PLDT Inc (PHI) 2011 Q4 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 full year 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 2011. As mentioned in the conference call invitation, today's presentation is posted on our website. For those who've 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 for 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 Attorney Rey C. Espinosa.

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

Good afternoon and thank you for joining us today. Before we proceed, I would just like to mention a few points regarding our 2011 financials. First, with the acquisition of Digitel completed on October 26, we have consolidated Digitel's financials from that date.

Secondly, our BPO operations were spun off from e-PLDT into SPI Global, with the remaining non-BPO operations, such as the data center, now classified under the fixed line.

Finally, our service revenues reflect a change in the presentation of our outbound revenues to more closely align with global accounting practices. Service revenues will include interconnect revenues on a gross basis, while interconnect expenses will be presented under expenses. There is no change to our EBITDA number but percentage EBITDA margin will be affected.

For ease of comparison, we have made available the historical restated data in the appendix of this presentation.

Allow me now to share with you PLDT's financial and operating results for 2011. 2011 was a milestone for the PLDT Group as we undertook a game-changing move with the acquisition of Digitel. It was a year marked by heightened competition in cellular and the explosive growth of broadband and data. We also embarked on a massive modernization of our network that would underscore PLDT's undisputed market leadership.

Our results for 2011 reflect the interplay of all these. Service revenues for the year dipped by 1% to PHP154b compared with PHP156.2b in 2010. EBITDA for 2011 declined by 4% year on year to PHP80b with EBITDA margin at 52%. Reported net income for the year declined by 21% year on year to PHP31.7b, mainly due to an asset impairment charge of PHP8.5b as a result of our network modernization program.

In line with our guidance for the year, core net income decreased by 7% to PHP39b from PHP42b in 2010. This translates to earnings per share of PHP201 compared with PHP222 in 2010.

The peso closed at PHP43.92 against the US dollar at the end of 2011, stable compared with PHP43.81 at the end of 2010. The average peso/ dollar exchange rate on the other hand for the period was PHP43.31, a 4% appreciation compared with the PHP45.12 for the same period last year.

In line with the Company's dividend policy, the PLDT Board today declared a total of PHP111 in cash dividends, consisting of the final regular cash dividend of PHP63 per share and a special dividend of PHP48 per share. Together with the PHP78 dividend declared in August 2011, total dividends for 2011 amounted to PHP189 or a 100% payout, making it the fifth consecutive year that the Company paid 100% of its core earnings as dividends.

The dividends will be payable in April 20 to stockholders on record as of March 20. The PHP189 per share dividend is lower than the PHP222 per share dividend paid out in 2010. The decline was mainly due to the lower core income and the expanded share base resulting from the issuance of 29.3m shares issued to pay for the Digitel acquisition, inclusive of the Digitel minorities who opted to receive PLDT shares.

We paid PHP458m in preferred dividends in 2011. However, we redeemed PHP405m preferred shares on January 19, which will reduce preferred dividend payments in 2011.

Under the approved share buyback program, PLDT may still acquire up to 2.3m of its shares from the market.

On the next slide, core net income for 2011, net of exceptional items, declined 7% to PHP39b from PHP42b in 2010. These results reflect the consolidation of Digitel's operating performance from its acquisition on October 26, 2011. The decline in core net income was a result of lower service revenues and higher operating expenses, partially offset by a higher equity share in the earnings of Meralco.

Overall consolidated service revenues dipped by 1% to PHP154b, including the PHP3.8b revenue contributed from Digitel and reflecting the combined effect of a 2% decline in wireless revenues due to heightened competition, a 1% decrease in fixed line revenues and a 6% rise in BPO revenues.

Approximately 30% of consolidated service revenues are directly or indirectly linked to the US dollar, which weakened against the peso in the course of the year. Had the peso remained stable, service revenues would have been higher by PHP1.9b and remain at similar levels to 2010.

EBITDA margin declined to 52% from 54% in 2010. Consolidated EBITDA was lower by 4% at PHP80b compared with 2010 as a result of lower revenues and higher operating expenses, primarily in wireless selling and promotions and subsidies as part of PLDT's response to the competitive situation. Digitel EBITDA stood at PHP1.1b.

On the next slide, our reported income for 2011 declined by PHP8.5b to PHP31.7b compared with a PHP40.2b in 2010 due to the combined effect of the following, the PHP3b decline in our core income, the higher asset impairment by PHP7b, lower net ForEx and derivative gains by PHP700m, and the tax impact of the reconciling adjustments amounting to PHP1.7b.

PLDT recognized a one-time charge of PHP8.5b relating to asset impairment as a result of the network modernization program that completes in 2012. The PHP67b two-year CapEx program includes the expansion of coverage and capacity, especially in broadband, the modernization of the cellular network and investments in our IT business intelligence platform.

On the next slide, our pursuit of undisputed market leadership is strengthened by our network modernization program which we embarked on in 2011 and which we expect to complete this year. By the end of 2012, the PLDT Group network will deliver additional capacity that is flexible and scalable to allow future business growth and allow seamless transition to becoming a cutting edge broadband multimedia provider.

In concrete terms, our access network would have been upgraded such that 100% of our base stations would be single RAN. 3G coverage would be at 90% and NGN migration would be near completion and the network would be LTE-ready.

Our transport network will have 54,000 kilometers of fiber assets, while for our core network, installation of new switches and packet core would have been completed.

We would have further strengthened our international capacity with four cable landing stations, alliances with 12 international cable systems and 1-terabit capacity. Clearly a superior network that would ensure that our subscribers enjoy quality service delivered cost efficiently.

On the next slide, the PLDT Group had a total of 63.7m cellular subscribers at the end of 2011. Our cellular subscriber base consists of 27.1m Smart subscribers, 20.5m Talk n Text subscribers, 1.4m Red Mobile subscribers, while newly acquired Digitel had 14.7m Sun Cellular subscribers.

The Group's combined postpaid cellular subscriber base stood at 1.9m at the end of 2011, 1.4m of whom were with Sun Cellular. Our postpaid cellular subscriber base grew to -- on the other hand, the Group's combined broadband subscriber base increased by 45% from the end of 2010 to just over 2.9m. SmartBro subscribers rose by 260,000 or 19% to about 1.6m in 2011, while PLDT's DSL subscriber base grew by almost 100,000 or 16% to more than 742,000 in 2011.

Digitel registered an additional 551,000 broadband subscribers.

There are an estimated 21.5m Internet-capable phones in our network, of which 5m are 3G handsets. Approximately 3m phones access data on a regular basis.

For the fixed line business, the subscriber base grew to over 2.2m at the end of 2011 from 1.8m in 2010, reflecting 47,000 new PLDT subscribers and 296,000 Digitel subscribers.

On the next slide, for the segment presentation, we will be focusing on the prospects and opportunities for each. The usual segment details are available in the appendix to this presentation.

Prospects for the wireless business are encouraging, particularly with the acquisition of Digitel, which allows us to create a platform that should eventually lead to improved yields and profitability. In addition to this, the potential upside from wireless broadband and mobile Internet browsing are substantial, to be unlocked with increasing smartphone penetration. Finally, our significant investments in the network will result in cost efficiencies that will allow us to enjoy EBITDA margin improvements.

In the fixed line business, opportunities abound as well, primarily from DSL growth. In addition to subscriber growth we are pursuing upselling opportunities, such as fiber to home or FTTH, which has become possible now that we have upgraded our fixed line to the next-generation network on NGN.

As we complete the integration of the PLDT and Digitel networks, we expect to migrate Digitel's fixed line subscribers to the PLDT network and attract more subscribers in Digitel's franchise areas.

Growth in the enterprise segment also holds promise. The continued growth in the BPO industry as well as the corporate and SME markets remains strong. PLDT continues to offer new business solutions to these market segments, further enabling their growth. The strong take-up of data centers and cloud-based solutions is another growth area for the fixed line.

Next slide, please. In addition to what I already mentioned earlier about the potential of wireless broadband and DSL, we see improvements to broadband delivery following our initiatives to introduce more volume-based pricing and fair usage policies, as well as tiered and differentiated services. Being an integrated network operator, PLDT has greater flexibility to offer bundled services, such as a WiFi service outside the home for DSL subscribers.

We also have alliances that allow us to make available direct-to-home and content bundled with our fixed line service leading to an eventual triple-play.

Finally, the outlook for our BPO segment is positive given the double-digit growth forecast for the industry. In addition, we have a robust sales pipeline given our focus and investment in sales and marketing across all verticals. Having divested underperforming verticals, we have focused growth, growing our exiting high-margin verticals and augmented this with others, such as our acquisition of Laserwords which is in education publishing.

On the next slide, since the completion of the Digitel acquisition, several areas of synergy were identified, largely related to network integration. These initiatives are either sources of OpEx or CapEx savings or provide a potential for incremental revenues. An example is an PHP8b CapEx avoidance in 2012 after we received network -- after we reviewed network CapEx plans and were able to identify duplications and various opportunities for complementation.

The other area where we expect to generate significant savings is in site sharing and site consolidation, where 160 and 850 sites respectively were identified. When fully implemented, savings in rentals and utilities could reach in excess of PHP500m per year.

The resultant improved Sun Network in terms of coverage and capacity will translate to an upgraded quality of service for Digitel subscribers. This presents an opportunity to generate incremental revenues from a larger subscriber base and increased usage.

The integration of the Digitel-Sun and PLDT-Smart networks ensures greater service resiliency and diversity translating to greater reliability and ensured continuous service.

Other areas that are being explored include merchanting and distribution. Smart has in fact just launched various tri-net products that offer all-net SMS and tri-net all buckets in various durations and denominations.

This ends my presentation. Let me now turn over the floor to our Chairman, Mr. Manny Pangilinan, for the outlook of this year and beyond.

Thank you, Poly, and good afternoon to all of you. We provide a solid outlook and profit guidance for the year 2012, starting with the revenues first, if I may.

Consolidated revenues for 2012 are likely to increase by approximately 7% from last year's PHP154b to approximately PHP165b, reflecting the full-year consolidation of the Digitel accounts in 2012. If you recall, Poly indicated that the numbers of Digitel were consolidated into the PLDT accounts only for two months, in November and December for 2011.

With respect to core, we're guiding lower, PHP37b from PHP39b in 2011 on account of three factors. One is the increasing change or decreasing proportion of our revenue mix arising from the growth of broadband and data which translates into lower margin and replacing the decreasing proportion of the legacy business of voice and text, as well as increased subsidies we envisage in order to see the market with Internet-enabled and bandwidth-capable devices.

And the second factor is we anticipate competition to be -- to continue to be tough and to be tight for the better part of 2012 before we can see some form of stabilization in the level and intensive competition.

The third is the process of integrating and aligning the operations and processes of Digitel and Sun with PLDT will cost us some incremental expenses in achieving the synergies that we envisage arising from the acquisition of Digitel, so there will be some short-term pain in the process. Now that these current expenses could be balanced to some degree by the positive outlook of our broadband, enterprise and data businesses, and of course the very healthy outlook for our BPO and call center business.

In many respects the year 2011 was a year of clean-up as well for the Group. We took advantage of the acquisition to clean up the balance sheet of PLDT, as such, pre Digitel, by creating this provision of approximately [PHP8b] for 2011 in the form of an asset impairment. And I believe we released the Digitel results for 2011 which showed a significant provisioning and asset impairment as well for Digitel. The core income in Digitel was up in 2011 compared to 2010. So we anticipate that for 2012, moving forward, that there will be no significant difference between our core and reported income.

In terms of CapEx, it's -- guiding that at PHP38b compared to PHP31.2b spent in 2011. This is practically the end result of our modernization capital expenditure and we anticipate that the CapEx spending will decelerate in absolute amounts starting in 2013 onwards to a level below 20% of total gross revenues.

Capital management, dividends, the regular payout 70%, with a look-back of an additional 30% so we are quite optimistic that we should be able to maintain the 100% dividend payout moving forward. There has been a buyback program of 2.3m outstanding shares or common shares that are outstanding.

Now we recognize 2012 as a year of change in alignment for the Group, but we anticipate to be back on the upward curve starting 2013 and 2014. Actually 2013 we anticipate that the core profitability should return to the 2011 level of PHP39b. And 2014 should see us going back to the PHP42b core income, which was the historic high for PLDT realized in the year 2010.

That ends our presentation.

We are now ready to take your questions. We will first take questions from those who have joined us through the conference facility before we take questions from the floor. Operator?

(Operator Instructions). Our first question is from Mr. Sachin Salgaonkar. Your line is now open.

Hi. Thank you for the call. I have three questions. Firstly, unlike previous years, you have not given any guidance on service revenue and EBITDA, so I would like to understand your thoughts on where do you see the industry revenue growth. And should 4Q EBITDA on a new reporting basis, should we take another benchmark for 2012 EBITDA?

Secondly, with more visibility on Digitel in the last few months, I was wondering if you could quantify the synergy benefits from Digitel on your P&L.

Thirdly, the question is on your one-time impairment. How much of this was from Digitel Cellular and how much of this was from Digitel Fixed Line?

And finally, I just wanted to double confirm that there is no change in nine-month 2011 reported core net income due to any reclassifications. Thank you.

Yes. The service revenues that we are guiding for 2012 is an increase of 7%, mainly arising from the full-year consolidation of the Digitel numbers in 2012.

Okay. And do you expect to gain market share because of this acquisition? I.e. let's say, revenue rate of growth is slower or more -- particularly on the cellular front.

On the cellular front, our revenue share is approximately about 64%. And we are looking at holding on to this share within the year. And this will be -- there will be heightened competition in order for us to do this, and that's the intention at this point in time.

On broadband, our market share is over 72% and we intend to hold on to that share too.

Okay. Thanks.

Maybe I can try on the issue of the synergies. I think the first and most immediate synergy was more on the CapEx side. I think we've indicated that in terms of CapEx avoidance because of the various initiatives across the two networks, we quantify that at about PHP8b.

In addition, in terms of OpEx we are anticipating initially, as a result of the various initiatives again on site sharing and consolidation, that will begin at about PHP0.5b a year, but we would see that increasing as time goes on, maybe up to as much as double that.

However, as Manny indicated in his comments, it's likely that during 2012 we will have to effectively incur OpEx to be able to obtain these savings which should then come through more in 2013 and later years. You can imagine as we put the sites together, there are costs associated with that either on a sharing basis or consolidation. So again that's why we see these savings occur, but the benefits of it affecting us more in 2013 and later years.

The other major synergies are the ones which were indicated in Poly Nazareno's presentation. Effectively, on the network side, having access to the transport facilities of PLDT will help Sun on the wireless business and in terms of access to roaming and quality of service. And on the fixed line side it should allow us to move quickly to offer and enhance the general service to the Digitel subscriber and also to offer them broadband connectivity as well. So I guess we're looking at three broad areas, CapEx, the OpEx side and enhanced revenue opportunities for Sun and Digitel itself.

I guess I'll turn it over to Anabelle on the impairment.

If you -- sorry, if you were referring to the PHP8.5b impairment that we booked, that's on the wireless side.

Okay. And that's entirely on the wireless side?

Yes. That's basically Smart's network asset impairment, not related to Digitel per se.

And how much is the Digital impairment, if you could provide any thoughts on that on a fixed line as well as cellular?

From our standpoint with the purchase accounting, I guess we don't have an impairment at the PLDT level, but we have initially based on the purchase prices allocated over PHP60b of that purchase price is going towards goodwill.

So -- but if you look at it from a Digitel standalone, I guess pre-PLDT standpoint, and there was an announcement today to disclose what the Digitel financials for 2011 were, so I'm not sure if you've seen that announcement or not.

Okay. And on the final question, if there is any change in the nine-month 2011 historically, core income. No, right?

No. Only the grossing up of the service revenues for the interconnect, so that doesn't affect the reported or the core income.

Okay. Got it. And I guess one of my question was missed, which was on the EBITDA front. I got your service revenue guidance for 2012 but any thoughts on EBITDA?

I think slightly lower in terms of an EBITDA margin given the -- what Mr. Pangilinan alluded to earlier. One is the changing revenue mix. Second, I guess you can see that the EBITDA levels or margins at Sun Digitel are not quite the same as the PLDT business so there's an element of dilution with respect to that. But of course that's something that we would aim to improve over time but at the onset, that would dilute the EBITDA margin level.

Okay. Got it. Thank you.

Our next question is from Luis Hilado. Sir, your line is now open.

Hi. Good afternoon. Thanks for the call. I also have three questions. I guess just following up on the 2012 guidance. Any indications for what kind of depreciation charges you will be booking this year for the -- in terms of the guidance? Or do you incorporate any changes in Digitel's depreciation policy or asset recognition?

Second question is more of a follow-up also to the impairment. Sorry, Anabelle, but I haven't seen the article about how much Digitel impaired on its part, if you could give us that number.

And also just to clarify whether -- as you integrate the networks, whether you anticipate since Digitel is largely a 2G network, whether you would have to impair any of its assets further or, as the case may be, PLDT's own assets.

The third question is with regards -- I noticed that salaries and wages were down Q on Q and year on year quite significantly. It seems to be due to [an LP/IP] reversal. Does this mean that the targets set initially were actually higher than guidance that eventually came through?

The Chairman may answer the last question actually. I think you can guess the answer.

Maybe I can try the first one, Louis, because it's a slightly complex question. I guess in terms of going forward, what we try to achieve is to align the policies of Digitel and Sun with the policies that we've been following on the fixed line and wireless businesses of PLDT and Smart. So we've also tried to anticipate that they're a part of what we are trying to do is to bring the two networks together. And that has implications both on the wireless and the fixed, and also the pace of the modernization on Smart and, as a result, the pace at which the old network would be depreciated.

So I think in summary, we have tried as far as possible to anticipate that in the 2011 results. So the implications of that are that the modernization effectively to accommodate the broader Digitel-Sun Group has meant an acceleration in -- at the Smart level, as a result of which certain network components we had to accelerate or impair at that level to position the network really to accommodate the enlarged Sun and Digitel group going forward. So that is a one-off at the Smart level and really only will affect 2011. I think the gross amount of that is about PHP8.5b.

In addition to that, we have tried as far as possible to align what is going on at Digitel and Sun with these -- the network strategy going forward. So that again would mean that certain network components there, we would have to take a pretty conservative view of the volume going forward. In addition, there are certain assets which, under our policies, we would depreciate faster than was necessarily the case in the past with Digitel and Sun. So we reflected that in the heavy impairment charge at Digitel in respect to 2011.

In terms of the network assets of Digitel, that's in an amount of not too far away from PHP40b. The result of that is that as we go into 2012, again, the policies that will be followed and the network strategy of Digitel and Sun should be consistent with the direction that we're moving both Smart and PDLT in. So we should be back to more regular depreciation going into 2012 and the later years. So I guess the alignment plus the integration have been anticipated I guess in the -- truly in the 2011 results. So I'd say we should be back to more regular depreciations in this year and the following two years.

Your observation about the salary and wages is correct. The actual result of [39] is somewhat below the target that was set. So there was a reversal effectively of what we have been pooling for long-term incentive plan or LTIP, as it's called. That affected the last quarter of 2011.

Thanks, Chris. Just one follow-up question. Going forward in the results announcements, will we still be seeing Digitel reported as a separate entity?

No. We will try to consolidate it. But I think at least for 2012, because we only consolidated two months in 2011, I think we will have to give you some information on how Digitel and Sun are performing so that you will be able to compare year on year. But no, eventually we will -- it will be a part of our wireless group or our fixed group going forward. But 2012, to aid the comparison year on year, we will be giving you some separate information.

Okay. Thanks a lot.

I think it will still be a public company per se, Digitel? Yes, it will be delisted, but I think to the extent that there are more than 200 shareholders, it appears so. So the [directors] of Digitel will remain public, yes.

Yes. We took a rather strict view of the LTIP so the targeted profitability for the three years, and in 2011 were not reached -- was not reached. And so I guess tough luck on management, no?

That said, we have really reset a new LTIP, so remember this is the third LTIP ending 2011, so we're calling LTIP-3A. So there's a 3B that will happen starting this year up to 2014.  So if I may share that with you, the guidance for 2012 is PHP37b; for 2013, as I indicated earlier, is PHP39b; and for 2014 it is PHP42b, which is similar to the historic high number of 2010. So management must achieve an aggregate of PHP118b for the three years in order for them to earn their LTIP-3B.

Yes. Just my own personal view about Digitel's significant or heavy provisioning, as Chris indicated, yes, I think we took a rather conservative view of what's happening over the Smart -- over our entire -- over the entire spectrum of wireless assets, particularly in light of the, as you know, fast-changing technology developments and how the current network relates to those changes. And the judgment is that you would take a significant impairment at the Smart level net after tax, about PHP8.1b, and at Digitel, if you don't fall off your seats, it's in excess of PHP60b.

Certain assets are not in use so we felt we should provision against those assets, network elements, as Chris described, that are not in use. So those are being provided more fully. Certain assets that were classified as construction in progress should have been already in PPE, plant, property and equipment.

There were certain financial assets where provisioning should have been made, for example, convertible bonds, which were convertible at PHP1 but the market price is PHP1.60 or less at that time. So to the extent that there is a deemed financial expense arising from that conversion, the difference between PHP1 and PHP1.60 should, in our view, should have been booked in the accounts of the Company, just as we do in the case of options, share options. So we felt that that should be -- there were certain losses arising from the derivatives, effectively arising from that.

So the whole melting pot of these adjustments had been made in one, if you may, one fell swoop. So that then you could see the accounts of Digitel-Sun moving forward to be more in line with how we treat our assets rather than any different. We're not saying -- we're not making a judgment here what's right or what's wrong; we're just saying these are the PLDT standards and we want the Digitel books to adhere as closely as possible to the PLDT standards and of course to international reporting standards.

Thanks very much. Very clear.

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

Hello. Good afternoon. A couple of questions from me please. Firstly, with regards to Digitel, what is the goodwill that you have provisioned for?

Secondly, what is the net debt that you have assumed?

And also in terms of the tender offer, what is the percentage ownership at the moment? And I noticed that your overall net debt is somewhere around PHP73b as of 2011, so where is this going to head once the complete tender offer is closed?

The second series of questions is on what you intend to do with Digitel. If you could elaborate a little bit more on products or marketing efforts in terms of how you intend to drive the business forward in six months.

Rama, on the goodwill, on a provisional basis, provisional goodwill is about PHP68b. So that's disclosed in the notes to the assets.

On the net debt, I didn't quite get your question, but we, as part of the year-end consolidation, we basically consolidated the debt of Digitel-Sun. So that's about $500m, if you may, incremental debt. And then the net debt to EBITDA on that basis is still below 1.

On a very technical note, we effectively consolidated the whole debt, but we also consolidated two months of EBITDA, so it's slightly exaggerated in terms of the net debt to EBITDA. But all in all, we do expect that we should be able to continue to manage the net-debt-to-EBITDA ratio at the 0.9 to 1 times, so no more than that level.

And then on the -- I think there was a question on tender offer. We basically now own 99.4% of Digitel as a result of the tender offer as well as the conversion of our -- some of our bonds into common shares. So we have 99% ownership.

Sorry, Annabelle, if I can just clarify a bit on the net debt level. So you have PHP73b net debt as of 2011. So this is not going to significantly change over the next quarter either because of the tender offer or because of the receivables or the way you want to look at the receivables of Digitel, right?

That's correct. There won't be any significant -- as Annabelle indicated, we've fully consolidated the balance sheet of Digitel into the results of the PLDT Group of Companies at the end of 2011. And the subsequent tender actually was mainly settled by the issue of new shares rather than a cash payment. So there's no significant movement in the debt or increase in the debt balance after the end of the year.

Is that okay, Rama?

Yes. That is fine. I just asked about the second one in terms of how you intend to drive the Digitel business forward in terms of maybe coverage footprint as well as products.

Rama, on the Digitel, let me start with the fixed line, which is a little bit simpler. The -- where we are together, where Digitel and PLDT is in the same area, the network of PLDT will be the one used for Digitel subscribers, and then the Digitel subscribers would enjoy the service of DSL immediately after that. As to which brand will prevail, it will most probably be the PLDT brand at that instance moving forward.

In the areas where PLDT is not around and Digitel is around, like Bicol region, for example, this is where we will be strengthening the Digitel network and connecting it with our transport and fiber backbone. And there we would be -- at the same time be offering data services too. And hopefully -- essentially moving forward the PLDT brand will be the brand for the fixed line.

And on the cellular side, Sun has obviously brand equity that is quite good and it is a growing brand. And what we are doing is right now we are enhancing the coverage of Sun. In fact, starting March 1, Sun's coverage in Mindanao will be enhanced and will be roughly about the same coverage as Smart and Talk n Text. And moving forward we will be clarifying the -- or sharpening the definition of each brands and how they will be addressing the market in terms of being able to differentiate the service among the three brands.

Good. Thank you, Poly.

Our next question is from Neeraja Natarajan. Your line is now open.

Hi, guys. Thanks for the opportunity. I have a few questions. In terms of the CapEx saving of $200m, is this -- is this $200m? Is this from -- all from Digitel side? I just want to clarify that. And I think there was some comment made about Sun synergies could potentially double. Was it the OpEx or the CapEx number, if you can clarify that?

Secondly, given that you're doing this network modernization, do you think you need to modernize your Digitel network as well? And if so, at what point in time and what could be the CapEx outlay for something like that?

And you also mentioned that you're enhancing Sun's coverage. And I think the network -- CapEx outlook for 2011/'12 has stayed unchanged at PHP67b. But my initial understanding was that a lot of it is for the modernization. So will the enhancing of Sun's coverage, etc., etc. also be addressed by this?

And at the end of this program vis-a-vis Globe-Smart migration, how comfortably do you guys think you're positioned? Yes, that would be my first set of questions.

And secondly, on the core operational trends, I see your sales and marketing as a percentage of sales has gone up quite a bit in this quarter. But PLDT's full revenue trends in the wireless doesn't seem to be very strong. Any color on that? That would be very helpful.

And lastly, on the 2013/'14 outlook where you expect net [entire] growth to come through, is this all going to be driven by synergies from the two businesses? If you can throw some color where you see this improvement starting to come through, that will be very helpful. Thank you.

Let me handle the second to the last question which I remember. It's on network modernization and whether there is a need for us to modernize the network of Digitel. Actually, in the cellular network of Digitel is -- has been quite recently installed. This is a Huawei network, and it's almost on single run on the access side. What has been accounted for in the impairment in -- prior to acquisition financials has been the change -- has been the obsolescence of their network on the fixed and on, to a certain extent, some of their core network which will be moved over to the cellular network of Smart.

So, in essence, moving forward there is really no need to modernize except maybe to enhance capacity if it's needed, and at the same time give the Sun network coverage on both 3G and 2G. Right now their 3G coverage is a little bit limited and we can let them roam into the Smart network and enhance therefore the 3G coverage.

Chris, the other --?

Well, as I can remember the last question, I'll try that. The first one is quite complex. Basically looking forward to 2013/2014, where do we expect the growth to come from and is it all as a result of synergies? I think that that is one of the areas that we would expect growth to come from. But I think if you look across the Group as a whole, there are quite a lot of encouraging signs.

I think the one that's most obvious is on the BPO side. It had a very good year in 2011, and I think it's positioned for continued strong growth as we move into 2012, '13 and '14. So we would see that on the revenue side as being one of the areas where we would expect growth. And in fact, while the margins are lower than the traditional telco business, we have seen some margin improvement and we would expect that to continue.

If you look at the fixed business, again there is robust growth on the broadband, both on the consumer side and increasingly strong growth on both our corporate and SME business. We would expect some impact during 2012 as we put the Digitel and Sun -- Digitel and PLDT businesses together. I guess that's why we're seeing some impact to 2012. But certainly we would expect to see that area grow strongly as we move into 2013/2014.

On the wireless side, I guess what excites us is that the initial growth on the wireless Internet access business is exciting. We're seeing growth levels 88%, 90% based on a very limited penetration of smartphones in the market. Our sense is that as the price of the access device, i.e. the smartphone comes down, we're going to see much faster growth in that area. And again I think that's something which we would see accelerating growth as we go into 2013 and 2014.

2012, as the Chairman indicated, I think we will take some time to digest Sun and Digitel. They are large businesses and there will be some costs involved. But certainly we will work through the synergies this year and we would expect to be very well positioned as we go into 2013/2014.

On the CapEx side, I think we've indicated that the PHP67b actually does incorporate the bulk of the Digitel investment -- Digitel-Sun CapEx investment. And it does anticipate that we would coordinate between Smart and Sun on the modernization of the network. We would also give Sun subscribers access both to the 2G and the 3G network of Smart going forward.

In terms of OpEx, we've indicated that initially through the site sharing and consolidation that we would see operating savings of about PHP0.5b. We would expect that to increase over time as the -- as there is greater network sharing. So we indicated anything up to as much as PHP1b of OpEx savings between Smart and Sun on the network side.

Actually, yes, my one other question was how do you feel -- given that Globe is also undertaking this sort of modernization and there is a chunky increase if you look at on a two-year rolling CapEx basis, how do you guys feel -- position vis-a-vis that? If you can give some color, that will be helpful.

And I think the last question was on the core PLDT trends in the fourth quarter. It would seem to be a bit more weaker than originally guided for, and given that sales and marketing has actually gone up. So any color on that, that will also be helpful. Thank you.

With regards to this question, our modernization is going to be completed at least on the access side by the middle of this year. So already now our subscribers are enjoying services and a quality of service that is as a result of roughly about half of the modernization program in place.

We are anticipating that on the cellular side and on the 2G side, the traditional voice and text business, there will be some heightened competition on a regional basis. And we are prepared for that. And hopefully that should be there within this year and hopefully should be slowing down or settling down to a new, so to speak, market equilibrium by 2013. Until that happens, I think on the cellular side there will be some competitive pressure. But on the broadband side, I think there will be more volume-based pricing and tiered and differentiated services pricing there and there will be more or less less competitive pressure.

On the second-half trends, I think the observation is accurate. I think the most competitive period in 2011 was the second half. And you see that, I guess, if you flow through everything, you see that in the net income number. So the net income number for the second half of 2011 was about PHP18b versus the PHP21b in the first half.

And I guess that reflects principally what was going on in the wireless -- on the wireless side. That effectively was the most competitive -- basically competitive intensity increased significantly during that period. And our reaction to that had been to partly -- there was quite a number of initiatives, but one of them was that there was a heavier A&P and product subsidy. We think that that will benefit us going into 2012, particularly as we coordinate between ourselves and the initiatives on the Sun side.

I think it's not terribly helpful to look at the third and fourth quarter because just basically the way it works is that generally certain expenses fall more into the fourth quarter than the third. So I think it's maybe better to look at the second half overall. But certainly it was a challenging one for us and I think there was a fair amount of management time as well involved in the Digitel-Sun acquisition.

So I think one of the reasons we are maybe conservative on our outlook for 2012 is that really we're looking at maybe the second half of 2011 as really being the base for us to work from going forward in terms of the guidance that we've given.

Thanks very much.

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

Good afternoon. Thank you very much for opportunity to ask questions. I have in total four questions.

The first one is regarding your revenue guidance which I understand is 7% year-on-year growth into FY12, mainly due to Digitel consolidation. My question is that it would imply that you are assuming a significant decline in the cellular service revenue at PLDT standalone level. Is that correct? And if we strip out Digitel, what kind of number actually forms the basis of your guidance?

The second question is regarding the handset subsidies. I understand that there is a significant increase in subsidies into fourth quarter 2011. How should we view this going forward? Should we just take fourth quarter as something as a run rate? I understand that it's around 2.6% of your service revenue.

In terms of the -- the third question is regarding the cross-network product that you introduced, for example, the tri-net product. May I confirm that there is no unlimited on PLDT or Sun cross-network product at the moment?

And the fourth question is regarding the synergies. I understand that you have not talked about manpower right-sizing program for the combined entity at all. Or are you implying that the current manpower is efficient already and there is limited thing that you can do around that? Thank you.

On the, I guess, implied guidance for the revenues for the PLDT-Smart wireless business, we're looking at flat to low single-digit growth. So there is some element of growth embedded in that number.

On your question on handset subsidies, that was one of the reasons why fourth quarter marketing costs were higher. I think we are looking at a slight -- a higher level of subsidies in that we are feeding the growth with respect to our postpaid business, with respect to the adoption of smartphones and mobile Internet, mobile broadband businesses. So all of that sort of element of higher subsidy spend than we saw in the first half. So the second-half level is more an indication of what we will see going into 2012.

And the tri-net, at the moment the tri-net offers our all-bucket types of offers, meaning there are a capped number of messages or minutes for those tri-net offers.

I think on the manpower side, the -- I think on the wireless side, they're -- Sun, I think, historically has run a fairly lean organization. On the fixed, I guess it's not a matter of really looking just at Digitel itself. I think we have to look across the whole of our fixed line business because I guess that's an area where we can look to integrate sooner. So I think there are potential synergies, particularly if we look at the fixed line side, not so much I think on the wireless.

Thank you. Just one follow-up question regarding the depreciation expense. I understand that you said earlier that the policy will be more in line. But is there any absolute amount guidance that we should be looking at in terms of depreciation and amortization charge for the combined entity to FY12?

Probably I guess in terms of depreciation, maybe around PHP32b if you combine PLDT and Digitel.

Okay. Thank you very much.

Our next question is from Arthur Pineda. Your line is now open.

Hi. Thanks for the call. Four questions for me. Firstly, can you elaborate on the incremental expenses to be recognized for network and operational integration for 2012? How much exactly can we expect for this year, and is there more for 2013?

Second question I had is on the mobile side. If you look back on the mobile industry in 2011, what do you think are the main gaps between you and your competitors which drive the performance differential? Is there a metric issue or distribution issue or is it pricing or marketing? What's being done to address this?

Third question I had is with regard to the competitive environment again. When do you expect the normalization of the competitive pressures in the industry? What do you think will catalyze this to become more rational given that the environment is already down to two players?

Last question I had is with the media side, just want to throw this question. Given recent comments in the press on GMA 7, I was just wondering theoretically, if a deal is to be done, is that going through BPS or PLDT, or is it a separate entity altogether? Thank you.

I think we were indicating in 2012 that the costs would come into the -- the savings for the full year could be PHP500m to PHP600m just on the network side. But we did not anticipate seeing the benefit of that until we got to 2013, 2014. So effectively, in terms of consolidating, site sharing, we would expect costs to run at about level. So we would then get the full benefits as we move into 2013/'14. And as there was more sharing of sites, etc., then that could get up to PHP1b plus as we move forward.

Sorry, your second question?

The expense side, how much do you need incur for all these restructuring charges for this year and possibly for next year?

We're looking at about something in the region of PHP600m, I think.

Okay. Is there more for 2013 or is that all [in sync] in 2012?

Some of the site consolidation I think would probably flow through into 2013, but the bulk of it should be done in 2012.

Understood. Thank you.

With regards to the competitive situation in 2011, as a background, the total industry revenues in the last four years have not really grown, as you know. And this is -- the reason for that is because of the increasing popularity of the unlimited services on the 2G side. What happened was that we entered the unlimited voice a little bit late, sometime in the second half of 2010, and this has resulted in a re-pricing in our own subscriber base, namely migration from the high-end prepaid packages down to the lower unli and lower bucket priced packages. And that's the reason why revenues have been eroded to a certain extent.

Moving forward, in the third to fourth quarter of this year this decline in revenues have been arrested, specifically in the fourth quarter of last year to a certain extent. And already in this first quarter we're seeing a little bit of a slight improvement on, for example, on the Talk n Text revenues.

So moving forward, this year we are seeing that, yes, in the traditional services of voice and text, regionally there will be some heightened competition still. And we are prepared for that now and we have already engaged Sun as a brand to also assist us in this regional aggressive effort that we will be doing.

The third question was --?

Normalization of the competitive pressures.

When will this normalize? Your guess is as good as mine. It depends on -- I think on the cellular side it will be heightened this year. And hopefully next year, once, as I said, a new equilibrium in the market dynamics will be arrived at, then maybe that will be settled to a certain extent. But in the meantime, there will still be tight competition on that side.

On the broadband though there is already a movement towards pricing on tiered and differentiated basis and on a volume-based type of pricing which would -- which augurs well in terms of improving the margin on the broadband side.

Well, with respect to acquisition of media assets and development funding for them, well first there are no acquisitions that are imminent as we speak. Secondly, it's really a question of size. I believe that if such were to happen and the size were modest enough, the pension fund I believe is capable of handling the development funding for such acquisition.

Now, if it's a significant acquisition, then the principle we'd like to adhere to is that the funding will have to be sourced from third parties because we do like to see the cash flows of the Group being focused on funding invested in the businesses that we now have. We have spent quite a bit of money, albeit the bulk of the acquisition of Digitel funded by shares, there was still some cash expenses involved. And as you know, there's still some continuing cash expenses involved in the integration. So that's the kind of principle we try to see if a significant media acquisition were to eventuate in the course of the next few months or years.

Understood. Okay. Thank you very much.

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

Hi. Thanks. Just one follow-up question from me, just on the LTIP-3B, are you able to give us a guidance on what the amount will be over the three-year period, the range, if you meet targets versus going above targets?

We know what the target amount is. Management is pleading for a range so that there is a lower threshold that -- whereby the LTIP could kick in, but obviously at a lesser reward. So we -- my view is that if you provide a threshold number somewhat lower than PHP118b then we will have to give you a ceiling with respect to that PHP118b. So we still have to agree on the floor and the ceiling, but the target number of PHP118b has already been fixed.

Thanks a lot.

Percentage of bottom line, between 3% to 4%. But the numbers, I'll tell you, [they are not] net of the LTIP. It's not pre LTIP; it's post LTIP. So if it's -- if the LTIP does not apply then we might produce PHP150b? That was in jest.

Thanks very much.

Our next question is from [Chan Ji Ong]. Your line is now open.

Hi. Sorry, my question has already been asked. Thank you.

If there are no questions on the conference call facility, we'll take questions from the floor. Any questions from those in the conference? Going, going, gone.

We don't have any questions on queue at this time.

All right. If there are no more questions, then let me turn the floor over back to the operator for the replay information.

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 leading on through March 20, 2012. Replay information, three o'clock pm call. International caller number 852-3018-4380. US toll-free is 1800-374-0488. Pass code is 5542. Conference leader is Melissa Vergel De Dios.

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

Thank you for joining us for this briefing. So we'll see you in the first week of May when we announce our first-quarter results. Thank you.

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