PLDT Inc (PHI) 2014 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to the PLDT conference call. 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 of 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 quarter of 2014. As mentioned in the conference call invitation, today's presentation is posted on our website. For those who have not yet been able to do so, you may download the presentation from www.pldt.com 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 Attorney, Ray Espinosa.

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

Good afternoon. Let me share with you PLDT's financial and operating results for the first quarter of 2014. The growth momentum we saw in 2013 carried into the first quarter of 2014 with data and broadband continuing to drive year-on-year improvements. Service revenues for the first quarter of 2014 increased by 3% year-on-year to PHP41.2 billion with our wireless and fixed line businesses registering increases of 2% and 5% respectively. Consolidated EBITDA for the period dipped by 2% to PHP19.7 billion with EBITDA margin at 48%. Reported net income at the end of March rose by PHP200 million to PHP9.4 billion compared with the same period last year. Core net income increased by PHP200 million or 2% year-on-year to PHP9.8 billion.

On the next slide, consolidated service revenues grew by PHP1.2 billion or 3% year-on-year to PHP41.2 billion in the first quarter of 2014. With the increasing adoption of broadband, growing revenue streams from non-SMS data services of PHP10 billion accounted for 24% of our first quarter revenues and exceeded the 16% contribution from our declining legacy international voice and national long distance businesses of PHP6.5 billion. This quarter saw the combined revenues from cellular domestic voice, SMS, and LEC dip by PHP400 million or 2% to PHP24.7 billion mainly due to the PHP1.1 billion decline in SMS revenues, which offset the PHP700 million rise in our LEC and cellular domestic voice revenues. EBITDA margin for the period stood at 48%, an improvement over 47% for 2013.

Consolidated EBITDA was lower by 2% year-on-year at PHP19.7 billion due to higher cash operating expenses and increases in subsidies resulting from a greater push to grow our postpaid business. On the next slide, as previously mentioned, PLDT expects the growth momentum and profitability to continue with core income estimated to rise from PHP38.7 billion in 2013 to PHP39.5 billion in 2014. For the first quarter of this year, core net income rose by PHP200 million or 2% to PHP9.8 billion. The increase was a result of higher revenues, lower net financing costs, and an increase in equity share in earnings of subsidiaries, and other income which exceeded the rise in subsidies. Reported net income for the period was also PHP200 million or 2% higher at PHP9.4 billion notwithstanding higher net ForEx losses during the quarter.

On the next slide are highlights of the various business segments starting with broadband. The upward trajectory in broadband service revenues was evident in its 24% year-on-year rise to PHP7.6 billion in the first quarter of 2014. These revenues now represent 18% of total service revenues. At the end of March, the PLDT Group had nearly 3.6 million broadband subscribers. The number of fixed broadband subscribers crossed the 1 million mark while wireless broadband subscribers reached almost 2.6 million. Wireless broadband revenues grew by 7% to PHP2.4 billion as a result of 14% increase in subscribers. Fixed broadband on the other hand improved by 18% to PHP3.4 billion after a 10% growth in subscribers. Finally, mobile Internet revenues climbed by 81% to PHP1.8 billion as smartphone ownership among our subscriber base rose to 18% and mobile data usage having increased by over 150% in volume terms.

On the next slide, wireless service revenues posted a 2% or PHP500 million year-on-year increase to PHP28.9 billion in the first quarter of 2014 underpinned by the continued growth of broadband and mobile Internet and with higher postpaid revenues. During the quarter, broadband mobile Internet revenues overtook legacy international voice revenues for the first time. We saw an increasing adoption of mobile Internet with higher smartphone penetration. Postpaid revenues also now account for 20% of cellular revenues following a 19% year-on-year increase in subscribers to 2.5 million, which resulted in a 17% growth in revenues. With these shifts in the market, we saw a dip in SMS revenues and volumes during the quarter partly compensated by higher voice revenues.

This appears to be driven partly by the increasing use of alternative messaging, including free options as well as propensity of postpaid subscribers to use more voice and less SMS compared to the prepaid market. Wireless EBITDA for the first quarter of 2014 increased by PHP1.1 billion or 8% to PHP13.2 billion due to increases in subsidies and certain cash OpEx items [fell] starting the second quarter of 2013. EBITDA margin of 46% dipped from 47% for 2013 partly due to the structural change in revenue mix and the increase in postpaid revenues to total revenues. On the next slide, moving on to the fixed line. This segment registered an PHP800 million or 6% year-on-year increase in service revenues to PHP14 billion in the first quarter of 2014 net of interconnection costs. Growth was fueled by data revenues, which accounted for 53% of total fixed line revenues.

Corporate data revenues posted a 6% increase to PHP3.4 billion. Fixed line broadband revenues rose by 18% to PHP3.4 billion following a 10% increase in subscribers. In addition, data center revenues rose 14% to PHP500 million. As the structural change in the revenue mix of the fixed line business has been ongoing for several years, over half of total revenues are now from the growing data business while declining legacy revenues from ILD and NLD have been reduced to below 15% of total revenues. For the first quarter of 2014, fixed line EBITDA was higher by 13% year-on-year at PHP6.4 billion as higher revenues and lower provisions exceeded increases in subsidies and cash operating expenses. EBITDA margin improved to 40% from 37% in the first quarter of 2013 and from 38% for the full year of 2013.

At the end of March 2014, PLDT had 2.1 million fixed line subscribers, of which 1 million or 48% are fixed broadband subscription. On the next slide, we are excited about the numerous opportunities that data and broadband present as these remain largely untapped and we believe we have established an early foothold in the market powered by the unmatched capability of PLDT Group's network that allows the delivery and quality of service to our customers. Even as we continue to grow our cellular postpaid business, we are focused on tapping the potential of the nation's prepaid data market. The prepaid consumers are starting to embrace mobile Internet usage and in order to spur a greater adoption of paid mobile Internet, we have an opportunity to push sachet data offers from our PowerApp proprietary data platform capability.

PowerApp allows prepaid subscribers to enjoy an always-on experience by ring-fencing the sachet apps available and thus avoid background charging. For the home, we have a suite of broadband services that offer varying speeds at different price points as well as bundles that offer access devices or content such as movies, games, and music. We are complementing the fixed network with the use of fixed wireless technologies. PLDT recently launched Ultera, a high speed fixed wireless offering for the home by our TD-LTE. This will allow households in the rural areas previously unserved by the fixed line network to enjoy broadband access with speeds of up to 10 megabits per second. Finally, the overall sustained improvement in the economy has fueled business expansions of corporates, SMEs, and BPOs. This in turn creates demand for more telco services.

For the enterprise market our offers include Ethernet, cloud computing, and data center services among others. On the next slide, focusing now to the balance sheet. Net debt at the end of March 2014 was at $1.4 billion or $200 million lower than at the end of 2013. Net debt-to-EBITDA was also lower at 0.8 times from 0.9 times at the end of last year. 47% of gross debt is denominated in US dollars taking into account our US cash holdings and hedges, only $933 million or 34% of our total debt is unhedged. 58% of our debt are fixed-rate loans. PLDT's debt profile remains healthy with maturities well spread out. Over 70% of our debt is due to mature in 2017 and beyond including our $234 million 2017 bonds and the PHP15 billion retail bonds issued in the first quarter of this year.

PLDT's credit ratings with Fitch, Moody's, Standard & Poor's remain at investment grade. On the next line, free cash flow for the first quarter of the year rose by PHP2.9 billion or 37% to PHP10.8 billion. For 2014, we expect CapEx of between PHP31 billion and PHP32 billion or between 18% to 20% of service revenues. In the first quarter of 2014, CapEx amounted to PHP2.2 billion compared with PHP3.1 billion in the same period last year. Ongoing network activities include expanding our 3G coverage presently at about 72%; increasing our fiber footprint currently at approximately 85,000 kilometers with total fiber strands of 3.4 million kilometers; and building our LTE network, which in addition to 1,200 FDD-LTE sites now includes over 200 TD-LTE sites, which support our newest fixed wireless service to the home called Ultera.

The integration of the Smart and Sun networks continues. These efforts have already resulted in significant coverage and site gains for the Group as well as savings in operating expenses and CapEx and OpEx avoidance. Also underway are several projects aimed to enhance our multimedia and IP capabilities. On the next slide, the results of the first quarter of 2014 are encouraging and support our view that our 2013 performance will be the springboard for continued improvements in the business. However, as our revenue mix remains dynamic, our task is to continue to manage the interplay among our businesses by pushing those sectors, which are growing and stable while maximizing the long tail of our legacy segments.

This will principally involve additional investment in our network to strengthen our unrivaled network advantage, growing further our postpaid business, exploring ways of unlocking the potential of prepaid data, and enhancing our product offers with more content. Given the Company's performance in the first quarter of 2014 and the outlook for the rest of the year, we are confident that PLDT is indeed firmly back on the growth path and on track to meet our core net income guidance of PHP39.5 billion for 2014.

Thank you for joining us today and we are now ready to take your questions.

Thank you. The floor is now opened for your questions. (Operator Instructions) Luis Hilado.

Congrats on the results. I have three questions. The first one is just on the SMS, just additional color. You did mention that the dip is most structural in nature, but just wondering if competition any factor at all in why SMS volumes are lower and are you losing share on the SMS side? Second question is regarding I seem to notice that for postpaid plans, a lot of the wireless data is still time-based rather than usage based. Do you anticipate that when we switch to time-based should be actually able to enhance the revenues and the yield from wireless data? And last question is on the results and on the cost of sales, just wondering if you can give a breakdown of what percent roughly is acquisition versus retention?

Luis, thank you for the questions. On your first question on SMS, our unique subscriber base for the prepaid has in fact slightly increased or more or less remained flat so therefore, what has happened was that there was a reduction in the number of SMS that they were sending. Part of it has been because of the alternative instant messaging available and this has been increasing because of the smartphone penetration growing from 10% in the first quarter of last year to roughly about 18% by the end of the first quarter this year. The free Facebook competition has also affected negatively the SMS. But considering that our subscriber base has remained intact, what has happened was I guess they were having a third or second SIM for this and doing the free Facebook on those SIMs. So, we are seeing this behavior and we are looking at several ways by which we can counter this situation.

Now I understand they are terminating that promo, which is disruptive not only on our part, but I guess on their part also; and we hope that Facebook can be incorporated and we can partner with them, but in a more profitable way both sides. On the number two question, Anabelle? When it comes to time-based and volume-based, we are of course encouraging to shift into volume-based, but we have to do this in a way that would be phased and acceptable by the consumers. And I think the PowerApp, which is proprietary to us, where we can sachet the data usage or data availment on the prepaid environment and ring-fence the apps that are being offered can very well help us do this. In that manner actually we are moving towards the volume-based rather than the time-based. Number three is cost of sales?

Because I guess we are still growing our postpaid subscriber base with new acquisitions, few of the subsidies would be higher towards new acquisitions rather than fewer retention.

Very good. Thanks. That's very clear.

Do you have any other questions, Mr. Hilado?

No, that's all.

Arthur Pineda.

Firstly, just a follow-up on Luis' questions on SMS. Given (inaudible) to terminate the free Facebook promotion from your competitor, should we now start to see SMS revenues being revised in subsequent quarters or do you think the pressure on this will continue? Second question I have is with regard to data usage, what percent of your subs now regularly use data and what would the average usage level be? And last question I had is with regard to your recent promotions on market denominated data plans. Could you help us understand what kind of take-up levels we are seeing from consumers on these promotions? Thank you.

On the first question -- what was the first question?

With the termination of free Facebook, do we expect to revise SMS voice growth? Will it continue to be under pressure?

Well, we are assuming that hopefully the promo will be terminated and once that is done, the partnership with Facebook can be done in a way that it would also be revenue generating on the operator side because at this point it is purely disruptive. But let me point out, Arthur, that if you combine both voice and SMS because actually voice went up by 8%, SMS went down by 10%; so the reduction in revenue has been mitigated by voice revenues increasing and that has to be taken together. What was the next question?

Average data usage and percentage of subscribers? We kind of indicated our smartphone penetration's approximately 18% of the base and of that, about quarter of that pay for data so you can work out that to be about 2 billion to 3 billion I guess users on a monthly basis.

And the usage level?

The usage level increased by about 150% in terms of terabytes for the prepaid for the mobile Internet. Revenue increased by 81%. So obviously more data is being used, but the yields are not going up as much.

Understood. And the last question was on the take-up for these micro-denominated promotions, which you launched in March?

Which promotions, PowerApp?

1.3 million have downloaded the app.

Two months about 1.3 million have downloaded the app.

Okay, understood. Thank you very much.

Thank you. Do you have any other questions Mr. Pineda?

I'm good. Thank you.

Navin Killa, Morgan Stanley.

The first one is going back on the SMS weakness. Now if I understand correctly, I mean a bulk of your SMS revenues are coming from that PHP20 I guess daily reloads, which include I guess unlimited SMS and voice. So I'm just trying to understand why the volumes and particularly the revenues are down because of this free FB promotions. Are you essentially trying to say that people are not uploading the value in their prepaid cards? So I guess that's question number one, just trying to again understand why the SMS revenues are declining.

Secondly, on the margins on the fixed side, which obviously have improved and you have got double-digit EBITDA growth. How sustainable do you think this double-digit kind of EBITDA growth rates are in the fixed business? Do you think that business has turned around from an operating leverage standpoint? And the last question, if you can provide a very quick update on the media businesses of the Group, I guess particularly TV size and what's the status there in terms of audience share turnaround, profitability turnaround, et cetera? Thank you.

For the first question, Navin, if I'm not mistaken; the frequency of load was the one that has lessened, it's not the number of subscriber base. So what has happened is most likely they have availed of the free Facebook with a separate SIM and that is not revenue generating and therefore, they could use Facebook as a means to chat with their community circle. So that's the behavior we are seeing, it is disruptive, but I guess it's more disruptive on the other side. The other --?

Navin, it's Chris. I think there has been a fairly hefty improvement, which is encouraging. I think it's partly that we're beginning to see the impact of the rationalization of the old digital fixed line network with the PLDT network. So, there are some fairly significant savings coming through. So in the previous periods 2012, 2013, we were effectively still running the [two] networks and having some rationalization costs included there. So, I think we're up to about 40% for the Q1. That may be a little bit high going forward, but I certainly think we're going to run at a higher rate than I think last year at 37%, Q1 36%. We may be settling about the 38%, 39%.

We were just having a close discussion as to what was the question. I understand your third question is the media update? Is that --?

Yes.

Well, when it comes to Cignal, that is doing very well and in fact in the first quarter of this year they have reached over 700,000 subscribers and is now on a positive net income and certainly EBITDA and so therefore, it's moving very well. On the print side, I guess most of them are profitable so we have no problems there. In fact, BusinessWorld in the first quarter because it has been incorporated now with the operations of Philippine Star is now positive EBITDA, largely because they have now improved distribution et cetera, et cetera. So on the free-to-air we have some challenges there, but we are currently trying to reformat our approach and strategy in the market, which we will soon disclose.

Can I just ask one follow-up I guess? On the fixed broadband side, you mentioned that you have got 1 million customers, which is roughly 48% of your total fixed line customer base. I'm just trying to think about I guess the target market size for the fixed broadband. I mean does your current fixed line subscriber base form a natural limit to that market or could your fixed broadband customer base in the medium-term be even bigger than the 2.2 million fixed line customers that you have right now?

I think there the effect on our closing in with conversion of the legacy network for NGN will help a lot. We are very close in that conversion already, I think we're about 75% or 80% done there. So, the remaining 20% to 25% or so would give us an additional subscriber take-up there once the outside plan for the last mile would be more capable or data capable. The other thing that would give us an upside would be our fixed wireless product, which we recently launched called Ultera, which is the TD-LTE deployment. I have personally looked at one connection in one of the towns in the outskirts of Luzon and it can easily be installed and the speeds that you can get is roughly about 10 megabits per second. So that one is we are deploying that in the areas where our reach on the last mile for the fixed line is not there. At the same time, we are also looking at TD-LTE as the substitute for our fixed wireless WiMax and Canopy, which are end of life type of technology.

Thank you.

Mr. Killa, do you have any more questions?

No. Thanks.

Chate Ben, Credit Suisse.

The first one is regarding the decline in SMS. Now I understand that possibly short term it's coming from the free Facebook promo, which is now not extended; but on a bigger picture, it also shows how cannibalization impact could negatively affect you guys. So at the current point in time, does this kind of free Facebook promo show to you that we might have not done enough in terms of protecting the revenue base and is there any other measure that you can actually do or this is structural? The second question is regarding the potential growth just go back to the free Facebook promo as well. I understand that your PowerApp also offer some free social network, basically if I download I can enjoy the free Facebook or some free features on that right now as well. Would you have plan to actually cancel that or would that actually continue? The third question is regarding your smartphone penetration, I understand that it's 18% of your base. Can you actually break that down between the postpaid and prepaid penetration, please? Thank you.

When it comes to SMS, we have our own plans because as you may know, about close to 40% of the handsets in the country are still feature phones. So, we are looking at ways and means to enhance SMS so that these would approximate the experience that you have on the other instant messaging services. That is the one that we are exploring and you are right, we [won't] be able to get this experience directly from the existing consumers who have feature phones. PowerApp that's not really offered free, but because it is a means of sacheting the app and ring-fencing it, but you are paying for it. So if you are --.

The free social is an incentive for people who download the app at the moment because it's still early introduction.

And also behind PowerAPP is a more efficient use of bandwidth so that makes it a --.

It's [payable] and profitable sort of accepted.

Right. Thank you. And just a breakdown of the smartphone penetration, please?

I don't have the [data] on that. If you work out the numbers, that number is bigger now that our postpaid base so certainly there is already quite a bit of penetration into the prepaid base as well.

Right, okay. Thank you.

(Operator Instructions)

Operator, if there are no more questions, let me now turn the conference over back to you for the replay information.

Thank you. I would like to give everyone the instant replay information for today's call. This conference will be available on a 24-hour instant replay starting today daily on through May 20, 2014. Replay information for the 3:00 PM call. The international caller number is 852-3018-4335, the US toll-free number would be 1-866-845-9497, the UK toll-free number would be 0-800-376-5673, the Singapore toll-free number would be 800-120-5661, the Japan toll-free number is 0-053-112-2224, the Australian toll-free number is 6-128-030-3035. The passcode would be 1792. Conference leader is Melissa Vergel de Dios. Now, I will turn the conference back to PLDT for any additional or closing remarks.

On behalf of my colleagues who are here today, thank you so much for joining us this afternoon and we look forward to talking to you again on August 5 I believe for our first half results. Thank you.

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