PLDT Inc (PHI) 2011 Q3 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 nine months 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 nine months 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; Ms Anabelle Lim Chua, SVP, Treasurer of PLDT and Chief Financial Officer of Smart and Mr. Doy Vea, Chief Wireless Advisor for Smart and recently elected President and CEO of Digitel.

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 on this call. Let me share with you PLDT's financial and operating results for the first nine months of 2011.

Aside from seasonality, the third quarter was impacted by heightened competition in the Wireless business and the strengthening of the peso versus the US dollar, as well as the continuing growth of Broadband.

Service revenues for the first nine months of this year dipped by 3% to PHP103.2b compared with PHP106.7b in the same period last year.

Expenses for the quarter were lower by PHP600m or 1% to PHP64.3b, from PHP64.9b in the same period last year.

EBITDA declined by 4% year on year to PHP61.1b while EBITDA margin stood at 59%.

Reported net income for the year was lower by 4% year on year to PHP30.6b.

Core net income decreased by 3% to PHP30.6b from PHP31.4b last year.

Core earnings per share for the first nine months of 2011 is PHP162.02 compared with PHP166.36 last year.

Free cash flow for the quarter improved by 11% or PHP3.8b to PHP36.5b.

The peso remained fairly stable versus the US dollar at the end of September 2011 having closed at PHP43.80 compared with PHP43.92 at the end of September last year.

The average peso/dollar exchange rate for the period of PHP43.26 reflecting a 5% appreciation of the peso versus last year.

Core net income as of end September 2011 dipped by PHP800m, or 3%, to PHP30.6b compared with PHP31.4b last year. That's on the second page -- on the third page.

The decrease is largely on account of lower Wireless and Fixed-line revenues partly offset by higher ICT revenues and equity contributions from our investment in Meralco, lower consolidated expenses and lower provision for income taxes.

Had the peso remained stable, our core income would have been higher by about PHP700m at PHP31.3b, similar to last year's level.

Quarter on quarter and year on year declines in 2011 core income reflect lower service revenues and higher expenses resulting from the competitive pressures, particularly in the Cellular business.

Reported net income for the first nine months of this year amounted to PHP30.6b or 4% lower than PHP32b last year largely due to the PHP800m decrease in core net income and a PHP500m decrease in the net ForEx and derivative gains.

On the next page, PLDT's consolidated service revenues for the first nine months of 2011 were lower by 3% year on year at PHP103.2b for reasons similar to those in the previous quarters. Growth in new revenue streams are not yet able to fully compensate for the declines in traditional revenue streams.

The 5% average appreciation of the peso year on year resulting in lower revenues of approximately PHP1.4b and about PHP300m in lower revenues is due to the sales of our Satellite business -- the sale of our Satellite business in the first half of 2010.

Approximately 26% of our September year to date service revenues are linked to the US dollar. Had the peso remained stable, our service revenue decline year on year would have only been 2%, while EBITDA would have been higher by PHP1b.

Consolidated EBITDA for the nine month period ending September 2011 of PHP61.1b was lower by 4% year on year as lower cash operating expenses only partly offset the decline in service revenues.

EBITDA margin for the period dipped to 59% lower than 60% for the same period last year, but similar to that for the full year of 2010.

Total expenses for the first nine months of 2011 of PHP64.3b is 1% lower year on year reflecting tight management costs from 2009.

Despite challenging business conditions -- on the next chart, despite challenging business conditions, cash generated from operations in the first nine months of 2011 remained strong at PHP55b which is PHP1b higher than last year.

With lower CapEx and net interest payment, free cash flow stood at PHP36.5b, an improvement of 11% or PHP3.8b over last year.

Note that free cash flow of PHP36.5b for the first nine months of this year is higher than our core income for the period of PHP30.6b.

CapEx for the nine months of 2011 amounted to PHP14.5b, 14% lower year on year. However, CapEx for the third quarter of PHP8.2b is higher than the total spend for the first half of 2011, reflecting the catch-up in spending as indicated earlier this year.

Smart continues to invest in its cellular and multi-platform Broadband networks, while upgrading its existing transmission or -- and access facilities. Smart now has over 3,000 HSPA base stations and 1,200 HSPA Plus base stations, more than double the 500 base stations in early September. As of mid October, a total of 120 cities and municipalities nationwide now have HSPA Plus coverage and Smart is also pursuing an aggressive rollout of WiFi spots to augment its Broadband coverage.

The base station upgrades are only one part of the PHP67b system-wide network transformation program, being undertaken by the PLDT Group. The program also involves the upgrading of other elements such as mobile switches, fiber optic backbone networks and international cable systems, among others.

The build-out of our third cable landing station in Daet, which is part of the Asia Submarine-cable Express, or ASE, is ongoing. This project will provide even greater resiliency and bandwidth capacity to our network, both critical to the delivery of data services.

Our strong free cash flows have allowed us to pay a total of PHP41.5b in cash dividends to date.

On the next slide, net debt at the end of September 2011 was $1.4b.

Net debt/EBITDA was 0.7 times.

PLDT had gross debt of $2.1b at the end of the first nine months of 2011, similar to year end 2010. As we continue to tap the local market, only 41% of total debt is denominated in US dollars and taking into account our US dollar cash holdings, peso loans and hedges, only 21% of our total debt is unhedged. 83% of our total debt are fixed rate loans. PLDT's debt profile remains healthy with maturities well spread out.

Cash and short-term investments at the end of September amounted to PHP33.3b or $800m. Additional debt may be raised to fund approximately PHP4b for the redemption of 405m SIP preferred shares and up to PHP5b to pay PLDT Digitel minority shareholders who may opt to tender their shares.

We recently issued a PHP5b fixed rate note facility priced at 30 basis points over peso interest benchmarks. Proceeds will be used to fund part of our capital expenditures and to refinance maturing loans.

Fitch recently announced the upgrade of PLDT's long-term local currency issuer default rating to A minus from BBB plus. Fitch also removed PLDT from a rating watch positive and changed the outlook to stable. PLDT is the first and only Philippines corporate entity which has been accorded an A minus rating.

On the next slide, let me now proceed, or provide you with more details on the different businesses starting with Broadband.

The growth momentum in Broadband is evident in our nine month 2011 results. PLDT's combined Broadband subscriber base grew by 14% from year 2010 to reach 2.3m at the end of September 2011, representing net adds of over 278,000.

Of our total Broadband base, over 1.5m are wireless subscribers of which over 1.1m are Plug-it prepaid subscribers.

DSL subscribers grew to over 725,000, or nearly 40% of our total Fixed-line subscriber base.

Total revenues from Broadband to the first nine months of 2011 improved by 10% year on year to PHP13.9b, or 13% of total service revenues. DSL and wireless Broadband revenues were each higher year on year by 13%.

The upward trajectory of mobile Internet revenues continues with a 109% growth in revenues to PHP1.1b at the end of September 2011 from PHP500m last year.

Third quarter mobile Internet revenues of PHP415m is a 120% improvement over the same quarter last year and a 9% rise over second quarter 2011.

Further, it is encouraging to note that while we have approximately 5m 3G and smartphones on our network, only 3m of them are used for mobile Internet on a regular basis. We therefore have an immediate potential market of 2m who can generate additional usage and revenues.

In order to convert these non-users we have designed a Broadband strategy on three fronts. Drive uptake by accelerating the adoption of smart net phone, both the device and the platform and other Internet enabled devices; capitalize on our network's superior performance and finally continue our device and service segmentation.

In anticipation of the increased demand for Broadband, we are investing heavily in our network to ensure that the customer experience meets expectations, in terms of speed, reliability and coverage.

Next slide. Smart continued to grow its subscriber base with 47.7m subscribers at the end of September 2011, or 2.1m new subscribers added from the end of 2010.

Most notable is the rise in the number of our postpaid subscribers to 477,000 having increased by 55,000 in the third quarter alone, one of the highest in recent memory.

Reflecting the continuing popularity of bucket and unlimited plans, wireless service revenues, for the first nine months of 2011 decreased by 5% year on year to PHP67.3b. Both cellular and cellular data revenues showed year on year declines of PHP1.3b and PHP2.1b respectively.

SMS traffic decreased by 6%, while yields remained stable. On the other hand voice traffic grew by 50%, while yield is now at PHP0.71 per minute.

Strong results were generated from mobile Internet and wireless Broadband with year on year improvements of 109% and 1% respectively.

Note however that the combined decline of PHP3.4b in cellular voice and data was only partly offset by the PHP600m in the combined mobile Internet and wireless broadband revenues.

Wireless EBITDA for the nine month period ending September 2011 was lower by 5% at PHP41.9b compared with PHP44.3b last year as decreases in revenues were partly mitigated by the PHP800m peso drop in cash operating expenses, following the tight management of costs.

EBITDA margin dropped to 62% from 63% in the first nine months of 2010 and full year of 2010.

Third quarter results reflect the impact of competitive market pressures and PLDT's response in defense of its market share. Service revenues declined 5% year on year to PHP21.5b. EBITDA was lower by 12% at PHP12.9b and EBITDA margin dropped from 65% to 60% for the quarter.

With unlimited offers here to stay and the competitive situation not yet quite stabilized, we expect higher selling and promotion expenses and subsidies to continue for the short term.

On the next slide, Fixed-line service revenues for the nine months of 2011 were lower by 4% at PHP35.2b due to combined effect of higher DSL and corporate IP based revenues, offset by the anticipated decreases in LEC, ILD and NLD revenues and leased line into 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. Excluding LEC, ILD and NLD revenues, DSL and third party corporate revenues actually grew by 9% year on year.

About 23% of our nine month Fixed-line revenues for this year are denominated in US dollars. Had the peso remained stable, service revenues for the period would have been higher by PHP400m.

EBITDA margin for the nine month period stood at 49%, similar to the same period last year but higher than the 47% at the end of 2010.

EBITDA for the period ended September 2011 dipped by 4% year on year to PHP17.4b with the decrease in revenues partly offset by 3% or PHP500m reduction in cash operating expenses.

EBITDA for the third quarter posted a 9% growth year on year with margin rising to 51% from 48% last year.

Higher service revenues for the quarter, in addition to low cash operating expenses and cost of higher -- and cost of higher sales, led to the improvement.

Our Fixed-line business has introduced various programs focusing on the HOME and enterprise. Our retail voice acquisition programs include low cost IDD offers, a HOME offering that bundles landline and Internet and video game services among others. We have also segmented further our enterprise markets to include micro businesses in addition to large corporates and small and medium sized enterprises. This will allow us to understand the needs of various customer groups in order for us to offer them relevant products and services.

On the next slide, the improvement in our ICT business is sustained with three consecutive quarters registering growth. ICT service revenues as of September 2011 rose by 3% to PHP8.2b.

The data center business continues to perform strongly with a 20% 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. Medical billing and content solutions continue to drive growth in our BPO business, registering a 13% year on year growth in dollar terms, although reduced to 8% in peso terms due to the peso appreciation.

Although our customer relationship management, or CRM, business registered a 2% decline in service revenues for the period compared with the same period last year, domestic sales improved by 11% year on year. 68% of ICT's revenues at the end of September 2011 were dollar denominated.

Had the peso remained stable, service revenues would have been higher by PHP300m.

ICT's EBITDA for the first nine months of 2011 improved by 36% year on year to PHP1.5b.

EBITDA margin has climbed to 19% for the period compared with 14% in the first nine months of last year and 16% for the full year of 2010. The EBITDA increase resulted from higher service revenues and lower cash operating expenses.

SPI continues to streamline operations while expanding its services which now include a more comprehensive and integrated suite of solutions covering among others revenue cycle management, health information recovery management, clinical documentation improvement and education and ASP hosting.

On the next page, this contains the 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 consolidated service revenues for the first nine months of 2011 grew by PHP4.4b or 2% to PHP192.9b as a result of higher transmission and distribution revenues offset by lower generation charges and system losses.

Consolidated core EBITDA of PHP21.6b grew 13% (sic - see presentation) year on year with core EBITDA margin of 11% (sic - see presentation).

Meralco's core and reported net income as of end September 2011 stood at PHP11.7b and PHP10b representing a year on year growth of 27% and 25% respectively.

PCEV's equity share in Beacon/Meralco's core and reported earnings amounted to PHP1.9b and PHP1.4b respectively.

A special dividend of PHP1.70 per share, representing 50% of the third quarter core net income, was declared by the Meralco Board yesterday.

Meralco increased its core income guidance for 2011 to PHP14.5b from PHP14b originally stipulated.

In October, PCEV announced the sale of its remaining 68.8m Meralco shares to Beacon Electric for PHP15.1b. PCEV in turn subscribed to 1.2b preferred shares of Beacon Electric for the same amount of PHP15.1b. With this, PCEV no longer has direct holdings in Meralco. Beacon now owns 45.35% of Meralco, making it the single largest shareholder of Meralco.

Other operating highlights of Meralco include the growth in its customer base to almost 5m at the end of September 2010; the ERC approval of the distribution rate for July 2011 to June 2012 and ongoing activities in connection with Meralco's re-entry into the power business via a joint venture with the Aboitiz and Taiwan Co-Gen groups.

Regarding areas of cooperation with the PLDT Group, Meralco announced that they were looking at introducing prepaid electricity services in 2012 while plans for Broadband over power lines would be deferred due to concerns on commercial viability.

On the next slide, PLDT completed its acquisition of Digitel following the approval granted by the National Telecommunications Commission, or NTC, on October 26. Following that approval, 3.3b Digitel shares were crossed in favor of PLDT, while 27.7m new PLDT shares were issues to JG Summit representing 12.9% of the expanded capital stock of PLDT as payment for the acquisition of Digitel.

As part of the sale and purchase agreement with JG Summit, the said PLDT shares will be covered by a one year lock-up period, except for shares which form part of option agreements undertaken by JG Summit with First Pacific and NTT. Exercise of the respective options would reduce JG Summit's ownership in PLDT to 8%. JG Summit is entitled to one seat on the Board of PLDT.

PLDT nominees were elected to the seven man Digitel Board, with Manny Pangilinan and Doy Vea named Chairman and President and CEO respectively. On the other hand, James Go was elected to the PLDT Board today.

Activities currently underway are the due diligence of Digitel and the finalization of plans for the mandatory tender offer to the Digitel minority shareholders by PLDT.

In connection with the acquisition of Digitel, PLDT committed to the following. Keep the Sun brand and Digitel to continue to provide nationwide unlimited type of services to the public; divestment of connectivity and limited resource enterprise in CURE, which includes its 10 megahertz of 3G frequency in the 2100 band and that PLDT and Digitel shall continue to provide high quality service to its subscribers and customers.

On the next slide, cognizant of the concerns raised by government and certain oppositors (sic) regarding the PLDT Group's ownership of 3G frequency and to assure all parties that it is not PLDT's intention to accumulate the said frequency, PLDT presented a plan to the NTC that would result in PLDT's divestment in CURE, which would include the 10 megahertz of 3G frequency in the 2100 band. NTC approved the plan and the salient points are captured on this slide.

In brief, CURE's existing subscriber base, Red Mobile brand and fixed assets would be sold and migrated to Smart within a nine month transition period. Cure will be left with its congressional franchise, the 10 megahertz of 3G frequency and related permits.

PLDT will then undertake a divestment sale which would be conducted under the supervision and control of the NTC. A minimum bid price would be prescribed which would allow PLDT to recover its investment in acquiring developing and operating CURE.

If the actual proceeds from the divestment sales exceeds the minimum bid price, the excess will be shared on 50/50 basis with the NTC for supervising the divestment sale.

The divestment sale is to be conducted within six months after the transition period provided the NTC decision allowing PLDT's acquisition of Digitel would have been final and executory. Should there be any delay in the implementation of the divestment sale, the PLDT Group will not use CURE's 3G frequency, but CURE will continue to pay spectrum users' fees and other related fees.

Slide 14 captures some financial highlights of Digitel from 2007 to 2010 as well as their nine months 2011 results. Note sustained improvements in service revenues, EBITDA and EBITDA margins. Part of the due diligence is now underway to review Digitel's financials.

On the next slide, we are pleased to have concluded finally the acquisition of Digitel and are eager to proceed with our plans to put the best of both companies together and pass the benefits of synergy on to our subscribers. In the meantime we will -- we still have to contend with the bearish outlook of the industry as consumer behavior and technology continue to transform our business at a pace much faster than anticipated. Intense competition is expected to continue. Revenues from the legacy businesses of voice and text are now yielding to revenues from data and Broadband solutions.

This transformation process will number one, take some time before a one-for-one revenue substitution process can be achieved and number two, mean higher margins being replaced by lower ones at least in the short-term.

We are therefore faced with the sobering prospect that revenues are likely to continue declining for the foreseeable future and the cost rising in the near term as we need to know through -- as we need to follow through with improving and upgrading our networks, including Digitel's, and seeding the market with Internet based enabled devices.

In this slide and as the year draws to a closer, our near term outlook requires us to consider a guidance number lower than the PHP40.5b core net income we provided in the early part of this year.

For the full year 2011 we anticipate core net income to be PHP39b. However I am confident that with the requisite people, networks, products and quality of service in place, we can return to more profitable times as soon as practicable. We have been there before and we have done it.

That covers the highlights of our results for the first nine months of 2011. Again, thank you for joining us today and we are now ready to take your questions.

The floor is now open for your questions. (Operator Instructions). Our first question is from Sachin Salgaonkar. Your line is now open. You may proceed.

Hi, thank you for the call. I have three questions. First is a follow up on the commentary which you had mentioned about heightened competition in 3Q. I was wondering what led to this. And with the closure of Digitel acquisition, do you see the competition reducing going forward?

Secondly, your thoughts on the revenue growth for 2012. Now do you see a risk of increased data cannibalizing voice and SMS revenues more in 2012 as wireless broadband picks up?

And lastly, with the closure of the Digitel acquisition, do you see downside risk to the PHP67b CapEx which is intended for the network transformation program? Thank you.

The heightened competition is really the proliferation of the unlimited offers on voice -- on the legacy products like voice and text. And there has been a -- we had to go down to that level because in a way, as of the last quarter of last year, we were still premium priced. But on the third quarter this year and on the second quarter we then started to join in on unlimited voice for example which we didn't have on prepaid last year. We also had to offer prepaid -- no, unlimited on the postpaid service on both voice and text. And so this is the kind of competition that caused a little bit of erosion in our revenues mainly because we had to protect our market share.

As you may know, in terms of wireless share, end of last year we had about -- we were in the neighborhood of about 58% and at the end of the second half of last year we were at around 56%. And 1% went to Sun and the other 1% went to Globe. And so we had to be more aggressive on the third quarter with our marketing programs and offers.

Now moving forward, I think this has gone to a level where it is hopefully going to be no longer on a spiraling trend downwards. And if it remains where it is, I think we can manage the business better moving forward.

What's the second question?

Alright, Our next question is from Chate Bencha. Your line is now open.

Thank you very much for the call. I have four questions in total. The first question is again a follow up on the heightened competition. Just to be on a specific point, are you referring to the Smart hot promotion the PHP25 per day unlimited voice and text on-net for the Smart Buddy Plan. I'm not sure whether that's already start being offered in the third quarter or actually it has been there since the second quarter. Would you kindly guide on the timing, the actual timing of that offer again? I understand that the current promotion on that run until the end of November. Should we expect that to be continued or would you change the terms about it?

The second one is regarding the revision in guidance on EBITDA side. The key revision I understand is more from the cost side because you have already guided for a decline in service revenue to that magnitude earlier on. So what particularly is the cost item that surprised you here? Let's start with two questions first. Thank you.

Thank you for only asking two questions. It's hard to remember if it becomes three. On the heightened competition, I think the unlimited offers on voice came in, I think, on the first quarter of this year. Our responses were calibrated first. We responded with unlimited text first to counter the voice. And when there was still some erosion in the market share that we noticed, we then responded with entering on the unlimited voice, on-Net. And then competition responded with an all-Net offer, not on voice but on unlimited text, but bucketized with a little bit of voice and so, therefore, we had to respond to that.

So there was this spiraling downward type of offers that ensued up to end August of this year. After that, Sun came out with another offer that was even lower, but there was no response from both of us. So this is the situation at this point. And so we are seeing that hopefully this would signal something like a freeze on this existing competitive heightened situation on unlimited.

The second question is the EBITDA. Anabelle?

We are expecting that there will be higher costs in the fourth quarter, principally in the area of selling and promotion and subsidy. So that's one of the factors driving the lower guidance for the balance of the year.

Okay, thank you. Just two follow up questions regarding the PLDT and Digitel deal. Is there anything that you need to go through for the deal now or is it done given? Is there anything that could reverse the deal at the current point in time?

Then the fourth question is --

How is that again? Can you please repeat the question, I'm sorry.

The question is whether there is anything that could reverse your deal right now.

Reverse the deal?

Yes.

Okay. Yes.

And the fourth question is when would -- when should we expect to hear a guidance for the PLDT Digitel consolidated basis entity.

The deal has been--

Well the deal was completed on October 26 and changes have been made with respect to the Board composition of Digitel. We still have to do a few transaction related matters, including a tender offer for the Digitel minority shareholders that we hope to undertake in November or December. We have a few activities and post closing due diligence. And then of course we have to comply with the conditionalities by the NTC with respect to the divestment of CURE. So those are the key matters that we have to deal with.

I guess work is also beginning with respect to looking at aligning accounting policies etc. So there's a bit of work leading up to the year end audit process I guess before we can get clear or more definitive on guidance with respect to the combined outlook and where the synergies are that we may be able to extract in the near term.

I guess there was an earlier question from Sachin about is there a downward adjustment to our CapEx number. Again, that's a subject matter of review in the next few weeks and months. So that by the time we come back to you at the year end results, we would be able to provide better guidance with respect to that matter as well.

We need a little bit of time, a few weeks or months, to get to know the network of Digitel and craft an overall roadmap as to how the combined network would look like.

Okay, thank you very much.

Thank you.

Next question please.

Our next question is from Sachin Salgaonkar. Your line is now open. Please proceed.

Hi. Sorry, I had a couple of follow up questions. Firstly, in 2011 we are expecting around 4% YoY negative revenue growth. Now I understand competitive environment might slightly improve going into next year, but do you think this entire negative growth might turn up into positive growth going into next year and that also despite this entire data substitution which is impacting the voice and SMS growth?

And second question is again on a comment which you said, just wanted to follow up whether in 3Q you believe you have increased or maintained your revenue market share? Thank you.

To answer your last question, we don't have the figures yet of the other operators. So we -- in terms of wallet share, we cannot be exact in our estimate. But, based on our reading in the market, it looks like the erosion of market share has really been arrested already, based on the responses that we have done. So that's with respect to the market shares.

On the first question which was --

Data substitution revenue outlook.

With regards to the revenue outlook next year, to a certain extent, if you add on Digitel, there would be a revenue increase. But as you know, the overall industry revenues have really not been increasing in the last few quarters. And the reason for that is, of course, while the volumes have been going up, like voice minutes and SMS, the yields have not been improving and have been going down in fact. On voice it has gone down from PHP0.99 to about PHP0.70 per minute. So we feel that this -- the revenue that would be resulting after next year will be -- I mean the market share would at least be maintained, I think,

Okay, got it. Thank you.

In addition, Anabelle wants to say --

We are seeing growth on the new business with respect to mobile broadband and broadband in general. But I guess at the moment, while that's growing, that growth is not enough to offset the pressures in the traditional businesses. So the key there is how we can manage that transition best in terms of going into next year, as you highlighted. How we manage the growth of data broadband vis-a-vis protecting your traditional business is a challenge for us, as with all other operators going into next.

Okay. Thanks Anabelle. That's very helpful.

Next question please.

Our next question is from Vishesh Gupta. Your line is now open, please proceed.

Yes, hi. Thanks for the call. This is Vishesh Gupta with JP Morgan. I have actually two questions. The first one is on your core income guidance 2011. Basically, that implies around a 12% quarter on quarter and around a 21% year over year decline for 4Q. Are there any specific drivers behind the big decline in expectation like higher depreciation or something else, or is it just an EBITDA flow through?

Second, I've asked this question before, but if you can help us better understand the spectrum auction process in terms of the minimum bid price, or basically how should we look at the valuation of spectrum in Philippines given that there's a potential of making a profit here. Thank you.

In terms of the fourth quarter pressure points, I think those will mostly be on the wireless side. And we'll see some increase as with respect to certain OpEx items, specifically selling and promos and subsidies. That's the expectation with respect to the guidance.

On the auction process, what is envisaged to happen is that we would first transfer out the existing businesses that is inside of CURE and the assets there such that CURE will become a vehicle that principally just owns 10 megahertz of the 3G 2.1 bandwidth frequency. So -- and then it will go through a divestment sale under the supervision of the NTC.

Now there's the concept of us being able to recover our costs and then sharing the excess. But the specifics in terms of what cost or costs has still to be defined in greater detail because a cost -- initial cost for us having bought CURE from its original shareholders, but there's also been money invested into CURE since that time in terms of supporting its operations. So it's -- that's something that we still have to work out in terms of which costs are eligible to be recovered under this formulation. And I think the NTC would also like to see some audited financials as well. CURE is part of that process.

And then, after that, it's basically bidding. So we obviously cannot participate in the bid, so it will be a function of what the other interested parties would put forward by way of their bids for the (technical difficulty).

So, depending on how interested the other parties will be, for example the new entrant and existing competitor, that's how the price will be set.

Also, considering that there are no more available spectrum bands for 3G as well as for LTE going forward that are available, then it should affect the conduct of the auction.

Because the unassigned is still in -- the unassigned of 15 megahertz on 2.1 is still under litigation. There is a court case, so makes it unavailable, that's what Mr. Vea is pointing out.

Next question please.

Our next question is from Ed [Trinidad]. You may go ahead. Your line is now open.

Yes hi. Good afternoon. I have two questions. First, I just want to get the market reaction on the launch of your white branded net phone and how many units were so far sold.

Second question is, aside from the Smart net phone, do you have any plans of launching other devices to spur mobile Internet usage?

Our -- the net phone that was launched is a Smart branded phone. It's Net phone 701. It's one made by NCPT and the first -- the initial order of 10,000 units have been distributed to the trade. It's been followed by a new model that's coming from Samsung and that's being marketed at the lower price and we can't give the exact numbers now, but it's selling at a much higher rate. Its off-take is much higher than the first model and it's a branded phone. It's a Samsung phone wherein the net phone platform has been side-loaded.

Our plans in the future is not to develop more Smart-branded, but to introduce more of the Samsungs and the HPCs or Android phones that are side-loaded with the net phone platform.

I see. As a follow up question, yes, in regards to your plan to launch more branded smartphones, does this mean that you're going to incur some higher phone subsidy for these phones?

The trend is towards lower prices for smartphones. So I think, as we move on, there will be less and less of subsidies. Our latest purchase is already at PHP4,200.

Yes.

Thank you.

Next question please.

Our next question is from Luis Hilado. Your line is now open. Please proceed.

Hi. Good afternoon and thanks for the call. I also have three questions. The first one is just a bit more color on the ARPU decline in the third quarter. Do you feel it's more because of competition or because of the wireless data cannibalization, one being easier to solve than the other I guess?

Second question is with regards to the unlimited offers in general. Now that you will have Sun and Digitel, will you consolidate all of the unlimited and bucket plans under it or will Smart continue to maintain unlimited plans?

And last question is more of housekeeping. For the general offer on Digitel, do you think you can conclude it before year end?

And another timetable please on the SIP redemption. Will you also do that before year end?

I will deal with the last two. The general offer, it depends on when we're able to launch. Personally, I'd like to be able to conclude it before year end, but that's the subject matter of my next meeting after this to work out timetable with the lawyers and our various advisors.

And on the SIP redemption, the redemption date has been set for January 19.

Okay.

And the first -- what was the first?

The first question, on the ARPU decline in the third quarter. I would attribute it more to competitive dynamics, principally because it's driven by more unlimited on both voice and SMS. So you're seeing, like Mr. Nazareno mentioned earlier, you have increases in traffic usage, but actually lower revenues and lower ARPUs because of the fact that these increases in usage are basically on the unlimited platform.

So this is an erosion which has happened because of our entry into the unlimited space for voice and text and matching the competitors' offers.

Okay. And in terms of the consolidating the offers under Sun, is that possible?

Luis we have to study that first, but we are looking at that possibility also, as well as other possibilities. But we need to be able to understand first of all their offers and the background by which they have been launched. And we are now in the process of sitting down. Both our teams are sitting down and looking at these offers individually and also evaluating as to how we will be putting this forward into the market. Whether jointly or not, is something that we have to evaluate moving forward. But we will have a clearer picture a few weeks from now when we would have gone through with Sun and the teams at Digitel.

Okay thanks. Sorry, one more housekeeping question. In terms of consolidating Digitel, what period should it start? Is it October 26 or consolidation to start by [year-end]?

On October 26, Luis, that's the period which is the reckoning date for the consolidation.

Great. Thanks a lot.

Right. Next question please.

Our next question is from [Jess Coutinhorio]. Your line is now open. Please proceed.

Hi. Thanks for the call. Sorry to push the subject on ARPU and the competition again, but I just want to ask again on ARPU, the decline year on year, similar actually to quarter on quarter for 3Q is as much as 7% or actually 10% decline and you see actually net adds just growing 5%, voice traffic increasing by 50%, but not enough as we see Wireless revenues declining 5%. So given that scenario that you see -- that you saw actually in 3Q, where then are these promotions going moving forward? Any indication in this fourth quarter and also moving forward to next year, given that Sun is coming in and still will be maintaining its unlimited services?

Well the fact that we have already acquired Sun and they will be -- we will be reviewing intensely in the next few weeks, I suppose we will be able to understand better the offers, and be able to calibrate it related to what's going to happen as the competition unfolds in the next few months.

Our indication is that at this point in time it looks like the spiraling downwards has been put on hold to a certain extent for the last two months. Whether that is going to prevail or not is $64 question because we have decided, on our part, to really protect our existing market base and really respond, if we have to respond, as far as any market initiatives will be made by the competition and so, therefore, it would be difficult for me to make a prediction as to the next few months. But as I said, in the last two months there seems to be a little bit of a standoff.

Thank you for that. Just a follow up question. On the net adds I see it grew 5% year to date. This is driven by what brand basically under PLDT and by actually what promotion? And if this promotion will continue actually this fourth quarter or moving forward as well.

As far as PLDT is concerned, maybe that is the broadband net adds. We have a little bit --

[I think for wireless] --

--of net station gains on the fixed line, but we had about 82,000 or 85,000 gain on the DSL subscriber base. So are you referring to that?

Actually sorry about that. I'm referring to the cellular subscriber base, the wireless net adds increasing by 5%.

Wireless net adds. Yes we had a 2.1m net add for the first nine months. Is that what you are referring to?

Yes. Is the growth attributable mostly to what brand of Smart and basically what promotion?

Well 850,000 of that is under Buddy brand, about 600,000 on Red and another 500,000 I guess roughly, Talk N Text and we have some growth on postpaid as well, 57,000.

I guess just a commentary on that is that the impact of net add is a bit more muted these days compared to previous years in the sense that quite a number of these could be multiple SIMs, second SIMs or third SIMs. That's why you do see that erosion in ARPUs in that they don't necessarily have the same effect as it used to have in the days when we were growing subscriber base. Because what's happening now is, given the level of penetration in the market, more often than not these are more second SIM type of ownership.

Thank you.

Next question please.

Our next question is from Rama Maruvada. Your line is now open, please proceed.

Hello. Good afternoon. Two questions from me please. Firstly with regards to the Digitel acquisition, can we have the number on what is the gross as well as the net debt you'll be assuming on the transaction?

The second one is on the Wireless division. I'm just looking at your sales and marketing costs which have gone up a fair bit this quarter but the subscriber additions on a quarter on quarter haven't really moved. So if you could provide a bit of color on what you're spending on in terms of the sales and marketing in this quarter and what the outlook here is.

With regards to your last question, the A&P increase were mostly spent on the back of the offers that we have put into the market to respond to the competitive pressures. And we also had to increase our share of mind and share of voice within the market to be able to stay competitive at this point. So those were the reasons why our A&P has increased.

On the net debt, Anabelle, it's --

About $500m.

$500m increase as a result of the transaction.

Okay. If I can just follow up on the sales and marketing Poly? I understand you have spent more, but then that doesn't seem to have resulted in higher SIM additions this quarter. So just wondering, did it -- have you spent it on advertisements in the public relations, or is it something else?

It's more on advertising and promo. Mostly the promo would be in the form subsidies. But -- and mostly the considerable cost would be on the A&P back-up for the usage offers that we have launched. And, as you know, the effect of that would be -- when it comes to improving our image, would be in the future and not immediate. But the erosion could have been more if we did not make that move and decided to defend what we have.

Understand. So in terms of the outlook, is it this level of spend that you expect to maintain going forward, especially fourth quarter and the next few quarters?

We are looking at maintaining the same spend, more or less, on the fourth quarter. And we are hoping that there will be a little bit of a boost in revenues, especially because it's Christmas time. So there is a natural spike on revenues during that time. But, yes, we need to keep that, at least that level of dosage in terms of A&P. And we will be monitoring this closely in terms of our market share performance. And if ever there is a change, we will respond accordingly.

Yes, understood. Thank you very much.

Any more questions?

Our last question is from Surabhi Chandna. Your line is now open, please proceed.

Hi. Thank you. I wanted to understand what are the usage and revenue trends from the subscribers that are using mobile Internet and how has it changed over the last 12 months? You mentioned about 3m subscribers use mobile Internet. Can you share just how much they spend, how much data usage that you're seeing on them on your network.

Well mobile Internet is our most -- is the brightest revenue stream, albeit very small yet at this point. But it has grown by over 100% compared to the same period last year.

On a snapshot basis, we have about a little over 3m of 3G and smartphones in the market in our subscriber base. And on a -- and these are the ones who are using. And the unique means that we are seeing in this market is about 5m are smartphones and 3G enabled phones, or maybe smart screens, because you include tablets and -- the tablets. And so we are seeing that this particular 3m that are really using right now and the 5m unique means we are looking at a 2m opportunity of people that can still use more often and therefore have an ARPU increase to us.

On top of that, the entire universe is about 21m, which includes about 60m of 2G phones that are also from time to time using their -- by access through GPRS, maybe updating their Facebook. And these represent the next opportunity for us to explore when it comes to really getting the smartphone be pervasive in the market. So there is a great opportunity. And on the basis of what Doy has mentioned earlier, with us getting down to the lower end of the smartphone entry level pricing of about $100, then we are looking at increased demand because of -- as you know, the Philippines is now one of the more popular SMS capitals in the world because we have roughly about 30m Facebook subscribers already at this point in time.

That's the most popular usage, the top three sites that are visited are Facebook, Google and Yahoo.

Any thoughts on how usage has changed in the last 12 months? Are people spending more time on their phones and does that mean higher revenue for you?

Are people spending more time --

When it comes to broadband, it is really more usage. Yes they are spending more time. This 100% -- over 100% increase is on mobile broadband, on mobile Internet revenues that we have segregated out of the total broadband revenues.

Okay, thank you.

Any other questions?

And we have a follow up question here from Chate Bencha. Your line is now open, please go ahead.

Thank you very much. I just have one follow up question regarding the mobile data usage right now. I just would like to clarify two things. Number one, what exactly is the normal mode of paying for mobile data services right now? So I understand that the main usage could be on the postpaid side, or actually the main usage now is on the prepaid side as well already. And how (technical difficulty) voice and data and therefore be able to basically transfer my traffic from voice and data on to -- from voice and SMS on to data. So basically that's the question.

I think it's mostly on prepaid at this point. The rate that they are paying is about PHP10 for every 30 minute use and therefore, as what Anabelle has pointed out, the three most visited sites are Facebook, Google and Yahoo. And therefore, that's the way it is being used now. I would imagine it's basically updating your Facebook and reviewing your notifications and posting also whatever you want to post.

So this is a question of getting the critical mass out there. And more smartphones you are putting out there would mean that you are shifting the usage from the fixed/wireless side, or the fixed side into more -- or increase the ARPU more if they can use it while they are mobile. And therefore, they can update their Facebook while they are out of their homes or out of the desk type of or indoor type of usage.

The smartphone users would gravitate more towards the data plans while the 3G feature phone users and the 2G --

Under prepaid.

--users would gravitate more towards the prepaid plan, prepaid offers.

Thank you. A follow up. So the main mode of charging right now is still per time based rather than usage based, right?

Most of the users would be still feature phone users. But once the population of smartphones increases, then we should be seeing more of data plans and volume based plans which we are already producing.

Okay. Thank you very much.

Operator, any more questions?

At this time we don't have any other questions on queue ma'am.

Then that concludes the question and answer portion. Could you share the replay information for today's call?

This conference will be available on a 24 hour instant replay, starting today, daily on through November 17, 2011. Replay information for the CPM call, international caller number it would be 852-3018-4110. US toll-free is 1866-360-3310. Pass code is 2587. Conference leader is Melissa Vergel de Dios.

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

I just want to say thank you very much for joining us today. And we look forward to our next discussion sometime in first week of March where we would be taking up our year end results. Thank you.

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