PLDT Inc (PHI) 2011 Q2 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 half 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. Thank you.

Good afternoon and thank you for joining us today to discuss the Company's financial and operating results for the first half 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.

In today's presentation we have with us members of the PLDT Group management team, namely, Mr. Manny Pangilinan, Chairman of the Board; Mr. Poly Nazareno, President and Chief Executive Officer of both PLDT and Smart; Mr. Chris Young, Chief Financial Advisor of PLDT; Ms Anabelle Lim Chua, SVP, Treasurer of PLDT and Chief Financial Officer, Smart, and Attorney Ray Espinosa. At this point let me turn the floor over to Mr. Poly Nazareno for the presentation.

Thank you, Melissa. Good afternoon and thank you for joining us today. Allow me to share with you PLDT's financial and operating results for the first six months of 2011.

The challenges in operating conditions that we signaled to you in the first quarter of the year have not abated, with the continued effects of a slower economy and continued intense competition within the telecommunications industry. Nonetheless, our overall results show that we have weathered these conditions fairly well, considering that the first half of last year benefited from the election spending.

Service revenues for the first half of 2011 decreased by 3% to PHP69.6b, compared with PHP72.2b in the first half of 2010. Compared with the second half, however, service revenues were only 1% lower. Expenses for the quarter were lower by PHP800m, or 2%, to PHP42.5b from the same period last year and 7%, or PHP3.1b, lower than the second half of 2010.

EBITDA margin was steady, at 60%, although EBITDA declined by 4% year on year, to PHP41.5b. Compared with the last six months of 2010 EBITDA grew by PHP1b, or 3%. Reported net income for the year was lower by 2% year on year, at PHP21.3b, but higher by 15% versus the second half of the last --of last year. Core net income declined by 1%, to PHP21b, from PHP21.2b last year, but is 1% higher than the PHP20.8b for the last six months of 2010.

Free cash flow for the period grew strongly by PHP4.8b, or 25%, to PHP24.2b, allowing us to maintain the interim dividend payment of PHP0.78 per share similar to that of last year. The average peso/dollar exchange rate for the period was PHP43.52, an appreciation of 5% versus the same period in 2010.

This slide shows how our second-quarter results compare with the same period last year and with the first quarter of 2011. Service revenues were 1% higher, relative to the first quarter this year, reflecting seasonality. Expenses were 4% higher with some cost items, such as provisioning, being higher in the second quarter compared with the first. As a result, EBITDA was lower by 2% quarter on quarter, with margin also down, at 59%.

Core and reported net income declined by 1% and 2% quarter on quarter respectively. With the second quarter of 2010 having had the benefit of election spending, service revenues for the second quarter of 2011 were lower by 3% year on year. Core income was down by 3%, although reported net income grew by 3%. Nonetheless, free cash flow for the first six months of 2011 grew strongly by 40% compared with the same period last year.

On the next slide, reflecting the Group's continued strong financial position and robust cash flows, the Board of Directors today declared the payment of an interim dividend of PHP78 per share, representing 70% of the first-half core income consistent with PLDT's dividend policy. Record date is August 31, while payment date is September 27. The PHP78 dividend is similar to the interim dividend declared in the first half of 2010.

Core net income for the first half of 2011 declined by PHP200m, or 1%, to PHP21b compared with PHP21.2b last year, bearing in mind that revenues in the first half of 2010 were boosted by election spending. The decrease year on year is due to lower service revenues, partly offset by a reduction in the provision for income tax as well as lower consolidated expenses resulting from the continued focus on cost management. Had the peso remained stable, core income would have been higher by about PHP500m, at PHP21.5b.

Comparing the first-half core net income with the second half of 2010, core net income is 1% higher. Reported net income for the first six months of 2011 declined by 2% year on year, to PHP21.3b. Comparing with the last half of 2010, however, reported net income is 15% higher.

PLDT's consolidated service revenues as at the end of June 2011 was lower by 3% year on year, at PHP69.6b, as a result of the growth in new revenue streams not able to fully replace the declines in traditional revenue streams; the 5% average appreciation of the peso year on year resulting in lower revenues of almost PHP1b, given that about 26% of our first-half service revenues are linked to the US dollar; and about PHP200m in lower revenues from the sale of our satellite business at the end of the first-quarter 2010.

Service revenues for the second quarter this year were lower by 3%, the second quarter of last year having had the benefit of election spending. However, second-quarter 2011 revenues showed a 1% improvement quarter on quarter. In addition, if we compare first-half 2011 consolidated service revenues with the last half of 2010 the decline in service revenues is only 1%.

EBITDA margin was stable at 60%, although consolidated EBITDA for first-half 2011 declined by 4% year on year, to PHP41.5b, but increased by 3% compared with the second half of 2010. CapEx for the first six months of 2011 amounted to PHP6.3b, 35% lower than last year, with our CapEx spend expected to build up towards the end of 2011.

Free cash flow as at June 2011 grew strongly by PHP4.8b, or 25%, to PHP24.2b, due to higher cash from the operations of PHP2.8b, lower CapEx by PHP3.4b and a decrease in net interest of PHP400m. Our free cash flow of PHP24.2b is greater than the core profit for the period of PHP21b and are more than sufficient to cover the payback of the dividend in September.

On the next page, net debt at the end of the first half of 2011 remained at $1.3b, similar to the end of 2010, despite an increase in gross debt by $100m during the same period. The additional borrowings were used to partially fund CapEx requirements and to refinance debt. Net debt to EBITDA was 0.7 times.

PLDT's cash and short-term investments at the end of June stood at PHP39.3b, or $0.9b. As we continue to tap the local debt market our US dollar debt as a percentage of total debt has declined from 45% at the end of 2010 to 41% at the end of June. Taking into account our hedges, peso loans and dollar cash holdings, only about 21% of the total debt remains un-hedged. 81% of our debt are fixed-rate loans.

PLDT's debt profile remains healthy with maturities well spread out. Fitch and Moody's both upgraded PLDT's securities to investment grade, with PLDT's ratings capped by the sovereign rating. PLDT is the only Filipino corporate with investment grade ratings for its debt securities.

Allow me now to provide you with more details on the different businesses, starting with Broadband. The Broadband momentum that started in the first quarter of 2011 continued into the second quarter, as can be seen from both the subscriber and revenue growth registered for the period. PLDT's combined Broadband subscriber base grew by 10% from the end of 2010, to reach 2.2m subscribers at the end of June, representing net adds of almost 200,000 for the first six months of the year with net adds for the second quarter of over 113,000, higher by 41% than that for the first quarter.

Of our total Broadband base, about 1.5m are Wireless subscribers, of which over 1.1m are Plug-it prepaid subscribers. DSL subscribers grew to nearly 700,000, or over a third of our total Fixed-Line subscriber base. Total revenues from Broadband for the first half grew by 8% year on year, to PHP9b, or 13% of total service revenues.

DSL revenues increased year on year by 13%, while Wireless Broadband revenues, including revenues from Mobile Internet, were higher by 5%. Mobile Internet revenues continue to grow strongly with a 44% growth year on year, to PHP498m, compared with PHP345m in the same period last year. Our device strategies involving different smartphone models are directed to different market segments to encourage usage at all levels.

Active Mobile Internet users continue to grow monthly, with average daily revenue increasing by more than 30% year on year. We have also launched several unique initiatives, such as free Facebook for feature phones and an exclusive distribution arrangement for the HTC ChaCha, a moderately priced smartphone with a dedicated one-button access to Facebook, a first of its kind. In addition, we are pushing Broadband by making available content to our Watchpad offering and via a streamlined approach to marketing Broadband to the home.

On the next slide, despite high market penetration Smart's combined subscriber base continued to grow strongly, to reach 47.8m at the end of June 2011. This reflects net adds of 2.2m from the end of 2010, with the net adds of the second quarter of 1.2m higher than the 1m in the first quarter of this year.

Wireless service revenues for the first six months of 2011 decreased by PHP2.1b, or 4% year on year, to PHP45.7b. About PHP500m of the decline was accounted for by the peso appreciation, which impacted 21% of our total Wireless revenues which are dollar linked. Voice revenues declined by PHP1.6b, primarily due to a PHP700m reduction in international Voice revenues resulting from lower international termination rates and the impact of the peso appreciation, coupled with a PHP900m peso decline in domestic Voice revenues due to the rise in unlimited offers.

SMS revenues registered a PHP300m reduction because of lower SMS traffic and the impact of social media. The 44% increase in Mobile Internet revenues offset some of the decline in Voice and SMS. Wireless EBITDA for the first half of 2011 was 2% lower year on year, at PHP29b, largely due to the decline in service revenues which were not fully offset by the PHP1.5b reduction in cash operating expenses resulting from the focus on cost control. EBITDA margin for the first six months of 2011 improved to 63%, from 62% in the same period last year.

On the Fixed-Line service, Fixed-Line service revenues for the first six months of 2011 were lower by 7%, at PHP23.5b, as a result of the combined effect of higher DSL and third-party corporate IP-based revenues, offset by the expected continuing declines in LEC, ILD and NLD revenues.

[DPhone], international I-Gate and Fibernet revenues were also lower year on year, as a result of lower pricing and the impact of stronger peso. Approximately 23% of our first-half 2011 Fixed-Line revenues are denominated in US dollars. Had the peso remained stable, service revenues for the first six months would have been higher by about PHP300m.

EBITDA margin for the first half of 2011 dipped from 50% in the first half of 2010 to 49%, but improved from 47% for full-year 2010, reflecting the impact of efforts to control operating expenses. EBITDA for the quarter decreased by 10% year on year, to PHP11.4b, with the reduction in revenues offset by a 2%, or PHP200m, decline in cash operating expense. The impact of various management initiatives, such as the manpower reduction program implemented in the fourth quarter of 2010, is beginning to register in our financial results.

On the next slide, the continued improvement of our ICT business is reflected in the higher service revenues, EBITDA and margins recorded in the first half of 2011, despite the impact of the peso appreciation in this segment, where 68% of revenues are dollar linked. Had the peso remained stable, service revenues would have been higher by PHP200m. First-half 2011 service revenues grew by 3% year on year, to PHP5.4b, comprising about 8% of total PLDT Group service revenues.

The Data Center business registered a strong 15% increase in service revenues compared with last year, largely as a result of increases in co-location and rental revenues, as well as revenues for managed services. Our BPO businesses, particularly the Content Solutions and Healthcare divisions, posted a 15% year-on-year increase in service revenue in dollar terms, but was muted to 10% by the peso appreciation.

Revenues from our Customer Relationship Management, or CRM, business dipped by 9%, to PHP1.4b, in the first quarter of 2011, compared with the same period last year -- or first half of 2011 compared to the same period last year. This was partly due to the impact of the peso appreciation and lower dollar sales, partly offset by a 12% growth in domestic sales.

ICT's EBITDA for the first half 2011 advanced by 29% year on year, to PHP979m. EBITDA margin, likewise, climbed to 18% for the period, compared with 14% last year and in first-quarter 2010, and 16% for the full year 2010. The EBITDA increase was due to higher service revenues and the reduction in cash operating expenses.

EBITDA for the BPO business was up 54% in dollar terms due to better utilization of resources, technological innovation and cost-cutting initiatives. The prospects for our ICT business remains bright in terms of revenues and profitability.

Page 13 provides highlights on Meralco, whose financial results are equity accounted as a result of 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 core and reported net income for the first six months of 2011 stood at PHP7.8b and PHP6.1b, representing a year-on-year growth of 35% and 26% respectively. These increases largely reflect the impact of the various tariff increases granted to Meralco, the increased customer base and lower cost and expenses.

PCEV equity share in Beacon/Meralco's core and reported earnings of PHP757m and PHP1.2b respectively in the first half of 2011 compared with PHP783m and PHP1b in the same period last year. Last July 25 the Meralco Board declared an interim dividend of PHP3.45 per share, representing 50% of the core earnings for the first half of 2011.

Following its pursuit of sourcing cheaper power sources and identifying new sources of growth, Meralco recently entered into a joint venture with the Aboitiz Group and Taiwan Co-gen, which JV will build 600 megawatts coal-fired base-load plants that will be operating starting 2014.

I would just like to update you on the status of the investment in Digitel that we announced in March this year. At the shareholders' meeting in June we obtained approval from the PLDT shareholders to issue new common shares which will be used to pay J.G. Summit and other sellers for the acquisition of Digitel. We are awaiting the decision of the National Telecommunications Commission, now that the regulatory hearings and requisite submissions have been completed. Once the approval of the regulator is obtained, we will seek the remaining approvals, after which we should be able to close the transaction.

On the next slide, on July 5 the PLDT Board approved amendments to the Seventh Article of PLDT's Amended Articles of Incorporation to sub-classify the Company's authorized preferred capital stock into non-voting and voting preferred shares. These amendments are up for approval by the PLDT shareholders on September 20.

Under the proposed amendment 150m voting preferred shares with a par value of PHP1 would be created, resulting in an expanded voting capital for PLDT consisting of common and voting preferred shares. This structure would be similar to those of other Filipino listed companies engaged in land development, public utilities and mining. The PLDT voting preferred shares will be entitled to vote at the shareholders' meeting to elect directors and can be only by Filipino nationals. The other features of the preferred shares and the actual issuance of the said shares will be determined by the Board of Directors at the appropriate time.

That ends my presentation and let me turn over to you the floor to Mr. Manny Pangilinan, our Chairman, for the outlook for the rest of the year. Thank you.

Thank you, Poly, and good afternoon to everybody. My presentation will just be brief this afternoon. Basically, the Group guidance that we gave in -- with respect to the balance of the year is broadly similar to the guidance numbers that we have indicated last March when PLDT announced its 2010 results.

Service revenues will be -- are expected to be lower in 2011 compared to 2010. Indeed, the first half showed revenues down -- service revenues down by about 8%. One factor, which was the appreciation of the peso by 5%, which accounts for about PHP900m of the reduction in revenues for the first half. And with the peso continuing to strengthen, so, it will impact on service revenues for the balance of the year.

EBITDA has been guided at flat probably slightly down, given the performance in the first half as well, but margins will be maintained at around 60% of service revenues. Core has been guided at PHP40.5b for 2011 compared to PHP42b in 2010 for core income.

On CapEx, as Poly has presented, the CapEx spend for the first half was lower, in fact, than the CapEx spend for 2010, [at] PHP6.5b compared to PHP9.7b in 2010. So we probably have to reassess the overall CapEx level when we announce the third-quarter results with respect to the full-year CapEx. And as and when the Digitel transaction closes we do have to reassess how the CapEx expenditure of both companies could be better deployed for the balance of the year and onwards.

Capital management, as Poly indicated, regular dividend 70% with a look back for -- in respect of 30%. I think given the strong cash flows of the Group, principally with lower -- as well because of the lower CapEx spend, it is likely that the free cash flow should be much better this year compared to last year.

All these numbers do not, of course, reflect any potential change to them that might result from the Digitel transaction, if and when it does complete on or before August 26, because I am sure that its subject to due diligence and certain acquisition-accounted adjustments might arise as a result of the investment in Digitel.

That concludes my presentation.

We are now ready to take your questions. We'll take questions from the conference facility before we take questions from the floor. Operator, then.

The floor is now open for your questions. (Operator Instructions). We have a question from Mr. Luis Hilado of HSBC. Mr. Hilado, please go ahead.

Hi, good afternoon. Thanks for the call and congrats on the results. Just three questions from me. First of all, just on the q-on-q and year-on-year increase in marketing expenses, it seems a bit hefty at over 30%. Just wondering if we'll see that impact of that -- if we've seen that impact of that already in these results or whether that will translate to better revenues in the third quarter.

Second question is regards to SMS yields. It seems to be improving, quarter on quarter, quite healthily. Just wondering if that's a sustainable trend and whether -- what's driving that trend.

And last question is just on the tax rate, 23% for the quarter. Should we plug that in for the rest of the second half of the year?

Maybe I'll just try the tough one, which is the tax rate. I think there are just some timing differences quarter on quarter. And I think the tax rate that we see in 2010 you'll see really for the full year of 2011. I think it's about 25% both on the reported or core. So I think that's really just a timing difference that we see quarter to quarter.

Okay.

Hello, Luis. On the SMS yields I think we basically are seeing the levels relatively sustainable, given the mix of where the traffic is, which is more on the unlimited revenue. So that kind of a yield is a result of the mix that we have in terms our mix in the traffic at the moment.

Luis, on the question of marketing expenses, yes, there will be an increase in marketing expenses. And I think you noticed about in the second quarter there was an increase. It will be a little bit higher in the coming few months because we are launching several initiatives on both Post-Paid and Pre-Paid and on the Unli side of the business. So that's going to be the prevalent expense moving forward. But that has been taken into account and we expect that revenues will improve in the second half as a result of these initiatives.

Thanks a lot.

Our next question is from Vishesh Gupta from JPMC. Please go ahead.

Yes, hi, thanks for the call. Just one question from me. Can you help me better understand the associate contribution line [due] for Meralco? Basically, how does the reported PHP839m relate to Meralco's first-half pre-tax profit of PHP9.6b and net income of PHP6.1b? Thank you.

The Meralco earnings are taken up on an equity accounting basis at the PLDT level on two fronts. We have a participation in the earnings through our 50% ownership in Beacon which, in turn, now owns about 39% of Meralco. And PCEV, which is effectively 100 -- 99.5% owned by the Group, also has a direct 6.1% equity share in Meralco, so we equity account for Meralco's earnings on the basis of those ownership levels.

But there are certain other adjustments that we take up with respect to; one, aligning accounting practices with PLDT's accounting practices; second, the purchase -- fair value adjustments relating to the purchase price allocation; and then, third, at the Beacon level certain debts have been entered into to finance the purchases of Meralco shares, so there are -- there is a financing cost that is booked at the Beacon level. So all of that -- effectively, we pick up roughly about 16% of Meralco's core income in our numbers.

All right, thank you. And if I can follow up with one more question, basically, a different one. Globe recently launched an unlimited SMS offering to all networks. Is there any plan to come up with a similar offering on PLDT?

We already have a similar offer of both Unli Text to all networks and also bundled with Unli calls within on-net calls. So that has been launched --

Okay, thank you.

-- recently, I think, last month.

Thank you.

Our next question is from [Chate Benksa]. Please go ahead.

Hi, thank you very much for the call. I have three questions. The first one is regarding the number of Voice minutes in the second quarter. If you look at it on the quarterly basis it seems to me like it spiked quite a lot in the second quarter. Is that because of any specific promotion you launched and should you expect this trend to continue?

The second question is regarding the CapEx spending. That looks a little light compared to your full-year guidance. I just would like to understand if this is just a timing of booking and that you have already entered into a commitment to spend the CapEx as guided into the second half, or it depends on some certain revenue progression or anything like that.

And the third question is regarding the Wireless Broadband progression. Even though the penetration and everything is still quite low and the opportunity is there, I notice that the Wireless Broadband revenue progression has been a little bit on a lower side year on year. I just would like to understand what do you see as a trigger point that the growth would accelerate from here? Is it a demand issue, or is it a supply issue; the network or the content? What are we waiting for in terms of trigger point for the revenue to accelerate? Thank you.

I think, Anabelle, is going to take the Voice minutes.

On the CapEx side, yes, you're right it's a little bit of a timing issue there. Our CapEx for the first half is lower than last year maybe because the approval on the CapEx spending was triggered some time end of March. And we are still proceeding with the scheduled modernization and it should be coming [to us] in the second half of the year.

So most likely the CapEx will, of course, will be used at a time when the Digitel transaction will be completed. But the modernization plan will proceed at a level that will be justified on our own network. And when we are able to get visibility of the Digitel network, then we are able to adjust, accordingly, the CapEx. But generally that will be at the second half or back end of the year.

In terms of Broadband, the penetration is still low, that's right, and we feel that Mobile Broadband is the key and where the growth will be. And there we have drawn up a road map for our handset strategy there, including the net-phone. And we feel that when the barriers of entry will be lower when it comes to the mass -- availability for the mass markets on the handsets for smartphones, that's when this will be -- this will hit the tipping point.

So we're looking at contributing to that by developing the net-phone and launching the net-phones that will be affordable and in many variants that will be affordable to the consumer at the lower end.

On the increase in Voice minutes, I guess it's driven by two things. One, more aggressive Voice offering variants that we have been marketing. At the same time, as we expand the network through CapEx and modernization programs we are effectively adding Voice capacity, so there's more Voice capacity to sell.

Thank you. Just a little bit of a follow up on the Wireless Broadband initiatives. I understand that you were mentioning about the small-screen mobile data. How about the dongle Wireless Broadband? That seems like it has been a key portion of the revenue. So have you de-prioritized that and will not pursue growth on that front aggressively, or actually there's no robust growth opportunity for that?

Well, yes, you're right, the growth there is also quite robust and our approach there is to segment the market very finely. And that's why we have four types of dongles that we have launched. One is the starter dongle at a price that is less than $20. And then we have the regular dongle which is the power plug-in. And then the third would be the rocket, where the speeds are much higher. And the fourth is of course our LTE dongle which is going to be commercially available once the network is rolled out. Right now we are testing the LTE network on six spots within the country for our initial tests.

Okay. Thank you very much.

Operator --

Our next question is from Mr. Arthur Pineda of Citigroup. Mr. Pineda, please go ahead.

Hi, thanks for the call. Three questions from me. Firstly, looking at your Wireless Data revenues, it appears that it's not really moved much and it's very different from the other markets, like Indonesia and the Philippines, which have been growing by 25% to 50% in revenue terms. Why do you think Data take-up is so limited in the Philippines and what can be done about this?

The second question I had is with regard to your CapEx. Given that Data take-up seems to slow, is there room for you to actually ratchet back your CapEx plans over the next two to three years? On a standalone basis, as I recall, part of the CapEx uptick was partly due to Data preparation.

Last question I had was with LTE. Could you please just provide a little more color on what your plans are on this side? Thank you.

In the case of the Philippines, when we talk about our Wireless Data revenues there is quite a significant component that relates to Text Messaging as against Data, in the sense of smartphones, Internet browsing and other such value-added services. So you're seeing a composite picture, in that the Text-based types of revenues have come down on the back of lower yields that we've seen on SMS.

But in terms of Internet-based revenues we see, for example, our mobile browsing revenues increased by 44% year on year. So at the moment it's still because you're carrying a much larger number on the Text side that is affecting the picture of leading to your conclusion that Data is not growing as much as other countries.

On the question of LTE, as I mentioned earlier, as you know, LTE is the natural evolution of the technology road map for the GSM. And we are right now looking at the technology and deploying it on an experimental basis on six areas in the country. And we'll see from there as to how the technology and how we can take advantage of the way moving forward.

Right now we are still expanding our 3G coverage and at the same time moving into HSPA plus, which is -- can afford us higher speeds when it comes to Mobile Broadband. So the road map is from 3G, moving up to HSPA plus, then, after that, a full-blown LTE deployment.

No clarity on the timetable on the commercial operations for this?

For the LTE, not yet. We're still looking at how these six areas will be delivering, but next year we may have more areas to experiment on.

Understood, thank you.

Our next question is from Neeraja Natarajan of Nomura. Please go ahead.

Thanks. Thank you. I have a few questions. Firstly, on the Wireless side you had mentioned that there was a reduction in international termination rates. Is that right? Can you provide some clarity behind this? Was there some reduction, or is this based on a mutual agreement that these rates have come down? If you can provide some color on that.

Secondly, in your Fixed-Line business the Data segment seems to have done a bit better in this quarter. So are we starting to see a reversal following the whole pricing adjustment that was seen? Should this pick up in growth back to, say, 10%/15% in the back half of this year?

And then, thirdly, on this handset arrangement you have -- a launch of handsets in the back half of this year, does this means that you will actually be competing with the Nokias and, say, the iPhones, for example, to create mind space. Is that the way to see it, or will the vendor who is providing these phones be taking the risk for selling them? So if you could give some clarity on that.

Also, do you see any need to do some work on the applications front, which is probably more catering towards Philippines or something on a local content side to drive up Data growth from here on? That's it from me.

The easier one on the Fixed costs, I think. On the Fixed, I think your observation is correct. There is some pickup on the data side q on q. And, in fact, in the second quarter the impact of, as you know, the adjustment to the Diginet pricing we will no longer be impacted by that. So actually we would expect in the second half of the year to see our Data revenues increasing. So I think that's one thing that we are positive about. And it should result in a better performance in the second half on the revenue side from the Fixed business.

With regards to your third question on the net-phone, we are actually launching the net-phone mainly because the available smartphones at this point are still quite expensive for the mass market in the Philippines. And the net-phone is going to be priced -- it will come in several versions, but it's going to range from $70 up to about $120 for the touch-phone version.

And what has been done is that the user interface has been specifically designed for the Filipino consumer. And we felt that with this it can complement the array of services and the phones or handsets that will be available, which would be including the high-end smartphones.

So we are not really trying to compete, but we are making it affordable to a wider base of the market so that Broadband penetration on the Mobile side would be enhanced and would be increasing favorably in the next few months. The next -- the launch on the net-phone would be somewhere -- sometime in August or September.

Okay. Sorry, if can just ask a question on the handset. I'm trying to understand if you will -- the vendor will bear some amount of the risk, for example, for the take-up of these phones, or is it -- will it be totally on PLDT? So we could see your working capital -- your inventories go up and your working capital structure. Is that the way to think of it?

There are no fixed agreements as to volumes for the net-phone. It has been developed jointly by us and the OEMs in China, to be particular. And it will be, therefore, not a burden to our working capital because we will be ordering handsets as we move on with the demand. As the demand increases, that's when we order the handsets. There are no fixed volume requirements.

Going back to your first question on the international termination rates, the decline is driven more by the peso appreciation. So the peso's strengthened by about 5% year on year. So that's the principal driver for the decrease in the international inbound revenues.

Okay. So there was no reduction in the rate, as such, that's been agreed or anything like that.

It's been holding [up] at the same range.

Okay. Can I also get your thoughts on this discussion on termination rates for the domestic calls? What's the probability that it could get implemented?

Well, the -- what we've been discussing with the NTC the rates in conjunction with the -- their proposed lowering of interconnection charges, but they've not addressed that specifically yet. They're really focused on the domestic interconnection charges first, because they believe that by lowering those charges it could result in lower retail prices. Although we've cautioned the NTC that the lowering of the interconnection charges do not necessarily result in the lowering of retail charges. And you've seen that happen.

One good example is termination rate in the Philippines is PHP0.11 from, say, one country in the Middle East and yet the retail rate for an outbound call from that country to the Philippines is still PHP0.40. So there's virtually no direct correlation between lower interconnection charges and lower retail rates. So we're cautioning the NTC that they have to tread carefully because all that that will do for PLDT is to transfer, basically, money from us to our competitors.

Is there any -- can you provide any clarity if you guys are net payers? I understand a lot of the calls are on-net rather than the -- across networks but --?

On SMS it's basically receipt per call, so there's scope for parity on that one. On Voice, because naturally we have a bigger subscriber base, then we're a net receiver on the Voice side.

Okay. Sorry, one last follow-up question. Given that you guys are now increasing your marketing expenses, it seems to be a bit of a change from the first quarter. And also that the Data segment and Fixed-Line should do better in the back half, and then you're also expecting a revenue kicker from all the selling and promotions, are we a bit cautious on the revenue guidance of 4% decline?

I guess so.

Okay, great. All right, thanks very much. That's it from me.

Our next question is from Rama Maruvada of Daiwa. Please go ahead.

Hi. Good afternoon, one question from me, please. If you could explain the movement on Fixed-Line subscribers, in particular the Fixed-Line Pre-Paid subscribers seems to have churned. So any color there would be quite useful. Thank you.

I think that's a positive thing. I think we --most of these Pre-Paid subscribers came onto the network several years ago and, in fact, they're rather a low ARPU subscriber. So I think two things have happened. One is that we've been doing some tidy up there of the subscriber base, but, two, we've been trying to upgrade the subscribers to a full Post-Paid line and/or a bundled DSL and Voice line. And, in fact, that's been one of the sources of the increase in our Post-Paid subscriber base.

You'll see that the numbers have gone up. And it's also contributed to the increase in the DSL subscribers. So I think it's a positive development, in that we've been able to up-sell from the lower ARPU subscriber to higher, either Voice subscriber or bundled Voice and Data subscriber. I think that is a trend that we would expect -- you can expect to continue over the next 12/18 months or so. It's a source of increased ARPU for us going forward.

Okay. Chris, if I can just follow up on that then, any color on the revenue front, in the sense the local exchange revenues have declined? How does this migration impact the recognition of the revenue? Is a portion of it actually going on to another segment, like Data Services or (multiple speakers)?

Yes, yes. That's exactly the analysis, that one of the sources of increased Data, DSL revenues on the consumer retail side, is the existing Pre-Paid and Post-Paid base. So as we up-sell from a pure either Pre-Paid or Post-Paid Voice line, to a bundled line, that would tend to reduce, to some extent, the traditional Voice revenues, but actually is a positive contributor to the increase in DSL revenues.

So if you look at the year to date you can see that we've about a 13% growth in DSL revenues on the Fixed-Line and I think we expect that to continue to be quite robust through the balance of this year and, in fact, as we go into 2012 and 2013. So you will see that. But that is a trend that's set, I think, for the balance of this year and the next couple of years. Some reduction in the traditional Voice revenue, the LEC revenues as we call it, but contributing to higher revenues on the Data DSL side.

Yes, understood. Thank you very much.

At this time there are no more questions from the conference call facility. We'll take questions from the floor. The two microphones are in the aisle if you wish to ask a question. Last chance. No more questions from the conference facility, operator?

There are no further questions on queue.

Right, perhaps you could read us the replay information before we end the call.

Thank you. 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 August 16, 2011. Replay information, 3.00 pm call, international caller number country code 852 3018 4391, US toll free 1 800 839 3513, Pass code 7465. Conference leader is Melissa Vergel de Dios.

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

Right, thank you for joining us. We'll see you at the third quarter.

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