PLDT Inc (PHI) 2010 Q3 法說會逐字稿

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

Good afternoon and thank you for joining us today to discuss the company's nine-months 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 at www.pldt.com.ph under the Investor Relations Section.

Today's presentation will now be presented by the PLDT Group's management team, namely Mr. Poly Nazareno, president and Chief Executive Officer of PLDT and Smart, Chris Young, Chief Financial Adviser to PLDT, Annabelle Lim Chua, SVP, Treasurer of PLDT and Chief Financial Officer of Smart; and Attorney Ray Espinosa.

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

Good afternoon. Allow me to share with you PLDT's financial and operating results for the first nine months of this year. In our shareholder's meeting in June this year, we said that 2010 to 2012 will be critical years in the Group's transformation from a traditional telecom to operator to a multimedia communications group. The consequences of undergoing this transformation as well as the more competitive operating environment particularly in the wireless business in addition to the strengthening of the peso are evident in our results for the first nine months of 2010.

However, while our service revenues as at end September 2010 decreased by 1% to PHP106.7b and EBITDA for the first nine months of this year decreased by 3%, EBITDA margin remained at 60% and reported net income for the first nine months of 2010 increased by 7% year-on-year to PHP32b and core net income grew by 2% to PHP31.4b. This translates to earnings per share of PHP166.36 for the first nine months of 2010 compared with PHP163.70 last year.

The peso closed at PHP43.92 against the US dollar at the end of September 2010 compared with PHP47.42 at the end of September 2009 for a 7% appreciation year-on-year. The average peso/dollar exchange rate for the period was PHP45.60, an appreciation of 5% versus the same period last year.

On the next slide, our net income for the first nine months of 2010 increased by PHP400m or 2% to PHP31.4b compared with PHP31b for the same period last year. PLDT's diversification into other telco related business are beginning to bear fruit with the improvement in core net income resulting from the positive impact of our investment in Meralco, the contribution from ePLDT as well as the lower tax charge.

Our reported income as of the end of September 2010 was higher by 7% year on year at PHP32b. The difference between our core and reported net income for the period was primarily due to a net foreign exchange and derivative gain of PHP1.2b.

Next slide, PLDT's consolidated service revenues of PHP106.7b at the end of September 2010 is 1% lower year on year. A closer look at the underlying revenue mix will show the ongoing transition of revenue streams with the lower traditional sources being replaced by the growth of new revenue streams.

For the first nine months of 2010, consolidated service revenues reflected the combined effect of a 20% increase in combined fixed and wireless broadband revenues, a 12% growth in cellular voice revenues which includes a 24% increase in domestic voice revenues, an 18% rise in revenues from fixed data and other network services to third parties. However, these were offset by a 13% reduction in the cellular tax revenues, a 34% decline in the national long distance revenues, and a 16% decrease in ILD revenues.

In addition, our service revenues were also impacted by the strengthening of the peso during the period which resulted in reduced service revenues of PHP1.5b as well as the decline in revenues resulting from the sale of our satellite business.

Consolidated EBITDA as of September 2010 decreased by 3% compared with the same period last year due to the change in revenue mix and slightly higher cash operating expenses. Had the peso remained stable, EBITDA would have been higher by PHP1.2b. EBITDA margin for the period stood at 60% with wireless margin at 63%, fixed line at 49% and ICT at 14%.

On the next slide, we generated free cash flow of PHP32.8b for the first nine months of 2010, lower than the PHP35.3b in the same period last year. The reduction of PHP2.5b was primarily on account of the PHP2.2b decrease in cash from operations and the higher net interest of PHP700m offset by a PHP1.2b decline in CapEx.

Almost PHP41b of dividends were paid as of the first nine months of this year including the interim dividend for 2010 of PHP78 per share. Our debt profile as of September 2010 remains healthy with net debt at $1.5b, net debt to EBITDA of 0.8 times and maturities well spread out. 44% of our total debt is in US dollars. Taking into account our hedges, peso loans and dollar cash holdings, only 22% of our debt remains unhedged. 74% our debt are fixed rate loans.

On the next slide, we expect CapEx for 2010 to amount to PHP28.6b or about 20% of projected 2010 service revenues. CapEx for the first nine months of 2010 was PHP16.9b compared with PHP18.1b last year. Of the PHP16.9b, wireless CapEx accounted for PHP9.1b, fixed line for PHP7.3 with the balance for ICT.

This year's CapEx include investments for increased capacity and coverage in support of higher broadband and voice usage including the build-out of our second network for low cost voice delivery. We have also started to invest in the modernization of our core and access networks to improve operating and cost efficiencies as well as in the continuing upgrade of our fixed line to the next generation network. PLDT has made substantial investments to build network capacity to support both data and voice usage which have grown exponentially in recent years.

On the next slide, broadband continues to push ahead with PLDT maintaining market leadership in both subscribers and revenues. PLDT Group's combine broadband subscriber base crossed the 2m mark representing net adds of over 378,000 subscribers. Plug-It prepaid subscribers grew by over 300,000 at the end of '09 while DSL subscribers increased by about 71,000.

Also, broadband revenues for the Group grew by 20% to PHP12.9b at the end of the first three quarters of this year and now account for 12% of total service revenues. Wireless broadband revenues registered a 24% growth year-on-year while DSL revenues improved by 20%. Our wireless broadband revenues include about PHP821m in mobile internet revenues which grew 23% from PHP666m in the same period last year.

A slowdown in net adds during the third quarter resulted from the upward adjustment in dongle prices. This highlights the sensitivity of broadband take-up to the affordability of access devices. As such, we are studying initiatives that will address this in order to further stimulate broadband take-up.

Next slide, our cellular subscriber base stood at 44.1m at the end of September 2010 representing net additions of 2.8m from year end 2009. This includes a net reduction of 1.2m subscribers in the third quarter due to the expected post-election churn and the reduction in the Red subscriber base to better reflect active users of the service.

Notwithstanding the price competitive and market share sensitive operating environment and the impact of the peso appreciation, our wireless business registered respectable results for the first nine months of 2010. Wireless service revenues for the period registered a 1% decline to PHP70.4b. Excluding satellite operations and the impact of peso appreciation, revenues would have been higher by PHP600m or 1% compared with the same period last year.

The confirmation of our wireless business is evident in the change in revenue mix. Wireless broadband and cellular voice revenues registered year-on-year increases of 23% and 12% respectively, cushioning the impact of the 13% decline in cellular text revenues. Although the number of SMS messages grew 25% year over year, yields are now as low as PHP0.13 per SMS due to bucket and unlimited plans.

Voice revenues now contribute 49% to total cellular service revenues overtaking the revenue contribution from SMS. The emergence of voice as a strong revenue source is a result of our introduction of various unlimited voice services which has driven voice traffic higher by as much as 140% year-on-year.

In anticipation of this, we put in place a second network to where we direct and contain the higher voice traffic arising from unlimited offerings. This allows us to preserve quality of service for our regular subscribers as well as serve voice using a lower cost network.

EBITDA for the first nine months of this year was stable at PHP44.3b with cost reduced from last year's level. Margin of 63% for the first nine months of this year was stable compared with the same period last year.

On the next slide, fixed line service revenues decreased by 4% year on year to PHP36.8b at the end of September, reflecting the interplay between our traditional and new revenue streams as well as the impact of the peso strengthening. Had the peso remained stable, service revenues would have been higher by PHP500m.

Our corporate data DSL service revenues continued to register growth driven by double-digit increases in revenue from our I-Gate, IP-VPN, and IP based services including DSL. Corporate data and DSL now contribute 45% of total fixed line service revenues compared with 42% last year. However, the year-on-year growth in corporate and data service revenues of PHP600m were more than offset by the PHP2b year-on-year combined decline in ILD and NLD revenues.

EBITDA for the first nine months of 2010 stood at PHP18.2b or a 10% decline year on year, largely due to the change in revenue mix, and slightly higher cash operating expenses. EBITDA margin of 49% is similar to that of the full year '09 margin, albeit lower than the 53% for the first nine months of last year.

On the next slide, significant improvements in our ICT business have continued into third quarter of 2010. Service revenues for the first nine months of 2010 stood at PHP7.9b or a 1% decrease compared with PHP8b last year, largely due to a decline in revenues from our customer relationship management or CRM business.

Both our BPO and CRM businesses were impacted by the appreciation of the peso. Had the peso remained stable, service revenues would have registered a 3% growth year-on-year. Revenues from our data center business crossed the PHP1b mark at the end of September 2010, having grown 34% year on year. This is accounted for largely by the increase in contracts for co-location and server hosting, disaster recovery, and business continuity services.

ePLDT's EBITDA for the first nine months amounted to PHP1.1b reflecting a 34% increase year on year. EBITDA margin likewise improved to 14% for the period compared with 11% in the first nine months of '09 and 12% for the full year of '09. This was largely due to a 5% decrease in cash operating expenses resulting from lower compensation and benefit expenses following a reduction in headcount.

The robust outlook of the Philippine BPO sector coupled with the reorganization of the ICT business resulting in consolidated BPO operations under STI Global promises a significantly improved outlook for our BPO business.

On the next slide, let me now cite few highlights on Meralco. Our financial results for the first nine months of 2010 reflect the equity accounting of our share in Meralco's earnings held directly by PLDT Communications and Energy Ventures, formerly Piltel, and indirectly, through PCEV's 50% ownership in Beacon Electric.

Meralco's consolidated service revenues as of the end of September grew by 32% to PHP188.9b driven by an 11% increase in energy sales and an increase in its customer count, higher average pass-through generation and transmission charges, and the upward adjustments to the distribution rate.

Costs for the period grew by 30% year on year resulting from the higher cost of purchased power. Meralco's system loss hit an all-time low of 7.78% compared with the new system loss cap of 8.5%.

EBITDA of PHP16.3b is a 28% growth year on year. Meralco's core and reported income for the first nine months of this year were PHP9.2b and PHP8b respectively reflecting a year-on-year growth of 80% and 61% respectively. These increases are largely due to the various tariff increases granted to Meralco under the performance-based rate setting scheme or PBR, also applied on a higher volume of energy sales.

Meralco's total CapEx as of the end of September 2010 stood at PHP5.1b, a 5% increase compared with PHP4.9b last year. Under its application for rate increase for the third regulatory period, Meralco proposed an annual CapEx of PHP12b for 2012 onwards.

Our confidence in the sustained improvements in Meralco's performance stands. PLDT continues to work with Meralco to identify mutually beneficial initiatives.

On the next slide, I would like to summarize the backdrop against which our results for the nine months as well as that for the month ahead should be viewed. PLDT has begun the process of transforming itself from a traditional telecom provider to a multimedia communications group with the most impact felt between 2010 to 2012.

As an added challenge, the transformation is being undertaken at a time when the operating environment has become increasingly price competitive and market-share sensitive particularly in the wireless arena.

As a consequence of the transformation, we expect to see the transition of our telco revenues accelerating the decline of traditional revenue sources such as those from cellular text, NLD and ILD and the growth of the new revenue streams including those from cellular voice, fixed and wireless broadband and corporate data network services.

This change in our revenue mix is putting significant pressure on EBITDA margins which make efficiency and cost control critical. For example, we have embarked on another manpower reduction program for our fixed line business and for the first time, an MRP or manpower reduction program of this magnitude for our wireless business.

Aside from returning cost savings that will result from a reduction of about 850 employees by year end, the MRP also provides an opportunity for us to align the skill sets within the organization with those necessary for the new technologies we are deploying.

On top of these challenges, and specific to 2010, our results were impacted by the peso appreciation and the decrease in revenues from our satellite business.

We will continue to invest in strengthening our network for coverage, capacity, diversity, as these are necessary to achieve the transformation and to further strengthen our potential for growth.

Notwithstanding all this, the diversification undertaken by the Group in recent years such as the investment in Meralco and ePLDT has been able to cushion the impact of these transitional changes and comparative pressures.

As a result, we have fine-tuned our guidance for 2010 as follows. Service revenues are expected to decline by up to 2% from PHP145.6b in 2009. We expect EBITDA to decrease by up to 2% from PHP86.2b in 2009 with margin at about 59%. Quarterly income for 2010 is forecasted to hit PHP41.5b, up 1% than the PHP41.1b recorded in 2009. Our guidance for 2010 CapEx remains at PHP28.6b as we continue to invest in the network to support broadband, higher voice usage on top of maintenance CapEx.

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

This ends our presentation. We are now ready to take your questions. Thank you.

Thank you. The floor is now open for questions. (Operator Instructions) Our first question will come from Goldman Sachs, Sachin Salgaonkar. Go ahead, please.

Hi, thank you for the call. I have three questions. Firstly, on wireless revenues, how much would you attribute to the QoQ decline to competition versus factors like post-election churn, etc? And, a related question is do you expect the seasonal growth in Q4 to be weaker when compared to the 4Q in the last few years as the typhoon has affected the harvest crop which is partly responsible for the season growth.

My second question is on EBITDA margin. Do you expect the trend of declining EBITDA margin perhaps to continue for a while due to the shift in revenue mix or do we expect it to be stable or slightly improved due to the benefit from efficiency and cost control?

And my last question is on CapEx. If I look, a part of your investments are into modernization or NGN which are not perhaps, time sensitive, so any plans to postpone them until the competition stabilizes just to preserve your free cash flow? Thank you.

On the first question which is regarding the subscriber base, our base on the cellular went down to 44.1m. That is down by 1.2m mainly from the -- due to the election churn which we foresee within the next -- which has happened in the last two months and in the next three months.

And also, the reduction of the base of our Red Mobile which is our unlimited brand offer on the second network and it is to reflect the active subscriber base that is existing in that network right now which is roughly about 380,000 subscribers. So this churn or this cleanup is really subscribers that are no longer topping up.

Sorry, just to follow up on that. Because if I look at your revenues, I mean the fall is slightly more than the decline in subscriber so I guess the ARPUs are also getting impacted. And my question out here was how much was competition responsible for impacting these ARPUs?

It's hard to say that because we don't know the figures yet of our competitors but if you judge it from the first-half results, you will see that the revenues have gone down but on a total industry-wide level, the whole industry went down in terms of revenues and our market share has been maintained. In fact, it was a little bit enhanced and for the first half, we went up to 59%. I would surmise that this end of September, our market share would have been sustained and so therefore, really in terms of revenue measure, we would have maintained our position in the market.

Maybe I can comment on the EBITDA, Poly. I think that the EBITDA development is quite consistent with what we had anticipated and what I think we had been communicating that as the revenue mix changes from a number of the legacy sources such as NLD, ILD and to an extent, that the cellular revenues through text come down. These are some of the more higher margin businesses of the group. We are seeing growth obviously in broadband, cellular voice, and on the fixed line, the data business continues also to go well but the margins there are not quite as high.

So I think we had been indicating that we would, over the next -- including 2010 through 2011 and 2012, see declines of maybe 1% to 1.5% in the EBITDA margin. That's why I think Poly did make the point in the presentation that managing the cost base across the organization is a very important initiative for us at the headcount level but also increasingly, at the network level as well.

There are many initiatives underway both on the wireless and fixed which are focusing on reducing our cost there but, yes, the general trend is that we would expect to see margin reductions of 1% to 1.5% over the next couple of years.

I didn't quite catch the question on the CapEx but we do not plan any reduction in the capital expenditure funds. I think we would continue to take the view that one of the major assets of both the wireless and fixed group is the network itself. It has the most extensive coverage, it is the most robust in redundancy and in terms of delivering quality of service, we think it remains the highest. So I think an important priority for us, again, as we transition from the legacy services to the more of a broadband data network, is to continue to invest in the network.

The fixed includes the NGN upgrade which we think will complete sometime towards the end of 2012 but there will also be continued significant investment in providing additional capacity across all of our wireless products. So actually if anything, we might slightly see for the full year, a slightly higher CapEx than the PHP28.6b, we might be getting up to the PHP29b seeing the growth opportunities in a number of these newer areas.

Okay. Thanks, Chris. I just wanted to follow up on this entire typhoon impact question. Do you see the impact of harvest crop drop because of the typhoon impacting the seasonal pickup in 4Q this year?

Well, as far as the number of impacting typhoons that we are experiencing this year, it is much lesser compared to last year actually. So of course, the output has been affected but this is in certain parts of the provinces that were hit mostly in Central Luzon.

Got it. Thanks.

Our next question will come from HSBC, Luis Hilado. Go ahead please.

Good afternoon and thanks for the call. I just have three questions. I guess in terms of just noticing on the fixed line side, the data revenue is down 12% q-on-q, so if you could give us some insight on whether that is because of demand [losses] or rather, competition?

And the second question is just regarding on (technical difficulty) of the presentation that you are starting initiatives about access device prices. If you could add more color there and what you are thinking of doing?

And last question is in terms of the NGN, as you have mentioned in the presentation, the OpEx is (technical difficulty) a bit by operating both the NGN and the legacy network. On a hypothetical basis, if you were able to switch to NGN today, what percent of OpEx would drop?

Maybe I can try the first and the third and then let Poly deal with the more difficult second one. The actual issue on the cost outlook and on the data for the fixed is the underlying third party business continues to grow quite robustly. You will see that we refer in the presentation to non-group data and DSL revenues growing by about 18%.

And there were some adjustments on the data in the third quarter which reflected some of the services which the fixed line was providing to the wireless business and to other parts of the group.

And rather than go back and do any restatement there, we really just took it through the third quarter presentation. So in terms of the third party business, I think we can reassure you that that continues to be fairly robust. We are seeing growth both on the consumer side and we are also seeing that the corporate data part of the business is also fairly robust so it is not indicative of a general weakness rather just us processing that adjustment through that forecast.

The third question, yes, it is interesting because your point is correct. We are at a position where actually, maybe we are suffering to some extent from it and that we are running many areas in parallel but what we have done, and I'm not sure if you are aware or not, we do have certain subsidiaries which operate in discrete areas. So we operate a telco in Clark, and another one in Subic, and in both areas, we have had a full upgrade to the NGN. And there, we are seeing quite good savings. Across the maintenance level, we have seen savings of anything about 20% to 25%.

And if you look at the breakdown, maintenance is the second highest cost in the fixed line network. So if we could see that level of decrease as we move to the full NGN network across the group, what would be a substantial saving to us as we went into say, late 2012 and 2013 and would give us a bit of a cushion in terms of managing the fixed line margins.

But it seems to be that sort of order and mainly focusing in and around the maintenance expenses and things like the expenses -- electricity expenses and other rental expenses and the like.

Thanks, Chris.

The second question.

Access devices.

With regards to access devices, what we have done on the dongles, there was a repricing that we had to do so that resulted to a little bit of a slowdown on the demand. What we are doing is we are going back to the vendors and trying to bring down the price of the dongle so we don't have to subsidize it and we are closely studying it at this tough point in time.

With regards to trying to stimulate broadband growth, we are looking at the low cost devices in whatever form they will come out with but that is not coming until sometime first quarter or second quarter next year.

Sorry, one housekeeping question. There was some press that there would be headcount reductions in the fourth quarter, what kind of extraordinary retirement expense should we (technical difficulty)?

Roughly, Luis, about PHP2b for the entire Group's manpower reduction program.

Okay. Thanks a lot.

Thank you, our next question will come from Citigroup, Arthur Pineda. Go ahead, please.

Thanks for the call. I have three questions. First, your tax rate seems to be quite low for the period. Can you provide any clarity on this and how this could change in the fourth quarter?

The second question I had is with regard to guidance. Revenue and EBITDA has been guided downwards. What accounts for the maintained core profit guidance? I'm just trying to reconcile the divergent trends.

Lastly, on your cost-cutting initiatives and targets, I know that Luis just asked about this but could you provide any guidance in terms of how much this could save you going forward?

Maybe we'll try on the divergence between the EBITDA and the revenue in the core. I think really the reason for that is that while the traditional business is in this process of transformation that you are seeing pressure both on the revenue and the EBITDA. Principally for the reasons that were discussed earlier that the mix is changing and the parts of the business which are growing are not as high margins as we have seen in the past with things like ILD and NLD. And that is coming down to the EBITDA line.

However, I think as you are aware of, over the last several years, we have invested in related businesses and we are beginning to see them benefit us at below that EBITDA line outside the telco space. So the biggest contributor is obviously Meralco which is making a significant contribution. This year, the underlying profitability of Meralco is higher plus we are accounting for it for the full year.

But also, we are seeing enhanced contributions coming through from the ePLDT businesses which we think actually are positioned for a strong rebound going into 2011 and 2012. And again, you may recall that we bought out the minorities at Piltel last year so we are now getting a full contribution from the old Piltel business to the bottom line.

So I think the trend is set for the next couple of years that there will be, as we transition, pressure on the top line and the EBITDA but I think the diversification in -- across into the ePLDT area, Meralco, and buying out minorities is cushioning the impact on the bottom line and allowing us to show a bit of growth.

On the cost cutting, we are still really working through that but we are looking at cost savings which could be in excess of maybe -- well, probably higher than PHP700m a year, maybe PHP700m to PHP800m a year.

I think that other point, Annabelle, was on the tax?

On the tax rate, as we go into the fourth quarter, that is when we do finalize our full year income tax return so typically, there are -- just a more extensive review of the taxable positions at the end of the year. So there may be a few changes to include in the tax number as we approach here and as we complete the audit process.

Understood. Thank you.

Thank you. Our next question will come from Credit Suisse, Chate Bencha. Go ahead, please.

Hi, thank you very much for the call. I have three questions. The first one is regarding the cellular service revenue. I see that in the third quarter, it is a decline in both the voice and SMS revenue, the voice revenue has been growing over the past quarters so what has changed there and what is your plan on the -- in terms of the target mix going forward?

The other issue is on the peso appreciation. I know it is affecting your revenue but is it affecting your CapEx as well? Meaning if there is no peso appreciation, actually, you will be increasing your CapEx spending?

And also, lastly, I understand it is still quite early but given that the free cash flow is coming down, should we still be expecting a dividend payout of closer to 100% as have been over the past three years. Are you willing to get up -- to actually maintain that dividend level? Thank you very much.

With regards to revenues on the third quarter, you are right. The revenues on the third quarter for both voice and text have gone down. But basically, that is because the third quarter is number one, a seasonally low quarter to start with and also on the second quarter, we came from an election quarter where we had a boost, to a certain extent, in our revenues.

And so therefore, that is the reason why there is a drop, really, but overall, we are looking at the traffic volumes going up actually. On voice, it's up at 140% and on SMS at 25% so -- but the yields are going down for both. We are down now to about PHP0.13 per message and PHP0.20 per minute for the voice.

On the second question on the peso impact on the CapEx. Actually, to the extent that the peso strengthens, then the impact would be for us to show a lower peso amount because about 30% to 40% of the spend is dollar based. So when we translate that back to pesos that is a lower amount.

The reason why we might go a little bit above the PHP28.6b is really as we continue to build capacity in the network and with the build-out, we continue to add subscribers on the broadband side and usage is increasing, plus we continue to have the largest share by far of the corporate market which is quite demanding in terms of its capacity requirements. So we are really building out to support that. So the peso helps us a little bit but we are accelerating some of the additional capacity that is being put in place.

In terms of the dividend, I think you should know, we are retaining the 70% target with the look back. I think the look back remains the same; it looks at what's happened in the previous -- effectively the year under consideration, so 2010, and takes an outlook as to what we are expecting in 2011. So at the moment, we would still look to pay more than 70% but I think the guidance that we've had historically from the Board is that to achieve that 100% then we have got to borrow, then that is not the direction they would like to see us going.

I think what the general guidance has been is if there is an acquisition or other opportunity out there which requires us to leverage up the balance sheet for some time, that is something which would be supported but not just to be able to pay 100% or higher dividend. So I think that is still the general guidance.

Yes, thank you very much. Just one follow-up question regarding the wireless broadband services, given the huge slowdown in subscriber growth, are you willing to go back to deliver a subsidy we see earlier in the year?

With regards to dongle subsidies, we had to remove it because we were finding our dongles outside our market actually so -- because there has been an arbitrage when you subsidize so we are very careful with that. So we are looking at trying to bring down that price but within limits by talking to our vendors and hopefully, with the volumes anticipated to go up during the Christmas season, we should be able to do that. But, no, we are not going to bring back the subsidies.

Thank you.

Our next question will come from UBS, Jody Santiago. Go ahead please.

Good afternoon. Thank you for the call. I have three questions. The first is on your Red Mobile subscribers. The third quarter numbers were down by 700,000. I just wanted to find out why that was and what the strategy for Red Mobile moving forward is? Are you going to grow that subscriber base? Are you going to limit it? So I just wanted to know what the direction was for Red Mobile. That is the first one.

Secondly, your revenue guidance has been revised downwards, but the CapEx is flat. Is there a scope to reduce the CapEx given that revenue seem to be slower than anticipated?

And then lastly, the expenses in the cellular business, particularly the rent expense in the third quarter was lower than the run rate in the first half. I think there was like a PHP1b reduction in rental expense. Is there any particular reason for this and what should we assume moving forward? Thank you.

Maybe I can try the last two. On the cellular expense, Jody, that is the flipside of what I was saying on the fixed that the data revenues that you see there, is slightly -- the growth was a little bit lower than we have seen historically. The third party growth was about 18%; the overall growth was about 4%. That is because some of the services which we have been providing given the capacity the Smart is now using, we have repriced that.

And rather than go through and restate the numbers and the like, we just processed the whole thing in the third quarter. So that has had a bit of a depressing effect on the fixed, but from an overall group perspective, made little difference because the benefit of that was seen in the wireless. So that will walk through over four quarters, but really doesn't affect the consolidated result. But it is something you need to be aware of and will impact both the revenue on the fixed and the expense on the wireless. But that is really a -- because you are seeing it for the first time because we didn't go back and adjust.

On the issue on the revenue and the CapEx, I think the challenge is that, yes, the revenues are a little bit lower but the actual usage of the network continues to be greater and greater. The voice has grown quite robustly on the wireless side and that continues to need investment even though the revenue is down somewhat on the text as indicated by Poly in his presentation. The volume of text message is -- continues to increase.

I think we are also seeing on the fixed that as DSL continues to grow, the capacity requirements there are also high. And the corporate side as I indicated, the underlying growth is something in the region of [18%], that is a very demanding sector, it's a sector which PLDT dominates but it does require us to continue to invest quite heavily to preserve that market share and something we are continuing to do.

On -- and that is the domestic side of the CapEx. Internationally, I think as you know, as broadband becomes more available and is being used more, there is also a need to complement that with investment in international capacity. So again, if we maintain and in fact, improve the service, we are continuing to invest in international capacity as well.

So I think despite that lower revenue level, because of the additional capacity requirements across the network, we won't be able to cut back on the CapEx in the short term.

I think the first was on Red Mobile.

On the Red subscriber base, the strategy of Red really has been to -- for us, moving forward, is to really be able to offer the same prices and the same offers as in the unlimited space and in the bucket space. And it is really directly to compete with Sun and its offers and even with Globe.

And so therefore, what we have done is we have reviewed the base, we have looked at the inactive portion of the base and we have cleaned it up in an aggressive manner including those that we anticipate would churn out in the third quarter. And that is the reason why there is a drop to about 380,000 subscriber base. That is really the active base of Red.

Moving forward, at the rate that we are taking up subscribers on Red, we are looking at ending up this year to about 1m subscribers on Red.

And Poly, just a quick follow up. Like two or three years down the road, how many subscribers do you see Red Mobile having? Maybe in absolute terms or as a percentage of your total base.

It really depends, right now, most of our offerings on the unlimited space on -- with the major brands are actually by registration and we are seeing that even if we are not controlling the registration, it is really up to about -- I think on Smart Talk, we are up to 800,000 to 850,000 subscribers right now.

So really, the unlimited space, there are people using the unlimited service but there are also -- there is also a limit as to the number of people who would like to use that particular service and therefore, we will make it available and we will do it in such a way that it will not disturb the quality of the -- our primary subscribers who are in the primary network which is the majority of our subscribers. Right now, there is only about 1.5m subscribers in the unlimited space.

Thank you.

(Operator Instructions). Our next question will come from Daiwa. Rama Maruvada, go ahead please.

Hello, good afternoon. I have three questions. Firstly, with regards to the cost reduction program, will the entire PHP2b be booked in the fourth quarter or will it be spread out over a couple of quarters? If you could provide some color there, that would be great.

The second one is with regards to mobile internet revenue. The PHP821m, where exactly is this line item classified? Does it come under the cellular section of the cellular data or is it under broadband under the wireless division? And have there been any reclassifications on this line item from before?

The third one is with regards to the peso assumptions, if you could provide some color on what the assumption is at the moment, as well as if there is any hedging or any forward contracts that you have entered into or thinking of getting into in the next couple of months.

Again, I will answer the easy one which is the first one. The expenses will be booked fully in the fourth quarter.

And your second question, the mobile internet revenues are classified under cellular data which media is the line in the MD&A if you are looking for it.

On the FX hedging, we have historically hedged part of our dollar liabilities but with respect to the dollar receipts, the experience has been very difficult to get hedge accounting for any type of arrangement that you tried to put forward for your -- if you wanted to sell forward your dollar receipts. So we have no such hedges at the moment.

On the -- if I can follow up on the peso assumption then, is there a sensitivity in terms of if the peso moves -- appreciates another 5%, what kind of impact it will have on the revenues as well as your guidance?

Yes, our estimate in terms of EBITDA is about $700m per annum so for the remaining quarter, I guess it's $175m for one quarter.

Okay. Thank you very much.

Our next question will come from Nomura. Neeraja, go ahead, please.

Hi, thanks for the opportunity. I think my question is on the revenue outlook once again. Obviously, there has been a seasonality factor going into this quarter. I'd really like to understand where were the difference in how this quarter has finally panned out versus where you were expecting it? Is it different across all the business segments or is it one particular segment where it would vary from what you expected it to grow?

And then my second question is really on competition. Any thoughts, has it intensified or is it staying flat? One of the things that we hear right -- one of the other players will look to expand geographically so if they choose to do that, probably in the coming year or so, do you see prices falling down another step further or at the same or rate of decline continuing? Any thoughts on that?

And lastly, you mentioned some adjustment between fixed and wireless and if you can clarify once again, I didn't quite catch it clearly. Thanks.

With regards to the competitive situation, I think the entire industry, at least in the first half, has actually gone down totally in revenues and that is because yields have gone down while volumes are up and also because of the peso appreciating, bringing down those inbound revenues translated to pesos at the lower levels.

So really, the pricing at this point will continue to be low in the unlimited space but then again, the number of subscribers within the unlimited space is not really moving up that much. So we are looking at still on the fourth quarter, the volumes will be up and especially the fact that it is Christmas season, we expect the traffic to be up and normally, at this time, prices will not be spiraling downwards because it is Christmas and people are going to communicate and greet everyone in spite of how much it costs.

Maybe just I will make a stab at what was different from what we might have expected. I think the areas where we maybe have seen a sharper decline than we anticipated is probably both in the international business and maybe the NLD business on the fixed.

On the international business, I guess there are two factors there. That is generally denominated in dollars, the settlements, so when that is paid to us and we translate it back to pesos, that is lower. So with the peso, probably, I think it's fair to say, strengthening quicker than we anticipated that was a greater reduction than we had anticipated. Also, to a degree, the success in populating broadband impacts the inbound international business by making VoIP more accessible to subscribers.

The second area, I think, that was hit quite badly was the national long distance on the fixed. I think what we have seen there is that as there are more and more unlimited tariffs available on the wireless network, then the NLD business has suffered. So the -- as the yield on voice comes down on -- sorry, as voice grows on the wireless side but the yield comes down, then that is putting additional pressure on the NLD business.

So I think it's maybe these two areas where we have seen an acceleration in the decline in the third quarter probably somewhat ahead of what we have been expecting.

In terms of the adjustment between the fixed and the wireless, the fixed provides a lot of services to the wireless and in particular, access to its facilities domestically and so the DFON network and other facilities for co-location for example.

Also, it gives access to the international facilities which are mainly in the fixed business. Now, these are repriced from time to time and as the volume of usage of the wireless has increased, that effectively reduced the cost on a marginal basis so we have recognized that in the pricing and so rather than go back and adjust for the full year, we just put it through in the third quarter. So you will see slightly higher revenue on the one side and a reduction on the rental expense on the other. So from a consolidated basis, no net effect but it does have an impact on the individual line of business analysis.

Thank you.

Our last one follow-up question will come from Arthur Pineda. Go ahead, please.

All right just one follow-up -- two follow-up questions for me. With the change in the dongle subsidy strategy, have you actually seen an improvement in your broadband EBITDA margins even with the lower net adds? So is it better to sacrifice subs growth for lower costs?

Secondly on ILD, if you could please remind me, what percent of your ILD traffic is again generated in the fourth quarter?

I don't think it is necessarily different in the fourth quarter on the ILD. I think on the fixed, it's about now, 16%? About 15% to 16% of the fixed line revenues and I think on the wireless, about -- a little over 20% on the wireless.

The Christmas period -- maybe it's a fair comp, the Christmas period is usually a little bit higher because there are more inbound calls, yes. So it's probably on balance slightly more biased towards the fourth quarter so it's slightly --- New Year's Eve, Christmas and New Year, maybe 1% or 2% higher in the last -- or maybe it's more than that, maybe 2% or 3% higher than the last quarter.

The dongle subsidy is --, what was the question? Is it the --

The improvement in EBITDA.

As I mentioned earlier, when we subsidized the dongles, and the prices in the market are actually higher, you will find our dongles going outside of the country being exported because it is -- there is an arbitrage [goes on] so that is the reason why we pulled out subsidies because number one, it's an item that is easier to bring out, I guess. And then it is also something that they can -- what do you call this, unlock easily at this point in time so that is the reason why we felt that maybe we should pull out the subsidies.

However, we are looking at trying to bring down the price because worldwide, the number of dongles that are being sold are getting more and more and therefore, the scale is there for our vendors to bring down the price.

So let me clarify, there were subsidies as well on the prepaid dongles?

That is the prepaid dongles actually. Most of the dongles are prepaid.

Understood. Thank you.

Our last question will come from Wealth Securities. Ms. Anita Panaligan, go ahead, please.

I'm sorry, I think I may have missed your discussion on this one. Regarding the buyback, did you mention any specific time periods for it? The buyback program of the 2.3m common shares?

We didn't mention a specific time period.

There is no specific timeframe for it?

That's correct.

Okay, thank you.

Thank you. 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 November 19, 2010. Replay information is 3 o'clock pm call, international number 852-3018-4397. The US toll free number 1-866-350-3613. Pass code 1401. Conference leader is 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, thank you very much for joining us this afternoon and we look forward to talking to you again sometime in march when we would release our yearend results.

Thank you. We wish you a Merry Christmas.