PLDT Inc (PHI) 2010 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to the PLDT conference call to discuss the Company's first-quarter 2010 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 Mr. Nazareno. Please go ahead, thank you.

I will turn it over to Melissa first.

Good afternoon. Thank you for joining us today to discuss the Company's first-quarter 2010 financial and operating results. As mentioned in the conference call invitation, today's presentation is posted on 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, namely Mr. Poly Nazareno, President and Chief Executive Officer of both PLDT and Smart, Mr. Chris Young, Chief Financial Adviser of PLDT, Ms. Anabelle Lim Chua, SVP Treasurer of PLDT and Chief Financial Officer of Smart, Mr. Doy Vea, Smart's Chief Wireless Advisor, Mr. Olan Pena and Mr. Bong Mojica.

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

Good afternoon, ladies and gentlemen. Thank you for joining us this afternoon. Let me now present to you PLDT's financial and operating results for the first quarter of 2010.

When we announced previously our full-year results, we indicated then that 2010 would be a challenging year for the business, given industry development. Our first-quarter results bear evidence of the impact of these anticipated changes in market dynamics and the strengthening of the peso.

Service revenues for the first quarter of 2010 declined by 1% to PHP36b compared to PHP36.4b in the first quarter of '09. However, at a constant exchange rate, our consolidated revenues would have increased by 1%.

EBITDA for the first quarter 2010 declined by 3% year-on-year to 21.2b with EBITDA margin lower at 59% compared to the same quarter last year, at a similar level for full year of '09.

Reported net income for the first three months of 2010 increased by 19% year-on-year to PHP11.4b.

Core net income grew by 3% to PHP10.5b from PHP10.2b in the first quarter of '09.

This translates to earnings per share of PHP55.52 for the first quarter this year, compared with PHP53.98 pesos in the same quarter of '09.

The peso closed at PHP45.29 against the US dollar at the end of March 2010 compared with PHP48.42 at the end of March '09 or a 6% appreciation year on year. The average peso/dollar exchange rate for the year was PHP45.71, an appreciation of 6% versus last year.

We shall now go through these results in greater detail.

Core net income for the first quarter of 2010 grew by PHP0.3b or 3% to PHP10.5b compared with PHP10.2b for the same period last year. The increase was on account of the combined effect of our equity share in the earnings of Meralco, reductions in non-cash operating expenses, income taxes and minority interest, offset by higher net financing costs and cash OpEx.

Our reported income for the first three months of the year was higher by 19% at PHP11.4b year on year. We recognized PHP1.3b of net ForEx and derivative gains in the first quarter compared with a PHP900m net loss in the same period last year.

On slide three, our consolidated service revenues registered a modest 1% decline to PHP36b in first quarter 2010, largely due to the combined effect of a 3% increase in voice revenues, particularly in cellular resulting from the recent introduction of new unlimited voice offers and the growth in inbound international call volumes; a 4% decline in data and ICT revenues, which includes a 13% decline in cellular data revenues largely as a result of the decline in tax revenues.

This was partly mitigated by the continued strong broadband and Internet revenue growth of 22% and a 15% increase in corporate data revenues.

Approximately 28% of our total service revenues are directly or indirectly linked to the US dollar, against which the peso appreciated by 6% year-on-year. Had the peso remained stable, our service revenues would have increased by 1% year on year.

Reflecting results of initiatives on cost control, cash OpEx in the first quarter increased by only 1%, mainly selling and promotions and rent expenses.

EBITDA margin for the first quarter stood at 59%, similar to that of the full year '09 but declined versus the 60% margin for the first quarter '09.

For the first quarter, our Wireless margin stood at 61%, Fixed-line at 49% and ICT at 14%.

Consolidated EBITDA improved by 4% quarter on quarter to PHP21.2b but declined year on year by 3%.

Our CapEx guidance for 2010 is PHP28.6b or approximately 19% of projected 2010 service revenues.

Of this amount, about PHP5.2b has been spent in the first quarter; PHP2.4b was invested in the Wireless network, including the Red Mobile network to accommodate increased voice traffic; PHP2.7b was invested in the Fixed-line where the largest CapEx item was for the NGN network. About PHP100m was CapEx for our ICT business.

Our free cash flow of PHP12.8b for the first quarter is a 22% increase over the PHP10.6b in first quarter '09. The PHP4.4b increase in cash from operations more than offset increases of PHP1.3b and PHP0.5b in CapEx and net interest, respectively.

Approximately PHP26.3b of common dividends were paid in April 2010.

On the next page, the Group's net debt stood at $1b at the end of the first quarter of 2010 with net debt-to-EBITDA of 0.5 times. Adjusting for the PHP26.3b paid out as common dividends in April, net debt would have been $1.6b and net debt-to-EBITDA at 0.9 times.

PLDT's debt profile remains healthy with maturities well spread out. Total dollar-denominated debt has declined further to 46% from 48% at the end of '09 as we continue to tap the local credit market. If we take into account our hedges, peso loans and dollar cash holdings, only 22% of our debt remains unhedged.

Before we discuss the different business segments in greater detail, I would just like to describe the operating environment we contended with in the first quarter of 2010. Consumer wallets were impacted by the peso appreciation which in turn dampened the peso equivalent from OFW remittances.

In addition, consumers felt the pinch of the high cost of power resulting from the drought and the consequent power shortage. Expectations were high that election spend would provide a boost to consumer spending. However, election spending was allocated differently. More funds were channeled to TV and radio ads and campaigns made greater use of social networks in addition to SMS.

The offshoring and outsourcing industry remained strong and the growth momentum of SMEs was sustained. The telco industry on the other hand was impacted by the -- by several significant developments. In the Wireless arena, the multi-SIM phenomenon continued to grow as subscribers picked and chose from various on-net promos. The popularity of bucket and unlimited promos gained further strength. Telcos introduced bucket and unlimited voice plans to stimulate the undertapped potential from voice.

The Fixed-line businesses devoted greater effort to courting corporates and SMEs, resulting in a shift in customer base away from one that was previously predominantly residential or individuals.

Now, for more detail on the different businesses.

Broadband continues to surge forward. At the end of March, PLDT Group's combined Broadband subscriber base grew to 1.85m of which more than 1.2m are Wireless subscribers and 590,000 are DSL subscribers. This represents a combined market share of nearly 70% of the Broadband market.

SmartBro added approximately 188,000 subscribers in the first quarter while DSL added more than 30,000 subscribers. Of our Wireless Broadband subscribers, 61% or around 769,000 of our subscribers are pre-paid Plug-it subscribers while the balance are Canopy subscribers.

Total revenues from the Broadband increased by 22% year on year to PHP3.9b, which now represents 11% of total service revenues up from 9% at the end of '09. Wireless Broadband revenues grew 23% while DSL revenues were up 24%.

Our lead in Broadband can be attributed to the continued introduction of innovative Fixed-line and Wireless offers combined with a competitive advantage resulting from the extensive investment in a robust network.

On the next page, the combined Smart and Talk N' Text subscriber base expanded to 43.2m at the end of the first quarter 2010, growing by 17% year on year. Net adds in the first quarter were 1.9m subscribers.

Of the 1.9m net adds, 1.3m are Buddy subscribers, about 400,000 are Talk N' Text subscribers, while about 200,000 are Red Mobile subscribers. Smart maintained market leadership in both subscriber and revenue terms at approximately 55% market share and 59% market share, respectively.

Net blended ARPU declined by 16% year on year to PHP167, driven by the growing popularity of bucket and unlimited offers, coupled with a higher level of multiple SIM ownerships.

In March 2010, we introduced Red Mobile Unlimited as our response to capture subscriber spend on second SIMs.

Traffic volumes in our cellular networks are higher with text volumes rising by 24% and voice minutes dramatically by 310%. Yields have declined to PHP0.13per text and PHP1.22 per minute of voice on higher traffic volumes.

On the next page, the revenue mix of our Wireless business has shown significant changes. Not since the first quarter of 2005 have we seen cellular voice revenues higher than revenues from cellular data or text. Voice revenues at PHP10.7b for the first quarter of 2010 grew by 13% compared to the same period in 2009. Voice revenues now contribute 49% of total Wireless service revenues, up from 43% last year.

Call volumes have registered a dramatic year-on-year increase of 310% as a consequence of our recent introduction of various unlimited voice services to accommodate the resulting increase in voice traffic, we invested in the development of the Red Mobile Network.

In contrast, text revenues of the first quarter of 2010 declined by 14% year on year to PHP10.4b as lower yields resulting from bucket plans and unlimited offerings offset the 24% increase in text volumes.

Wireless Broadband revenues for the first three months of 2010 grew 23% to PHP1.6b compared to the same period last year.

The growth of revenues from voice and Wireless Broadband covered reductions in revenues from mainstream text. Excluding revenues from our satellite business, which declined due to the disposal of our satellite transponders, Wireless Service revenues would have been flat year on year.

EBITDA for the first quarter decreased by 4% to PHP14.4b compared with PHP15b in the same quarter last year due to lower service revenues and the 3% increase in cash operating expenses.

Margin expectedly declined to 61% from 63% in the first quarter '09 and 62% in the full year '09 given the margin dilution resulting from the increasing contribution from the relatively lower margin Wireless Broadband business.

On the next page, Fixed-line service revenues improved by 1% to PHP12.9b at the end of March 2010, resulting from the combined effect of the growth in corporate data and DSL revenues, flat local exchange revenues and net declines in international long distance and national long distance.

Despite the increase in the number of postpaid billed lines, our LEC revenues are flat as a result of bundled voice and data services.

Decline in call volumes caused our NLD revenues to fall while the unfavorable impact of the peso to the US dollar exchange rate and the lower average settlement rate for inbound international calls negatively impacted our ILD revenue streams.

Corporate data and DSL revenues continue to grow on two fronts. Domestic revenues are higher as a result of the continued demand from the local offshoring and outsourcing industry. International data service revenues, on the other hand, have increased due to the higher I-Gate revenues from Smart's higher usage and recurring monthly charges.

Revenues from corporate data and DSL now account for 45% of total Fixed-line service revenues compared to only 40% last year.

The growing contribution of DSL to total service revenues is manifested in the lower EBITDA for the first quarter, which is lower year on year by 4% at PHP6.3b due to higher cash operating expenses principally for maintenance, rent and selling and promo expense.

The Fixed-line EBITDA margin of 49% for the first quarter of this year is in line with the full year '09 margin but is lower compared to the 52% margin for the first quarter of '09.

Although service revenues for the first quarter of 2010 were flat compared to the fourth quarter of '09, EBITDA margin grew by 27% on account of a 13% decline in cash operating expenses.

Slide 12 contains highlights of our ICT business whose operations have continued to show significant improvements. Service revenues for the first quarter of 2010 increased by 1% year on year to PHP2.63b and accounting for about 7% of total PLDT Group service revenues.

The growth of the data center business remained strong with a 65% improvement in service revenues over the first quarter last year, driven by the continued increase in contracts for co-location and server hosting, disaster recovery and business continuity services.

Our BPO business, particularly in the publishing and medical billing verticals, registered a modest 1% improvement versus last year.

The call center unit recorded a 15% reduction in service revenues for first quarter 2010 compared with first quarter '09, largely due to decrease in domestic and international dollar-denominated service revenues.

ePLDT's EBITDA for the first quarter amounting to PHP369m is an 82% increase year on year.

EBITDA margin likewise improved to 14% for the period compared with 8% in first quarter '09 and 12% for the full year '09. This was a result of the increase in service revenues supplemented by a 7% decrease in cash operating expenses largely due to lower compensation and benefit expenses resulting from a headcount reduction by nearly 1,000 staff.

The reorganization of ePLDT is underway, which will result in two separate business groups, SPi Global Solutions which is our combined BPO and Call Center businesses to be headed by Maulik Parekh and ePLDT where our data center, Internet and online gaming operations would remain to be headed by Beth Lui. Both Maulik and Beth are industry veterans who we are confident will propel our BPO and ICT businesses to new heights.

Let me now share with you a few highlights on Meralco. Note that our first-quarter financial results reflect the equity accounting of our 20% share in Meralco's business.

Meralco's consolidated service revenues for the first quarter of 2010 grew by 34% to PHP61.1b, resulting from a 14% increase in energy sales, an increase in its customer base to 4.8m, as well as higher average pass-through generation and transmission charges.

The first-quarter costs and expenses of PHP58.1b are 32% higher year on year due to the higher cost of purchased power. Meralco's system loss performance of 8.21% is below the new system loss cap of 8.5%, previously at 9.5%.

EBITDA of PHP5b was registered for the quarter, representing a 60% increase compared with the same period last year.

Meralco's core and reported income for first quarter 2010 each amounted to PHP2b for a year-on-year growth of 135% and 127%, respectively.

This year's financials will include the impact of tariff increases approved under the performance-based rate settling mechanism or PBR, namely the PHP0.27 per kilowatt hour price increase approved for '09 as well as the PHP0.26 per kilowatt hour price increase approved for 2010, which would be billed starting April 2010.

Following its recently approved dividend policy, Meralco declared a dividend of PHP3.15 per share paid in May 2010. This dividend is equivalent to 50% of 2009 core earnings per share.

Last May 7, Piltel secured formal approval from its shareholders to contribute 154.2m shares of its Meralco shares as equity contribution into Beacon Electric, which Piltel now co-owns with Metro Pacific Corporation or MPIC.

Piltel will continue to hold 68.8m Meralco shares indirectly and the combined Piltel, Beacon and Lopez ownership in Meralco now stands at 47.5%.

The prospects of our investment in Meralco continue to look brighter. In addition, our joint teams have made significant progress in pursuing the various areas of synergy from both businesses.

Lastly, we have fine-tuned our guidance for 2010 to take into account developments in the first five months of the year.

Service revenues are expected to grow 2% to PHP148b compared with PHP145.6b in '09. The modest growth takes into consideration the significant boost from elections, the impact of the peso appreciation and the lower revenues from our satellite business due to the disposal of our Mabuhay satellite transponders.

We expect EBITDA to increase by 1% to PHP87b from PHP86.2b in '09, with margins steady at 59%. To achieve this we intend to manage our costs very closely to supplement revenue growth.

Core income for 2010 is forecast to be slightly higher than the PHP41.1b recorded in '09 with increases in revenue, the contribution from Meralco and lower taxes being somewhat reduced by higher financing charges.

Our guidance for 2010 CapEx remains at PHP28.6b or PHP0.5b, higher than last year's CapEx, as we continue to invest in the network to support broadband, higher voice usage on top of the maintenance CapEx.

We remain committed to our dividend payout of 70% of core earnings with a look back at the end of the year.

The recently concluded elections point to a peaceful transition of government in the second half of 2010, which promises a favorable environment for Philippine business. Although the challenges for the telco industries are expected to remain, we are confident that we will be able to surmount these challenges and deliver a satisfactory performance to our shareholders.

Thank you for joining us this afternoon. We are now ready to take your questions.

Thank you, sir. (Operator Instructions). Our question will come from Sachin Salgaonkar from GS.

Hi, thank you for the call. I have four questions.

First, can you give more color on the reasons for the decline in your service revenue guidance? As in which division largely contributed to this decline, or is it more because of macro factors or higher competitive dynamics?

Secondly, PLDT's employee costs were down 7% YOY. Can you please give us some color as in what caused the decline and what should we expect going forward?

Thirdly, your voice minutes increased meaningfully and mainly I guess this is because of the Red service uptake. Now is this more of a structural trend we are seeing, as in where consumers are using voice more than texting more? Or is it more like you're gaining traffic as you reduce some of the traffic going to the third operator?

And lastly, what benefits could we see after the reorganization or restructuring of ePLDT? I guess your voice business is underperforming some of the peers around in the Philippines, so could we expect a turnaround there? And are the 14% EBITDA margins which we saw in Q1 sustainable going forward? Thank you.

Related to the growth -- related to the revenue figures, the reason for the decline in revenues is in the first place, for the cellular -- on the cellular side a 13% decline on the data or text revenues. And this was offset by 22% growth in broadband and Internet revenues and a 15% growth in corporate data revenues. And also we had a negative impact on the ForEx. Had the ForEx rate remained the same, our revenues overall for the whole Group would have increased by 1%.

On top of that, the cellular traditional revenues of voice and text plus broadband remained flat actually. But the negative 1% was caused by our satellite transponders being sold out which had revenues in '09 and are no longer around for the first quarter 2010. So that is the difference in the revenues.

You mentioned about the increase in volumes. Our text volume increased. We're now averaging about 1.2b messages a day versus about 950m messages a day last year. So volumes have increased by about 24%. But the yield for SMS has gone down from about PHP0.18 per message to PHP0.13 as of today. The reason for that is because of the popularity or the increased preference of our subscribers for the bucket-price promos and the unlimited service offerings that we have for text messaging.

You also mentioned about the increase in voice revenues. Our voice revenues went up by 310% but our -- sorry, the voice traffic went up by 310% but the revenues only increased by 13%. And the reason for that is, again, the bucket-price voice offers that we have and the launch of unlimited which we had to do due to competitive pressures.

On the question as to why declining employee costs, there are two principle contributors to that. One is the level of pension benefits is significantly lower compared to last year, and it basically takes off from the actuarial review that has been done which lags by a year. So in '09 we were basically taking off from the '08 year-end value of the pension assets.

And if you recall the financial markets had taken a downturn in the second half of '08, so therefore, the level of mark-to-market losses in pension assets affected the level of the valuation for the pension fund. But in '09 there was obviously a recovery in financial assets as well as the gain we recognized from the sale of the Meralco shares, the beneficial trust fund.

The second contributor to the decline in employee costs is a lower level of incentive plan expenses recognized this year relative to what was sold last year.

Okay. There was a question on ePLDT.

Does that conclude your questions, sir?

Actually I have one follow-up question which is, I understand the voice traffic is increasing due to unlimited voice offers. But my question was more on the side of are consumers getting addicted now to talking more on voice and could we see a structural change in the Philippines market?

And secondly, the question which I had was -- on ePLDT is what kind of reorganization benefits we could see at this division once the reorganization is complete?

Actually voice volumes have gone up together with SMS volumes. So one cannot say that they are getting addicted to voice just because the unlimited offers are there. But definitely I think for the first time in five years our voice revenues are now higher than our SMS revenues. So in effect -- but not that much higher though. Our voice revenues account for 49% of our revenues in the cellular and the text revenues account for about 48%. So there's a slight increase, a slight gap between the voice and the text.

I would say that this is largely due to the unlimited offers on voice and also the text yields have gone down. And while the volume has increased and therefore usage was there they were taking advantage of all these bucket-promos and unlimited offers. So I don't think one can conclude that they're getting addicted to voice now. I think they're getting addicted to both.

Okay.

The benefit on the new structure for ePLDT, number one we're bringing in people who are quite qualified and well known in the industry and have a track record of achievement in their fields. And we feel that by putting together both the BPO and the contact center business, or the call center business, we would be able to get -- achieve the focus that we want on the outsourcing part of the business while also we would like to focus on the ICT part of that business. And that's the reason why the structure is done that way.

Our data center business is the fastest growing business actually in the ePLDT portfolio. It has shown an increase in the first quarter of over 60% in terms of revenues and it continues to be profitable, very high EBITDA margins in the 40s. And therefore we would like to put more emphasis and focus on this. And by separating the leadership and management we hope to achieve better growth and bring the businesses -- both businesses to higher levels or greater heights.

Okay, thank you.

Our next question will come from Luis Hilado of HSBC. Please go ahead.

Hi, good afternoon, thanks for the call.

I just had one question that's regarding your CapEx. You've already increased it this year. But I was just wondering given the trends in voice, SMS and now Wireless data, do you feel there's some upside due to that CapEx number? Or alternatively if you didn't see this increase in volumes would your CapEx forecast for this year been lower?

Thank you for the question, Luis. We don't see any increase anymore with the PHP28.6b CapEx that we have programmed. That's roughly about PHP16.3b or PHP16.4b for Wireless, about PHP11b for the Fixed and about PHP1b for the ICT. We don't see that changing because of the market dynamics changing. In fact we have projected that this would be in sync with how the market is evolving. And that's the reason why we have put in place CURE network that would capture, or the Red Mobile network that would capture the unlimited offer for this space in unlimited offers for both voice and text.

Thanks a lot.

Thank you. Our next question will come from Chate Bencha of Credit Suisse. Please go ahead.

Hello hi, thank you very much for the call. I have three questions.

The first question is on the cellular revenue side. Given the exponential increase in the volume but not so on the revenue side, do you think your current offers are too aggressive? Would there be any adjustment on that one do you think?

My second question is on your EBITDA margin. You mentioned two things in your guidance. The first thing is the higher subsidy level, how higher would that be? And the second thing is on the cost control. What's the cost item that you are looking at in particular for the cost control program?

And lastly, given the slowing growth trajectory do you think that there's any acquisition opportunity to enhance the growth of the Company? Thank you.

With regards to the huge increase in voice traffic and the relatively low increase on revenues for voice, that's largely because of the bucket-priced offerings that we have for the prepaid in the cellular side, and also the unlimited offers. We feel that we have to continue to do that as a competitive response to the demands in the market.

Right now we're seeing that the subscriber base on the unlimited space is not really growing and their usage are coming down. In other words, our minutes of use on the unlimited space is going down dramatically. So we feel that if we continue on that it will self-adjust and that is the current trend that we are looking at on the voice side.

I want also to mention that the reason why we have a network that specifically targets itself to capture the unlimited space is so that we are able to manage the load on the -- excess load on voice because on this network we are able to deliver a different set of quality standards without affecting our normal subscribers.

With regards to subsidy on the prepaid dongles, that will be adjusted. We did that. We had an aggressive program in the last six months to seed the market. We feel that it is now time to sort of tease that out and we are now back to normal levels in terms of subsidies at this point in time. Actually we are no longer subsidizing at this point in time.

With regards to the cost items, there are several areas we're looking at. The use of (inaudible) for the network is one area that we are pursuing. We're also trying to modernize our (inaudible) so that we can manage it more (inaudible) from the [sub-switches] instead of the large ones. And then in terms of managing the data traffic there is now an ongoing proofing of concepts for offloading of the data traffic from the Mobile network to the Fixed network.

We are not in discussion with any acquisitions at this point.

Okay, thank you.

Does that answer your questions?

Yes, thank you.

(Operator Instructions). Our next question will come from Rama Maruvada from Macquarie. Please go ahead.

Hello, good afternoon. I have one question which is to do with our data revenues. If you could just give some color in terms of how we should be thinking about the data revenues going forward? There's a significant downward trend for both you as well as Globe this quarter. What is the interplay here between voice and data and, more importantly, how should we think about data revenues going forward?

Well, in terms of data revenues they'll be flat overall for the entire Group. The data and ICT revenues -- this is really more of data than ICT, declined by 4% and mainly that is due to a 13% decline for the cellular data or text revenues. And roughly that is a decline which is brand related and which we have now tried to correct with recent programs that would improve that side of the business. And we hope that in the ensuing months we will be able to bring up that gap in revenue with a particular brand.

We also have a 22% growth in broadband and Internet revenues. That will continue to grow at a similar pace and the other part is the 15% increase in corporate data revenues. As you know the Philippines is now a preferred -- is a location of choice for outsourcing and off-shoring, in the outsourcing and off-shoring business, and that continues to give us business for corporate data and international data. So that will continue to increase.

I was more referring to the texting revenues on the cellular data in particular.

Yes, as I said, the texting revenues, the volume has gone up by 24% but the yield has gone down from PHP0.18 per message to PHP0.13 because of the popularity of bucket-pricing and the unlimited offers. Until the competitive dynamics change, that will continue.

Yes, understood. Thank you.

(Operator Instructions). That concludes the question and answer portion. Before I turn the conference back 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 May 28, 2010. International Caller number 852 3018 4341. US Toll-free 188-566-0349, pass code 4911. The conference leader is Miss Melissa Vergel de Dios. I will now turn the conference back to Mr. Nazareno for any additional or closing remarks.

On behalf of my colleagues who are here with me I wish to thank you all for joining us today. And I look forward to the next conference call which is on August 3, to discuss our first-half results. Thank you very much.

That concludes today's conference. Thank you for your participation. You may disconnect your lines in your own time.