6.6% in Meralco owned by the Lopez family, we will not breach the 35%. So arithmetically that means 13.7% of Meralco owned by Piltel or approximately 154m Meralco shares owned by Piltel.

So the combined initial step will mean ownership by Beacon of approximately 28.2%. And MPIC will assign the call option rights it now has with the Lopez family to Beacon such that when -- indeed when that is exercised, the aggregate shareholding of Beacon in Meralco will only be 34.8%. Indeed that has been done as of last night, as I understand it. And the -- so the call option agreement is alive between Beacon and the Lopez family. The exercise period is between March 15 and May 15.

Now the cash. Beacon Electric has made arrangements to raise PHP18b. What will happen is that PHP11.2b is really a replacement credit. But what will be done is to take down the debts of MPIC of PHP11.2b and, as a practical matter, effectively push it down to Beacon as debt to Beacon. And there's an incremental debt of about PHP4.6b to complete the balance of the PHP11.2b. That's the reason for this PHP6.6b injection of cash from MPIC provided by the First Pacific affiliate here in the Philippines. We can get into values later on.

So there's still, if you may, stranded shares of Meralco held by Piltel of about 6.1%, something like 64m or 66m shares, which we'll have to wait for 12 months to elapse from completion of this transaction so that the general offer obligation is not triggered. But in the meantime obviously there will be concerned party voting arrangements.

When you aggregate the Group's shareholding in Meralco, that is about 41%. If you aggregate that together with the remaining 6.6%, we will [hold] approximately 47.5%, 47.6% of Meralco. Of course if you have any questions later on about this particular structure, that's -- but this has been put in place. It has been triggered as of last night.

Moving on to the second part, the guidance for 2010. Dealing with service revenues, they're expected to grow by 3% in 2010 over '09. That is approximately PHP4.4b increase in service revenues versus about PHP2.8b increase in service revenues in 2009 over 2008.

With respect to EBITDA, I think Poly's indicated where the growth will be coming from, from Broadband, data services, SMEs, improvements in our call center, BPO and the robust growth anticipated for the data center, particularly now that it is an election year. On the cellular growth, we're going to be challenged by the very high penetration rate already, the multi-SIM environment and the bucket plans which are eroding revenue gains in the course of the year. Subscriber net adds in the first two months have actually been quite good. But it doesn't necessarily translate into the relevant increase in revenues for the first two months.

EBITDA is anticipated to grow by about PHP1.8b, 2%, that's a slightly lower margin, from PHP86.2b to PHP88b on account of new business being added at slightly lower margins than the old businesses. EBITDA actually declined in '09, as Poly indicated, in relation to '08. So we're anticipating EBITDA to rise by 2% rather than decline in the year 2010.

So, so far, we're actually quite optimistic when it comes to revenues and EBITDA. I think what we're guardedly optimistic about is the growth in the net income, simply on account of increased debt levels for the full year 2010. There has been somewhat of increased debt levels for part of the year. So the full impact of financing charges has not been felt in the '09 accounts and which will be felt in the 2010 accounts.

The year just passed has seen PLDT quite active, both in terms of returning money to shareholders and in terms of making new investments. As Poly indicated, the new investments relate to Meralco, which cost us PHP20b, the general offer for the minorities of Piltel, which is PHP6.6b, the unbudgeted CapEx which meant an additional PHP2.9b and new investments in WiMAX and in [Chica], a value-added service company, to the extent of, together, about PHP2.1b. And of course the dividends, the cash dividends paid for the year '09 were about PHP38.6b and the share buyback was about PHP1.8b. So together these two, we spent more than PHP70b. Free cash flow was PHP44b, so there was a net debt increase of about PHP26b, PHP27b in the year 2009.

It is our goal to start reducing somewhat our debt in the latter part of 2010 so that the financing charges could again get reduced slightly in the second half of 2010. Our debt levels are somewhat similar to where they were in 2006, where gross debts were about PHP1.8b and the net debt to EBITDA was about 0.8. So we'd like to be able to see a slightly lower, slightly better debt profile by the end of 2010 and moving forward into 2011.

So on the guidance, we're guiding the core income to be what we call PHP41b plus. And if management were to be mandated, as they are being mandated, to look at various cost savings initiatives in the course of the year, then we could be able to exceed this particular guidance number.

In terms of capital management, CapEx is being guided as slightly higher because of the various network build out that is needed to be done.

And on dividends it's the usual 70% as our basic dividend policy. And we will look back and if the going is as good as or better than the year 2009, there is no reason why PLDT should not adopt a special dividend policy as it has been doing for the past three years in terms of a 100% dividend payout.

I believe that ends our presentation and we're now open to your questions. Thank you.

We'll first take questions from the conference call and then take questions from those who are here at the conference -- at the briefing. Operator?

(Operator Instructions). We have a question coming from the line of Chate Bencha from Credit Suisse. Please go ahead.

Hi. Thank you very much for the call. I have four questions. The first question is on the EBITDA margin in the fourth quarter. I see that the sharp EBITDA decline quarter on quarter was due to multiple cost items, like one among them is professional and contracted service. Can you clarify what it is?

And the second question is on the Fixed Broadband subscribers. I see that the net additions in the fourth quarter is quite low, at only around 12,000 subscriber additions. Can you clarify the reason?

And also the third question is on the special dividend. Is there any chance that you would be considering further capital management in the form of yield and higher payout than 100%?

And the last question is on Meralco. I understand initially that PLDT would cap the investment at not higher than 20%. Is this restructure in shareholding for Meralco means that PLDT will go above 20% in the future, the effective interest? Thank you, that's my four questions.

Just I'll deal first with the EBITDA number. You're correct. There are a number of factors which affected the fourth quarter EBITDA. If you look at the Fixed line in particular, there was another round of our MRP, Manpower Reduction Plan. So there was a sizeable provision there, something in the region of PHP350m in excess of 100 people. And some quite senior ones availed of that latest round of the MRP. So that had an effect there.

The other issue that affected it and you picked up, in the professional and contracted services. As a result of the typhoons and the flooding which followed, there was quite a bit of damage to the network. And both on the Fixed and the Wireless side, we needed to rely on additional third party contractors to come in to help us restore the network quickly. So that has affected both the fourth quarter and the particular line that you identified.

On the issue of the dividend, there is no intention to increase the dividend beyond 100%. I think we feel from the management's side that the 70% is a fairly high payout and we've stuck to that pretty well over the last few years. The 30% look back gives a degree of flexibility depending on the amount of corporate activity during the year and the impact on our cash flows.

So it's something that management is comfortable with. And I think also the Board have indicated they wouldn't really like to see it go beyond 100%. Obviously there's an interplay between the paying of a special dividend and what happens to the overall debt level. And I guess, as our Chairman indicated, there's a desire actually to see that debt level come down from where it is.

I think the last one was on the Meralco shareholding or DSL, sorry.

On your second question on the apparently lower net adds on the fourth quarter of DSL, this was basically the effect of the typhoon Ondoy and Pepeng that ravaged the country. And what happened was that this is not an indication really of net adds, but -- or what is in the pipeline. But what was affected was the conversion of what was in the pipeline into actual subscribers. In other words, the provisioning percentage went down because people were just concentrating on restoring the lines.

The trend this year in the past two months has been quite positive for DSL take-up. And I think moving forward this will be more in line or even better than the 127 net adds for the year '09. We're looking at -- I think our target for this year is doubling the net adds for the DSL for 2010.

The answer to your question as to whether PLDT's interests in Meralco will go above 20% is no, it won't. Let me -- maybe what might be slightly confusing is the interim. So, as I indicated, as and when the call option on the 6.6% Lopez shares are exercised, the total ownership of the Group will be about 40.9%. So Piltel will own half of that. So there will be a slight increase of 0.5% or 0.45%. But Piltel will not pay for that incremental ownership. In fact the benefit to Piltel will be a little over PHP1b of value based on the current net offer share price.

However, in the interim, remember that the stranded shares of Meralco of 6.1% are owned by Piltel. So initially whereas Beacon will own about 34.8%, Piltel will own 17.4% plus the 6.1%. So optically Piltel's ownership will move up from 20% to 23.5%. But that's an interim. Once it injects the 6.1% then it will drop to about 20.45%, so well within the 20% cap that we've put on Piltel. So the idea is really for Piltel not to go beyond the 20% or to put up any more cash for Meralco shares.

Okay. That's very clear. Thank you.

Thank you. Next question will be coming from the line of Mohit Jain from Citigroup. Please go ahead.

Hi. I have three questions. First on voice. Can you please throw some light on the aggressive initiatives that you plan to undertake in 2010 and consequently how much impact should we expect on ARPU of such an initiative.

Second question is on your Fixed Line growth rate. What kind of growth rates do you expect given your CapEx allocation of 40% in 2009? And do you expect DSL growth rate, revenue growth rate to outperform Wireless Broadband revenue growth rates in the near term?

Third question is on your target debt-to-equity ratio. If you could give us a number on your target leverage and by when do you plan to achieve it? Thank you.

With regards to the first question on the aggressive initiatives for the cellular voice, we would kindly ask you to wait. There are products that are in the pipeline that will be launched. Essentially this will be more on pushing on the bucket pricing and unlimited space. That's all I can say.

With regards to the Fixed Line growth rate, in '09 the Fixed Line revenue growth rate was 4%. We're looking at a higher growth rate mainly, for 2010, a higher growth rate than this, roughly between 7% to 8%. This is mainly driven by corporate and the SME business and of course also driven by the increase in hopefully the offshoring business within the country for this year. This has to be balanced off, however, by the expected decline of our international inbound traffic, which is partially affected also by the aggressive drive to broadband the country, where the calls are going through more on the VoIP route rather than the normal legacy route.

In terms of our gearing ratio, what we have indicated is that we are comfortable with anything below 1 times net debt to EBITDA. At the year end we were at about 0.7. So for 2010 we would expect that we would more or less also approximate that kind of gearing ratio.

And as a follow-up question on the Fixed Line growth, do you expect DSL growth rate to outperform Wireless Broadband growth rates?

I think in terms of the Wireless Broadband, the thrust towards prepaid plug is our primary product offering. So in terms of subscriber take-up, that should be much faster than DSL take-up. Albeit of course on the prepaid side the ARPUs will be lower than typical DSL postpaid plan where there is a monthly rate of about PHP1,000, whereas the prepaid plug-in ARPUs would be some PHP300. But in terms of absolute number of subscribers, the take-up on the prepaid would be much faster, as we've experienced similarly in the cellular space.

And in terms of revenue?

In absolute amount, DSL revenues are higher today than Wireless Broadband revenues. But in terms of, I guess, growth rate, probably the Wireless Broadband will grow a little faster and sort of catch up.

Thank you.

Thank you. Next question will be coming from the line of Sachin Gupta from Nomura. Please go ahead.

Yes. Thanks very much. I've got a couple of questions as well. Firstly just interested in your margin guidance of 58.5%. Given the trends we have seen in the fourth quarter, and you are talking about Broadband growing and extension of subsidies, etc., I was just wondering does that margin guidance look a bit optimistic, or are there any cost levers you can pull to maintain that? That's the first question.

Secondly, just on your sales guidance as well, just wanted to get your thoughts on competition for the rest of the year given you talk about wireless is a saturated market and everyone seems to be focusing on wireless broadband. Just wanted to get your thoughts on how is Globe currently reacting in the market. I think there was some noise around them refreshing their branding, etc. That's my second question.

And third question is just on capital management. You have paying close to 100% of the earnings for the last few years now. And you obviously pay specials, but if you continued to pay specials they won't be considered specials for long. So I was just wondering why not increase the payout ratio to 100% versus 70% at the moment? Thanks.

The comment is you want an extra special dividend?

Maybe, yes.

I can try the first one, which is basically on the EBITDA guidance. If you look at the expenses really for 2009 which have grown the most in percentage terms, it really focused on compensation and rent. So I think you really need to dig into these numbers. On the compensation itself, in terms of the absolute salary levels, the increase is around about 5%, 6%. What's boosted up is really two things. One is the accrual for the long-term incentive plan which we indicated at the -- in the first quarter results, and the others would actually distort things a little bit this year.

You may remember back in 2008, for the first half of the year there actually wasn't an accrual. There was a reversal of the accrual because of the sharp movements in the share price at that time. For the balance of the year in 2008 there was an accrual. And then for 2009 it's been running at between PHP400m to PHP500m a quarter. So that's actually pushed the compensation expense up to actually a double-digit number, about 12% -- well one of the factors that's pushed it up to that double-digit number.

The second is that on the Fixed Line we have a defined benefit plan. So the actual accrual that we make in any year depends on the valuation of the plan at the end of the previous year. So at the end of -- the accrual in 2009 is driven to a large extent by what happens in the valuation of the plan at the end of 2008. And, as you can imagine, a number of the investments of the plan at that time were significantly affected by what was happening in the stock market. So as a result the deficit increased. And therefore actually the accrual that we had to make for the balance of the year was quite a bit higher, in fact higher by almost 80%. So these two items together have pushed up the compensation expense up to 12%. Now in both cases we would not expect a repeat of that as we go into 2010.

On the pension valuation, the actuarial valuation, I guess as you know, the equity prices have recovered and the valuation of a number of our assets within there have recovered as a result. So the actual accrual that will run through the P&L in 2010 will be significantly below the 2009 number. Also the [LPIB] is more likely to -- in fact it will be a new LPIB going into 2010. So the accrual level is likely to be a more recurring regular amount rather than the volatility which we saw in 2008.

So we would expect, rather than the compensation expense which is, as you know, is our largest expense, growing by double-digit amount, probably growing more in the region of 4%/5%. So that makes us more confident that we'll be able to maintain the EBITDA margin.

The second and also quite substantial expense that we had in 2009 was growth in rent. And within rent is the lease of international cable capacity which has become quite significant for us as broadband has grown. Now during the early part of the year, because the Broadband business was growing so quickly, we were leasing additional international capacity.

However, into the end of the third quarter, beginning of fourth quarter, we actually -- there was a new international cable network called AAG, Asian American Gateway, in which we participate, which was fired up and became active. So we are now using that, the cost of which is significantly lower than short-term leases, short-term rental leases. So while there may not be a fall in that rental expense going into 2010, we wouldn't expect to see anything like the recurrence of an 11% increase which hit us in 2009.

So as a result of these two items in particular, that makes us more confident that we'll be able to see the growth in the revenue line falling to a growth in the EBITDA line. And, again, maybe don't get too distracted by what happened in the fourth quarter because there were particular items, such as I mentioned, such as this MRP program which in fact reduced headcount in the Fixed by closer to 200, which actually helps us in terms of the compensation expense going into 2010.

That's great. Thanks. Just the second question and the third question, I guess?

Well the wireless broadband market is exciting and the rivalry is quite intense. So we are pursuing more intensively and launching new products for the broadband to enhance our take-up and also to increase the ARPUs with the contents such as the WatchPad. And recently a new product was launched which is the SurfTV for SmartBro which addresses the lower end of the market, those who could not afford a PC at home. This is a kit that we sell to them which allows you to use your TV to access the Internet. And it is -- the initial indications is quite positive for this product.

So overall we are addressing the entire spectrum of the consumer segments for the broadband market from the high end, which is fiber to home and DSL and DSL Plus, down to the Internet-for-all which is a bundled product of wireless broadband and fixed voice, and to the lowest segment which is the SurfTV.

As to how they will react, please ask them the question.

On the dividend, I think there really is no plan to go to the extra special dividend. I think, from our perspective, the setting the base at 70% and then giving the flexibility on the 30% dividend is something which has worked well for the Company. And I think that's the way the Board feel as well. This gives us a degree of flexibility to see how the Company performs during the year.

We call it a look back. I think it's also to some extent a look forward, a little bit of a look as to how the next year might pan out as well. So I think it's -- we can confirm there's no plan to go beyond 100%. And that we will maintain the base at the 70%.

Okay. Thanks for that. Just a very quick follow up question, I guess. Just on this revenue outlook guidance you had talked about, are you building anything in from this whole election campaigning, or that's not really that material?

As of the moment we don't see the effects yet on election spending. But we're hoping that come March we will see an increased spending when it comes to top-ups on our subscriber base.

Great. Thanks very much.

Thank you. Our next question will be coming from [Chaitanya Pampana] from (inaudible). Please go ahead. Your line is now open, Chaitanya.

We'll take questions from the floor first until we get Chaitanya back on the line. Are there any questions from those present at the briefing? There are microphones in the aisle. No questions? Operator, do we have Chaitanya back on the line?

We have a question coming from the line of Arthur Pineda from RBS. Please go ahead.

Hi. Thanks for the call. I have a number of questions. Firstly on the Mobile business. I was wondering what percent of your business or revenues are exposed in the Mindanao region and how significant power outages are impacting the service revenues in costs. Is this included in the guidance?

Second on the Mobile business again, can you please give us some color with regard to how much of the softness was driven by the flooding and typhoons and how much was actually driven by competition? If you were to geographically segment the areas affected by the flooding, what kind of growth rate can we actually see?

Third question I had was with regard to Broadband. Can you elaborate a little bit on the Broadband strategy and expectations? You did mention that you're looking for higher subsidies for this segment going forward. What are the margins like for this business now and what are you targeting in terms of penetration levels?

The fourth question I had was with regard to the portfolio strategy. Is it possible to elaborate what the strategy of the Company is with regard to its portfolio of assets and how it can actually extricate value? I'm particularly curious on the recent media and power investments and how they actually fit in the core telecom strategy. How do you monetize this or translate this into competitive advantage going forward?

And last question I had is with Beacon. Given that the holdings will only really be Meralco shares, it does strike me that the only cash flow it will really generate would be on the dividend side. Now does this mean that the debt servicing for Beacon will take seniority over the dividends to the Piltel from its Meralco investment? Thank you.

Yes. The principal source of cash flow for Beacon will indeed be the dividend income from Meralco. And debt service clearly will take precedence over any further dividend up-streaming from Beacon to the equity holders. There will be a covenant that would allow dividends to be paid, actually subject to meeting certain debt service cover ratios pre and post payment of the dividend. So it's not totally no dividends, but you just have to be able to comply with the DSCR of 1.5 times before paying the dividends and 1.1 times after payment of dividends.

I think with respect to the investment portfolio of PLDT, particularly with respect to the investment in Meralco, we outlined the rationale for the investment about a year ago when we made the investment, that there were positive reasons for the investment, which I think earlier Poly outlined. The [pole] agreements, etc., etc., prospects in relation to enveloping and billing because they have a more significant -- they have about 4.7m postpaid. We only have about 1.8m, 1.9m postpaid plus Smart, maybe over 2m postpaid subs. So there would be elements of synergies there. We're interested in using the fiber optic network of Meralco around the greater Metro Manila area. There's aspects of prepaid metering which ties in with the mobile phone and so forth and so on.

Now the converse side of that is the desires -- are the negative reasons, namely we were concerned that if a shareholder, like San Miguel, who is now entering the telco space, were to be a significant or controlling shareholder of Meralco, we're not quite certain whether the pole arrangements will stay or at what cost we'll have to pay for it. We want to have access to the fiber optic of Meralco for PLDT and so forth and so on. So there are both positive and negative reasons for the investment.

Now to the extent that PLDT's cash cost with respect to the Meralco investment, which is including the miscellaneous costs being PHP96 per share, and considering where the share price is and considering the earnings per share of Meralco last year, and then of course the better earning prospects this year of Meralco, we think that it has been a, well, frankly, an excellent investment for PLDT and Piltel as a whole.

Now there are no investments contemplated in the horizon precisely because, as I indicated earlier, 2009 was a rather busy year for the Group in terms of what it did and therefore incurred a modest level of incremental indebtedness. And that's something we don't like to see in 2010.

I guess phrased differently, how do we see this as translating to incremental cash on the part of PLDT, especially given that by injecting it into Beacon you basically forego the dividends in favor of debt servicing?

That is true. I think in the first -- in the initial years of the investment, to the extent there is some debt, there is debt of Beacon, the dividend flows from Meralco to Beacon to Piltel will get attenuated by the requirement to service the debt. The give-up there is the fact that the ability to control Meralco has been enhanced by putting the shareholding together. The choice would be to stay at 20% and get stranded and have no influence at all over the affairs of Meralco and be precisely where you were if your investment had been zero.

So the give-up is that to join up with Metro Pacific, so that your collective securities is assured, and therefore your investment position is protected, particularly with respect to your main telco business. So your choice would be to spend another 20% at a high price, certainly a price higher than [PHP96], or to join up with someone like Metro Pacific so that you don't have to shell out. I think there will be a bit of sacrifice in this initial two to three years where your cash flow drops. But we foresee that as the debt levels in Beacon itself gets reduced, then your cash flow will get restored.

From an earnings standpoint, it will be accretive nonetheless to PLDT in terms of overall earnings and EPS.

On the effects of the typhoons on the mobile business, it was not as bad as the effect on the Fixed Line. As you may know, the typhoon Ondoy affected a part of Metro Manila area. And Pepeng was at I think somewhere in Central Luzon. And the base stations that went down were restored in two to three weeks' time. So roughly the effects therefore, in terms of revenues for those areas, were about two to three weeks, and in those particular areas only.

On the Fixed Line side, the effect was longer because certain equipment were submerged and the restoration was, I think, roughly about 60% was done within a month's time and the balance went on for another two months.

And if you were to compare the growth rates --.

With regard to the --.

Sorry. If you were just to compare the growth rates in areas outside of those affected by Ondoy, are they actually materially faster?

What was that again? Can I have the question again, please?

Sorry. If you were to compare the growth rates of both the Mobile and Fixed Line operations outside of the areas affected by the typhoons and the floodings, would we have seen them to be materially faster? I'm just trying to get a sense of what the normalized growth would actually be.

Roughly the growth rate of the Fixed right now for '09 is 4% on revenues and on the Mobile it was 2%. If the Fixed were affected higher, to a greater extent, because the damage was long -- restored for a longer period, then the effect then of the Fixed was -- would have been -- the Fixed growth of 4% would have been higher. So that's all I can tell you.

And the 4% of Fixed growth is driven by increase in revenues on the corporate, basically, and the SMEs. And since this now accounts for roughly about 47% of the total revenue, this has more than offset the decline in the international long distance, the national long distance and, to a certain extent, the slight decline in the LEC revenues because of the bundling offers.

Arthur, your other question was the Broadband strategy and the expectations with respect to margins and penetration. Is that correct?

Yes, that's correct. Thank you.

There are no questions at this point. And that concludes the question-and-answer session.

If you really want, the World Bank has prepared a PDRA, post disaster results analysis, of Typhoon Ondoy and Pepeng. And if you really want to get scared, if you believe the numbers, the total damages and losses to the economy out of those two typhoons was about, if I recall correctly, about PHP205b. About PHP80b represent damages to properties. And about PHP125b represent losses, losses from lost revenues, losses from inventories, losses from crops in the field, etc., etc. So now I can go back to the report, because it was a very phone-book thick report, and look at the broadband and the effect on broadband lost revenues and send it to you. It may be better to send you the full report.

Well, thank you very much for that. Actually my question a while ago on that one was basically I was just trying to figure out what percent of the market was related to Luzon. And if you were to look at maybe besides the now growth how fast it would have been just to get a normalized scale for growth for 2009?

It's all speculative. We really don't know. Frankly, at the end of the day, we really don't know. We could give you numbers, but they're all speculative. And they're gone.

And, by the way, it will happen again this year. I think we'll have typhoons. The extent of the gravity of the typhoon or typhoons, we can never predict. So we don't know. Right now we're in the midst of a drought. What's the impact on our business? Well, I have no idea. We're trying our best to drive the revenues as high as we could. As to what could have been if God were to be more cooperative, well I'm afraid he's not texting us what the numbers are.

Understood. Thank you very much.

Thank you.

Operator, any other questions?

Yes. Our next question will be coming from the line of Vikas Gupta from JP Morgan. Please go ahead.

Hi. Thanks for the call. I have two questions. The first one would be what kind of browsing speeds can a SurfTV product support as compared to the speed on dongles?

And the second one is am I right in thinking there would be a one-off gain included in 2010 P&L for 13.5% Meralco stake sale to Beacon Electric?

Vikas, was it browsing speed enjoyed compared to -- by SurfTV?

As compared to speeds of normal dongles.

That would be the same because the SurfTV, the modem is SIM-enabled. And therefore it partakes with our HSPA, our 3G and the rest of our wireless broadband platforms.

Okay.

On your second question, I wish I could say there was a gain but there is none, basically because the Beacon will be essentially a joint venture, 50/50 owned between Piltel and MPIC. And both will equity account for Beacon's earnings. So because of the joint venture nature of the entity, then there's no gain being recognized upon the transfer of the Meralco shares. What essentially will happen is that the original carried value we have of the Meralco shares will effectively be our carried value for our investment in Beacon.

Okay. Thank you. Thanks a lot.

Any other questions, operator?

There are no questions at the moment ma'am.

Any further questions from those present here at the hotel? If there are no further questions, we'll have the operator read the replay information before we hand the floor back to Mr. Pangilinan for closing remarks.

Well thank you again for joining us this afternoon. First quarter results on May 13. That's a Thursday, no?

Thank you. And that concludes the question-and-answer session. This conference will be available on a 24-hour instant replay starting today, daily until March 17, 2010. Replay information 3pm call. International caller number 852 3018 4317. US toll-free 1 800 945 6632. Pass code is 1017. Conference leader is Melissa Vergel de Dios. And that concludes today's conference. Thank you for your participation. You may disconnect your line at your own time. Thank you.