PLDT Inc (PHI) 2011 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to the PLDT conference call to discuss the Company's financial and operating results for the first quarter of 2011. This conference call is being recorded. Replay information will be provided at the end of the call. At this point, I would like to turn you over to Melissa Vergel de Dios, head of investor relations for PLDT for the introductions.

Please go ahead, ma'am. Thank you.

Good afternoon and thank you for joining us today to discuss the Company's financial and operating results for the first quarter of 2011. 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 Advisor of PLDT; and Ms. Anabelle Lim Chua, SVP Treasurer of PLDT and Chief Financial Officer of Smart.

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

Good afternoon and thank you for joining us on this call. Allow me then to share with you PLDT's financial and operating results for the first quarter of 2011. As anticipated, the operating conditions for the first three months were quite challenging given the combined effect of a slower economy and the continued intense competition within the telecommunications industry.

Service revenues for the first quarter of 2011 decreased by 4% to PHP34.6b compared with PHP36b in the first quarter of 2010. Expenses for the quarter declined by PHP900m or 4% to PHP20.9b from the same period last year.

EBITDA declined by 1% year on year to PHP21b with EBITDA margin having improved to 61%. Reported net income for the year declined by 6% year on year to PHP10.7b. Core income grew by 1% to PHP10.6b from PHP10.5b last year. Core earnings per share for the first quarter is PHP55.91, higher than the PHP55.52 last year.

Free cash flow for the quarter grew 17% or PHP2.2b to PHP15b. The peso appreciated by 4% versus the US dollar at the end of March of 2011, having closed at PHP43.41 compared with PHP45.29 at the end of March last year.

The average peso/dollar exchange rate for the period was PHP43.78, an appreciation of 5% versus the same period in 2010.

On the next chart, core net income for the first quarter of 2011 grew by PHP100m or 1% to PHP10.6b compared with PHP10.5b last year. The increase is primarily due to lower operating expenses resulting from the proactive management of expenses across the different business segments supplemented by a higher contributions from Meralco, SPI's BPO businesses and our data center operations.

Had the peso remained stable, core income would have been higher by about PHP300m. Reported net income for first quarter 2011 amounted to PHP10.7b or 6% lower than the PHP11.4b last year. Accounting for most of the PHP700m decline in reported net income was the PHP500m lower net ForEx and derivative gains.

On the next chart, PLDT's consolidated service revenues for the first quarter of 2011 was lower by 4% year on year, at PHP34.6b due to the combined effect of growth in new revenue streams not yet able to fully compensate for the decline in traditional revenue streams, the 5% average appreciation of the pesos year on year resulting in lower revenues of approximately PHP500m, about PHP100m in lower revenues from the sale of our satellite business at the end of the first quarter of 2010.

The 1% decline in the consolidated EBITDA for the first quarter 2011 was lower than the decline in revenue. In fact, EBITDA margin for the quarter improved to 61% from 59% in the first quarter for the full year 2010, reflecting the effect of a group-wide effort to preserve margins through prudent spending.

Approximately 28% of our first-quarter service revenues are linked to the US dollar. Had the peso remained stable, our service revenue decline year on year would have only been 3% while EBITDA would have grown by 1% over last year.

On the next chart, despite the challenging operating environment, cash generated from operations increased by PHP1.2b in the first quarter of 2011 to PHP20.8b compared with PHP19.6b last year. With lower CapEx and net interest payments, our free cash flow for the quarter was stronger than previous year at PHP15b, higher by 17% or PHP2.2b.

Note that free cash flow of PHP15b is higher than our core income for the quarter of PHP10.6b. CapEx for the first quarter of 2011 amounted to PHP3.1b with CapEx spend expected to build up towards the end of 2011. We are on track with our programmed CapEx spend in pursuit of our goal to reinforce our undisputed market leadership through a superior network and quality of service.

On the next chart, net debt at the end of the first quarter was $900m, down from $1.3b at the end of 2010. Net debt to EBITDA was at 0.5 times. Net of cash to pay dividend in April 2011, adjusted net debt and net debt to EBITDA would be $1.5b and 0.8 times respectively.

PLDT has a gross debt of $2.2b at the end of March 2011, an increase of $100m from the end of 2010. The additional borrowings were used to partially fund CapEx requirements and to refinance debt.

PLDT's cash and short-term investments at the end of March amounted to PHP56.6b or $1.3b inclusive of about PHP27b for the April dividend payment. As we continue to tap the local debt market, our US dollar debt has declined from 45% at the end of 2010 to 41% at the end of March.

Taking into account our hedges, peso loans and dollar cash holdings, only about 21% of our total debt remains unhedged. 80% of our debt are fixed rate loans. PLDT's debt profile remains healthy with maturities well-spread out.

Fitch, Standard & Poor's and Moody's each affirmed PLDT's existing credit ratings following the announcement of the proposed investment in Digitel. It will be recalled that the payment for Digitel would be in equivalent PLDT shares and the maximum cash outlay for the tender offer to minorities is estimated at $110m.

On the next chart, let me now provide you with more details of the different businesses starting with broadband. The first quarter of 2011 saw a reversal of the slowdown in broadband pickup experienced in the second half of 2010 with much higher net adds for both fixed and wireless broadband registered during the quarter.

PLDT's combined broadband subscriber base grew 4% to reach 2.1m subscribers at the end of the first quarter of 2011, representing a net add of over 80,000 for the quarter or more than 2.5 times the net add of the fourth quarter of 2010.

Of our total broadband base, about 1.4m are wireless subscribers of which over 973,000 are plug-it prepaid subscribers. DSL subscribers grew to over 672,000 or over a third of our total fixed line subscriber base.

Total revenues from broadband for the first quarter increased by 8% year on year to PHP4.5b or 13% of total service revenues, up from 12% contribution at the end of 2010. DSL revenues were higher year on year by 12% while wireless broadband revenues including revenues from mobile internet increased by 5%.

The upward momentum of mobile internet revenues continues with revenues for the first 3 months of 2011 amounting to PHP236m, a 40% growth over PHP169m in the same period last year.

With take-up sensitive to the price of handset, Smart will soon be launching low-priced smartphones and tablets designed to appeal to a broad market of users.

On the next chart, the strong growth in Smart's subscriber base continued into the first quarter of 2011 with net adds of 1m bringing our total subscriber base to 46.6m and reaching 47m at the end of April.

Wireless service revenues for the first quarter of 2011 decreased by 4% year on year to PHP22.8b. The change in revenue mix in the wireless business continued with our traditional revenue sources of voice and SMS data showing year-on-year declines.

Wireless broadband revenues remained stable despite a 15% growth of subscribers year on year while VAS or value added services revenues inclusive of revenues from the mobile internet posted a strong year-on-year growth of 24%.

SMS/data revenues of PHP10.3m which made up 49% of total cellular service revenues for the first quarter of 2011 were 5% lower compared with the same period last year. The number of outbound buckets and standard SMS messages decreased by 5% year on year with yield for SMS of PHP0.13.

Voice revenues accounting for 48% of total cellular service revenues in the first quarter this year were 5% lower year on year at PHP10b. In the first quarter of 2011, international inbound revenues registered a PHP300m decrease over last year as a result of lower inbound termination rates and the impact of the peso appreciation.

Wireless EBITDA for the quarter grew by 1% to PHP14.1b compared with PHP14.4b last year as decreases in revenues were offset by a PHP1b drop in cash operating expenses following the tight management of costs. EBITDA margin improved to 64% from 61% and 63% in the first quarter and full year of 2010 respectively.

On the next chart, fixed line service revenues for the first quarter of 2011 were lower by 10% at PHP11.5b as a result of the combined effect of higher DSL and corporate IP-based revenues offset by the anticipated decline in LEC, ILD and NLD revenues.

International I-Gate and Fibernet revenues were also lower year on year as a result of lower pricing and the impact of the stronger peso. Approximately 22% of our first quarter 2011 fixed line revenues are denominated in US dollars. Had the peso remained stable, service revenues for the quarter would have been higher by PHP130m.

EBITDA margin for the first quarter of 2011 improved to 51% from 49% in the first quarter of 2010 and 47% for the full year 2010 reflecting the impact of initiatives to further tighten operating expenses.

EBITDA for the quarter declined by 6% year on year to PHP5.9b with the decrease in revenues offset by a 9% or PHP600m reduction in cash operating expenses. The decline was due to focused cash management initiatives that included the impact of the manpower reduction program implemented in the fourth quarter of 2010 that resulted in PLDT headcount being lower by 666 people.

The next chart, we continued to gain in our ICT businesses as they registered higher sales and stronger margins. First quarter 2011 service revenues grew by 3% year on year to PHP2.7b accounting for about 7% of the total PLDT Group service revenue.

The data center business continues to grow strongly with a 21% increase in service revenues compared with last year largely as a result of increases in co-location and rental revenues as well as in revenues from managed services.

Business from existing clients in our BPO businesses, namely medical billing and content solutions continue to expand resulting in service revenues being higher by 13% in US dollar terms. In peso terms, year-on-year growth was only 8% due to the effect of the peso appreciation.

Our customer relationship management or CRM business registered a 13% decline in service revenues for the first quarter of the year compared with the same period last year. This was mainly due to the impact of the peso appreciation partly offset by an 11% increase in domestic sales.

68% of ICT's first quarter revenues were dollar denominated. Had the peso remained stable, service revenues for the year would have been higher by 4% or PHP93m. ICT EBITDA for the first quarter this year improved by 23% year on year to PHP454m. EBITDA margin likewise climbed to 17% for the period compared with 14% the first quarter 2010 and 16% for the full year 2010.

The EBITDA increase resulted from higher service revenues and stable cash operating expenses. We expect to sustain the gains we have achieved in ICT; the pipeline of new CRM clients continues to grow. In addition, we have further strengthened our sales and marketing organization. SPI is also leveraging on its recent BPO Company of the Year award to attract new clients and new talent.

Page 11 contains highlights on Meralco whose financial results are equity-accounted. As a result, our shares in Meralco 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 for the first quarter of the year declined by 6% to PHP57.4b, largely due to lower average pass-through costs offset by a higher customer count and stable energy sales volumes compared with the same period last year.

Consolidated expenses were lower by 7% year on year at PHP53.7b largely on the back of the lower cost of purchased power.

Core EBITDA of PHP6.6b grew 35% year on year. Meralco's core and reported net income for the first quarter of 2011 stood at PHP3.3b and PHP2.1b representing a year-on-year growth of 64% and 6% respectively. These increases largely reflect the impact of the various tariff increases granted to Meralco under the performance-based rate setting scheme or PBR and lower cost and expenses.

In an effort to lower the power cost on consumers, Meralco continues to drive at achieving operating efficiencies while studying investment in power generation to diversify and improve power supply.

On the next page, this slide provides you some updates on the Digitel investment since we announced the transaction at the end of March. At PLDT's annual stockholder's meeting on June 14, we will be seeking PLDT shareholders' approval to issue up to 29.65m new PLDT common shares as payment to JG Summit for the acquisition of the Digitel shares convertible bonds and advances and for Digitel shares to be acquired from Digitel's public shareholders under the planned tender offer. We have begun distributing the relevant material to our stockholders.

We filed our application for approval of the transaction with the National Telecommunications Commission or NTC on April 20 and the first public hearing has been scheduled for May 23. Requisite approvals from the SEC are likewise being sought and we expect to close the transaction by the end of June.

To recap the benefits we expect as a result of the investment in Digitel are the enhancement of consumer services arising from complementary operations of PLDT and Digitel as well as CapEx optimization and cost efficiency. A more detailed quantification of these benefits could be undertaken after the transaction closes and after PLDT is able to pay in full access to Digitel's operations.

Beyond the commercial aspects of the transaction however, we expect the transaction to benefit the general public through improved affordability and higher levels of service quality and coverage.

We reiterate that the investment in Digitel is not meant to reduce competition. In fact, we anticipate competition to remain very keen in view of the competence and financial resources of the new and future players but also with the presence of over-the-top or OTP players such as Skype and Voodoo.

On the matter of spectrum, Smart has been using its assigned spectrum efficiently in order to serve its subscriber base and we believe that this should be the regulator's basis for future (background noise).

Finally, we have faith that the regulator will adhere to the principle of protecting the consumer rather than protecting rivals. In assessing the merits of the Digitel transaction by ensuring that these two principles prevail; number one, that there is no barrier to entry of new players, and number two, that competitors remain free to market to customers of other competitors.

On the next page, as we have yet to disclose the Digitel transaction, we cannot, as of now, offer updated guidance that considers Digitel as [impact].

We expect to be able to announce our preliminary guidance with our third quarter results in November. For now, excluding the impact of Digitel, we affirm the guidance on EBITDA, core income and CapEx that we shared at the announcement of our full-year results in March.

However, we expect service revenues for 2011 to be 12% lower in line with our first quarter results. This partly reflects our view of the continued strengthening of the peso. We expect EBITDA for 2011 to be flat year on year because of tight management of cost and expenses. Core income for each of 2011 and 2012 is estimated at PHP40.5b which is lower than the PHP42b in 2010 resulting from higher depreciation and financing costs following the higher CapEx levels.

We confirm that our dividend policy of 70% regular dividend payment coupled with a look back approach will not change on account of the investment in Digitel.

We also maintain our CapEx guidance for 2011 and 2012 at PHP34b and PHP33b respectively. The funding of which, we will source from debt.

As such and as mentioned previously, the elevated level of CapEx is not expected to affect our ability to pay out dividends. That covers the highlights of our first-quarter results.

Again, thank you for joining us today and we are now ready to take your questions. Good afternoon.

Operator?

(Operator Instructions).

Okay, our first question is from Luis Hilado. You may now ask your question.

Hi, good afternoon. Thanks for the call and congrats on the results. I just had three questions. First, on the operational front, you did mention that the cost cutting initiatives will continue throughout the year, and could be sustainable also into the next year or are you going to eventually hit a barrier where it will affect quality of service if you continue to cut costs?

The second question is relating to Digitel. I guess in terms of accounting policies between PLDT and Digitel, are they fairly similar or do you anticipate there maybe some realignment needed once you have taken over the Company?

And the third question is you also mentioned that Smart could be coming out with more affordable smartphones going forward and in your assessment, how far are we from smartphones becoming a more mass-market product? Is it a year away or two years away? Thanks.

With regards to the proactive management of cost and bringing it down, Luis, we are moving forward. The substantial portion of the cost reduction really comes from the manpower reduction that we have done in the fourth quarter of last year. And therefore, that makes it a more or less, sustainable moving forward.

The other part of the cost reduction is withholding a little bit on the A&P expenses. We are taking this slowly and moving forward, depending on how the market evolves, we will be measuring the expense and tailoring it as to how the market will evolve moving forward, so that one is a little bit variable.

The third would be the operating efficiency savings that we would have on the network side that would be as a result of two things. One is the modernization of our network and we are now rolling out that one. It's starting to be rolled out on the second quarter and will intensify on the third and while it brings up CapEx, we expect that there will be savings in the operating efficiency too. So in a way, we feel that this level of cost will be sustainable at least this year and even into next year moving forward.

The second question is --?

I think, Poly, on Digitel and the accounting policies. I think there will be a need to align accounting policies between Digitel and the broader PLDT Group of Companies.

Roughly in terms of timing, if the transaction close at the end of June, then we would anticipate a period of about three months of where we would be doing mot just getting the operational input but there would be a fairly detailed financial review as well.

And so we would anticipate that by the time we go out with the third-quarter results, which are usually early November, I think we could begin to give some guidance on broadly how the transaction would affect us for 2011 but more importantly as we go in to 2012.

And part of that would be the detailed review of the differences between the underlying accounting policies and procedures and our own. So the answer is yes, but in terms of quantification, I think you need to give us the benefit or we need the benefit of that three months assuming a June closing, to be able to report to you. So we anticipate coming out with something with the third-quarter results.

Thanks, Chris.

I think the third question has to do with smartphones. Maybe we can -- we have prelaunched the -- soft-launched the Netphone which is our version of the iPhone in last February in Barcelona in the GSM conference. We are expecting that the commercial launch for this would be sometime in July if not late June.

But that is the target, Luis, so with the launch of this -- with the versions of -- with the several models of our Netphone that will range between -- the basic ones would be about between $50 to $80 and the more sophisticated ones would be the one with touch screen and all that will be roughly around -- a little over $100.

We hope that this would make it affordable enough to stimulate the demand on the mobile internet access and we are seeing that because, right now, it's the fastest-growing broadband revenue for us. Mobile internet revenue has grown 40% in the last quarter compared to the same period last year.

Thank you. Just one follow up in the smartphones, you will be selling that essentially at cost, I guess?

What is that? Again, please?

The smartphones that you will be bringing will be essentially sold at cost or a small --?

Yes, yes, we are not subsidizing it, neither are we going to make money on it.

Okay.

Actually, we will be making -- our revenues will be geared towards the services that will be in it. It is a -- it will have an Android OS and it will be WAP enabled and we will have our own user interface and it is an interesting phone. And in fact, we had favorable reviews about it in the GSMA launch that we had last February.

Okay, thanks a lot.

Thank you, our next question is from Rama Maruvada.

Hi, good afternoon. Just one question from me please. If you could just provide some color on the volume as well as the revenue trends on both voice and text this quarter, in particular, both volumes are down as well as revenues are down, what is driving this on a year-on-year basis?

For the first quarter on traditional revenues, we are seeing a drop on the volumes on SMS/data on the cellular side and that is roughly in the neighborhood of about a 5% drop on the first quarter compared to the same period last year.

On voice, in terms of billed minutes the drop on the first quarter compared to the previous period is on an outbound basis an overall 9%. But the yields have improved though; it's now up to PHP1.26 per minute on the voice. And on the SMS it's now PHP0.13 per minute.

Yes. My question is, Poly, what's driving this volume trend? Has the traffic gone to competitors, or is it a seasonal one or what's -- if you could provide some color there?

We're looking at the traffic maybe going -- maybe translated into several forms, already on the SMS, for example, social networking. And the number of Facebook subscribers right now has grown to about 23m, or maybe now I understand it's 25m, the updated number. So we're looking now at Facebook having 25m subscribers in the Philippines alone. And we are seeing that maybe the SMS has been sort of -- being eroded by the onslaught of social networking. We are also looking at the --- with the rise of smartphones being in use in the market that the mobile Internet access is also moving up. As you can see, we have our revenues on mobile Internet or mobile broadband has gone up 40%. So therefore people are either using it for SMS, or in fact maybe using more of email. So --

Okay, understood.

That is the trend. On --

Understood, Poly. So broadly you're saying it's probably because of the rise of social networking that it's -- so it should be an industry-wide phenomenon, not a shift to (inaudible), right.

Most likely, yes. Although we're seeing that our -- the slowdown in the economy in the first quarter -- because that is what we're seeing in all these districts that we are exposed to, both our -- be it power, be it highways, the tollways and in the food. For example, the food companies are telling us that their revenues were sluggish in the first quarter this year. So we're looking at this one having an effect also to our revenues because the consumer wallet is challenged at this point in time. So we are feeling that the consumer is spending less.

Right understood. Thank you very much.

But April's trend is getting better. April's revenue is moving better than March. And we're seeing that, although not completely over last year's figure, but it's moving up. So we're seeing that the second quarter might be trending better than the first in terms of the macroeconomic situation, and on our revenues itself for the traditional services like voice and text.

Yes. Thank you very much.

Thank you. Our next question is from Mr. Chate Benchavitvilai. You may now ask your question.

Hi. Good afternoon and thank you so much for the call. My first question's already been answered, so I have another two questions. Number one is regarding your broadband effort, wireless broadband in particular. I see there's already some pick-up in the broadband net additions, and also the revenue improvement from the past two quarters which reported a decline. Now what I want to understand is that just a seasonal effect, or is there some change in effort from your side on cost base, and whether that will continue into the rest of the year as well.

My second question is more of a housekeeping question regarding the contribution, equity contribution from Meralco. What is your effective stake in Meralco right now? I understand that Meralco reported around PHP2.1b net income this quarter, but when I look at the equity income contribution to your bottom line it's only PHP192m. The number doesn't really -- I cannot back-calculate the number basically. Can you give any color on that? Thank you very much.

Well, when it comes to the first question which is the wireless broadband, yes, the net adds are improving quite dramatically. Our net adds, I believe, is three times better in terms of subscribers compared to the net adds of the fourth quarter. And we feel that this is sustainable given the trend in April which was better than March. So we're looking at, really, a better situation for us in terms of net adds. And the recovery was in the pre-paid bundled side where, finally, the consumer is beginning to accept the new price levels that we have set without subsidies. And this was really the reason why the volumes dropped on the fourth quarter last year because we took out the subsidies on the bundles.

We're also seeing that on the fixed wireless side our take-up and the net adds there are beginning to go up with the deployment of our WiMax technology in the areas where it's complementary with our fixed line DSL. And at the same time also our canopy installations are trending less at this point in time. So we feel that that's sustainable and in fact will even get better within the next -- within the rest of the year.

Chate, on your question on Meralco, our ownership in Meralco is now split into two forms. We have a direct interest of 6% that is held by PCEV or formerly Piltel. And then we also are 50/50 -- 50% owners of a joint venture with MPIC in an equity called Beacon Electric which in turn owns 34.8% of Meralco. So we effectively equity-account from both sides, from the 6% direct ownership in Meralco, and then our 50% interest in Beacon which in turns owns 34.8% of Meralco.

As part, however, of the purchase price allocation accounting that we did from the time we acquired Meralco, there are certain fair value adjustments that we take on -- because you have to look at the fair value of the assets at the time of the acquisition, which result in some differences in terms of, being say, for example, fair value of PPE so this causes additional depreciation expense at our level with respect to the fair value adjustment.

Secondly, Beacon has also incurred certain debts to acquire additional Meralco shares. So there are financing costs and other expenses associated with those shares that were acquired principally, if you recall, from the Lopez group.

Then the capital structure of Beacon is also where, aside from the 50/50 ownership of the common shares, there is a certain block of preferred shares that were issued to MPIC for the capital that they put in. And there are preferred dividends accruing on those preferred shares. So the -- our sharing of the 50% earnings is effectively after the preferred dividend.

So there are several differences which result in calculating exactly the attributable interest in the Meralco earnings.

Then I guess to highlight also the earnings of Meralco from a core and reported basis are quite different. So at our level there's about PHP300m difference between the share in terms of the reported and our share in the sense of the core income.

If you can -- if you don't mind, can you share with me how much is the preferred dividend at Beacon?

It's about PHB8b in terms of the preferred shares issued. It earns a 7% preferred dividend rate. The amount of preferred dividend accrued in the first quarter was about PHP140m.

Thank you very much.

Thank you, sir. Our next question is from Neeraja Natarajan.

Hi. Thanks for the opportunity. I have a few questions. Actually to start off with, can you please tell me, in terms of your revenue outlook, which has been a bigger driver, fixed line, or is wireless also a part of the reason for the lower revenue growth outlook?

Second, in terms of cost saving, one thing you mentioned was employee manpower costs. It still seems to be running at about 15% of sales. So where does -- do you expect it go lower.

Secondly on the selling and promotion there's been quite a bit of a pullback if you see in the last three to four quarters, as in year over year the selling and promotion costs seems to have come down. So how much do you see this going down further? And are you being a little less aggressive in announcing that you're pulling back on selling and promotion. That's my second question.

My third question is more on the yields in terms of voice and SMS. Actually this quarter it seems to be stable and actually up a little bit on the voice side. So are we seeing the whole subscriber base stabilizing at current bucket plans? Is that what you're seeing, if you can throw some color on that.

And lastly on the CapEx, since you're saying it is going to be back-loaded, is it fair to assume that given the impending acquisition, it may actually come lower than what is currently being stated? Thanks.

Maybe I can try on some of the questions. There were quite a few in there. I think in terms of the revenue outlook, I think it's really, I think, both the fixed and the wireless. I think the guidance is for 4%. And I think, on the consolidated basis, that is where we would expect to see both the wireless and fixed down over the period.

As Poly described earlier, I think the reasons for it are somewhat different on the fixed and the wireless. I think he covered the wireless in quite a bit of detail. But I think the fixed continues to be impacted by the decline in the so-called legacy toll revenues of ILB and NLB in particular. So we think that that's unlikely to change in the short term. So I think overall we would expect to be down by about that -- similar by 4%.

If you look at the fixed, however, you will see it's slightly higher than that. And part of that is really -- again, is probably indicated that there has been some adjustment on the pricing of some services between PLDT and Smart that reflect greater volume of usage by Smart. If we look at the third party revenues on the fixed and wireless, I think our working assumption at the moment is that they will be down by about an equal amount, by about 4%.

In terms of expenses, I think on the A&P, again the thought is that that's really been calibrated to an extent based on how we see the current outlook which has been described as challenging. I think we would see that there probably is some pick-up in A&P as the year goes on, but we're keeping a very tight eye on it. And we are -- if there are specific launches that come along such as the smart or the Netphone that was described, and one or two other major launches we're looking at then we will spend behind that. But for regular support, I think you can anticipate it will run at the lower level than maybe we have done historically.

Employee costs, again I think if you look at the consolidated, we were down by about 6% reflecting the higher -- sorry, the lower headcount. And I think we anticipate that continuing for the balance of the year. We would expect -- and it still remains the largest cost on the fixed line business and is quite a substantial cost on the wireless. So maybe a 5% to 6% decline for the full year would be what we're looking at. What's not really in the numbers yet and which, hopefully, will be helping as the year goes on, a significant amount of the CapEx spend that we are undertaking is part of the so-called modernization of the network and a result of that modernization is that it should give us efficiencies. And we should see that reflected in lower costs going forward. So that's not something I think we've seen the impact of yet. But as we go into the later part of the year and into 2012, we should begin to see the benefits from that.

Lastly on the question I picked up on the CapEx number, at the moment we're still giving you guidance, as we indicated, on the basis of PLDT, Smart and ePLDT standalone, without the impact of Digitel taken into account, because as you I think know, at this stage Digitel, until the transaction is consummated, Digitel is -- still are competing. So it's really not -- we haven't really been into the details of the operations. So that number remains. And we would hope however, maybe as early as the end of the third quarter results, to maybe give some update and outlook as to what the combined CapEx might be. But for the moment we are maintaining the guidance with that outlook when we announced the 2010 year-end results.

I think there was another question in there somewhere.

Yes, just about yields, actually voice yields going up a bit and being stable. So I just wanted to understand in terms of pricing is there some sort of stability that we're actually starting to see?

In terms of the voice offerings, I guess we have had a combination of different offers, meaning (inaudible) and other buckets which are in capped minutes. I think it's something we continue to review and study, but one of the things about voice is that once we establish a community, then I guess in terms of how much people's MOUs are, then stabilizes at a certain level at some point. Whether we're there or not there, probably not quite yet, but it's something that -- I guess that unlimited, that part of the market develops, it does have an effect and stabilizes at certain level of usage.

Okay, thank you.

Thank you. Our next question is from Jody Santiago.

Yes hi. Good afternoon and thank you for the call. My first question is on your dividends. You're guiding towards maintaining your 70% payout ratio. With the higher CapEx target, how much scope is there to pay the 30% special dividends that PLDT has paid in the past?

Secondly what is your strategy to temper the SMS and voice volumes decline that Poly was talking about earlier, from the migration to social networks? I guess you want to slow down this decline that we've seen in the past quarter.

Thirdly on fixed line, you had -- you mentioned that NLD and ILD revenues were declining, but there was also some decline in the domestic data service revenues. That has been quite volatile actually in the past years. What trend should we expect moving forward, or what was the reason for the decline and what should we expect moving forward.

And then lastly the hearing of the NTC on May 23, what are your expectations? Thank you.

On the dividend policy, we have stated that we have the capacity to fund the incremental CapEx with debt. So we don't think that the higher CapEx per se should change our dividend payout policy.

The SMS volume versus MMS is a trend of this behavior [we've seen] in the market. And therefore it is for us to make sure that we are able to participate in this change in behavior. And that is the reason why we are really emphasizing the strategy of looking at developing our own, end to end control of this matter by looking at the launch of the Netphone and be able to stimulate and participate in this transformation in the market.

As far as the traditional services are concerned, we are also looking at our offers on the SMS and trying to enhance this with several features that would allow us to attract more consumers to using it even more. So these are the type of (inaudible) that we want to do. I cannot describe it to you in detail for obvious reasons, but we're moving towards trying to arrest the decline and at the same time even enhance it. Let me just tell you that the April volumes are looking better than March, so in effect whatever we are doing is giving us favorable yields.

I think the third question was on the fixed line data services. And I think your observation, Jody, is correct. I think that, particularly starting from the middle of last year, and I think this is what we've been highlighting, is that if you look at domestic data services, it really is split between traditional services and the newer IP-based services, some of them with a wireless element such as the SWUP product. So I think we're seeing quite good growth on the IP side.

On the domestic data service, the main volatility is brought about by the re-pricing between the fixed and the wireless business for the use of effectively the [certain] transmission facilities, the DPON facilities on the fixed, driven really by the far greater volume that Smart has been using. So in the absence of that actually the domestic data business would have been actually a little bit ahead, probably about 7% ahead because the adjustment in the first quarter was something in the region of about PHP700m between the two.

So I think it's a fair comment, but I think the biggest volatility really is a result of that price and volume driven pricing adjustment. Now that will affect us again in the second quarter but the re-pricing kicked in, I think, in the third quarter results last year. So you should see significantly less volatility in that particular line item in the second half of the year because we would anticipate actually that our IP-based revenues there would continue to grow, excluding the impact of that re-pricing.

And then, I think, the last part was on the -- well, actually we are hoping that actually it does not -- it's not going to be too much happening there. We understand the first hearing will be principally sort of information gathering, facts and figures type session, where information will be requested and turned over to the NTC. So it could be that some parties use it as an opportunity to be vocal in terms of views and the like. However that's not how we anticipate it going. As I say, it will be very much a sort of technical, information-gathering exercise during the first hearing. So it may be later in the process before the hearings themselves become, I don't know, more interesting from a process perspective.

A quick -- just to follow up on that. So May 23 you have information gathering and then you would anticipate maybe a couple more hearings after that. Does that mean that potentially that the June -- what is it, the June or July deadline that you're targeting could be moved?

No, I think we're targeting a June closing. And I think at this stage, as far as we're aware, that that's still achievable. But that line isn't absolute between ourselves and the JG Digitel Group. There is some flexibility built into that. But we are anticipating that there would be more than one hearing and we're anticipating also that we can still aim to close by end of June. So there is the ability to go beyond one hearing and still close by the end of June.

I think we're hoping that the subsequent hearings would be called on a weekly basis so that things can be dealt with expeditiously.

Okay. Thank you very much.

Thank you. Our next question is from Vishesh Gupta.

Yes hi. This is Vishesh from JP Morgan. And I have just one question remaining and that's on wireless net adds which seem to be really declined by around 35% year-on-year. I'm just trying to get a sense of what is the Company expectation for the full year?

Can we have the question again? Is it wireless subscriber --

The wireless net adds were weak. They declined by around 36% year-on-year and around 33% quarter-on-quarter. If you can give guidance on what is the expectation for the full year or the reason behind the weakness?

Our net adds for the cellular business is at 1m for the first quarter which is quite good actually.

No, this is -- I'm talking of monthly net adds. So these amount to around 1m for the quarter.

What was that again, can you please --?

Basically I'm talking about the monthly net add number, so monthly net adds amount to around 340,000 for this quarter.

Sorry. We're having a hard time understanding what you're saying. But I kind of assume that on the cellular net adds we did add about 1m subscribers to our --

Yes, but that was still down 35% year on year and around 33% quarter on quarter.

Subscriber number was 1.8m in the first quarter of 2010. I think you have to take into account what penetration in this market is already, so nominally already over 90% in terms of penetration. So the net adds pretty much represent second phase and up type of additions already.

Okay, okay.

So it's really (multiple speakers) in the sense of our overall penetration.

Okay, thank you.

Thank you. Our next question is from [Bebe Yu]. You may ask your question.

(multiple speakers) for the call. Hello, thank you for the call. I just have one simple question in relation to Meralco. I was wondering if you have any further plans to divest any more of Meralco to Beacon Electric?

Yes, with respect to the 6% direct holdings that we have, the plan is for that to be injected into Beacon before March 2012.

Would that be done at market price?

Yes.

Okay, great. Thank you.

Okay. Our last question is again from Neeraja Natarajan. You may now ask your question.

Yes, hi. I just wanted to come back on the cost savings and the network modernization. So you're saying that the current outlook for EBITDA does not include improvements from this initiative. And, if possible, can you quantify this, or will you be able to quantify it sometime down the line?

I think we should reserve to quantify it sometime on the third quarter to a certain extent because right now we're still rolling out. But definitely we're looking at efficiency savings and, at the same time -- because we're moving into a more efficient access network, plus at the same time looking at a consolidation of our core network which will be moved into all IP. So that is something that we would like to roll out first before we can give you exact figures, but definitely there will be efficiency savings.

Okay, thank you.

Okay. That concludes the question and answer portion. Before I turn the conference back over to PLDT, I would like to give everyone the instant replay information for today's call.

This conference will be available on a 24 hour instant replay, starting today, daily on through May 24, 2011. So the replay information is as follows. International caller number is 852-3018-4114. The US toll-free number will be 1-866-361-4939. And the pass code will be 5346 and the conference leader is Ms. Melissa Vergel de Dios.

I will now turn the conference back to PLDT for any additional or closing remarks.

Thank you very much for joining us today, on behalf of my colleagues who are here. And we look forward to talking to you again sometime in August too when we will be releasing our first half results. Thank you.

And that concludes today's conference. Thank you for your participation. You may now disconnect your line in your own time.