PLDT Inc (PHI) 2014 Q2 法說會逐字稿

Good afternoon, everyone, and welcome to the PLDT conference call to discuss the Company's financial and operating results for the first half of 2014. 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 introduction. Please go ahead. Thank you.

Good afternoon and thank you for joining us today to discuss the Company's financial and operating results for the first half of 2014. 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 under the Investor Relations section. For today's presentation, we have with us members of the PLDT group management team; namely Mr. Manny Pangilinan, Chairman of the Board; Mr. Poly Nazareno, President and Chief Executive Officer of both PDLT and SMART; Mr. Chris Young, Chief Financial Advisor of PDLT; Ms. Anabelle Lim-Chua, SVP, Treasurer of PDLT and Chief Financial Officer of SMART; and Attorney Ray C Espinosa.

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

Thank you, Melissa. Good afternoon. Allow me to share with you PLDT's financial and operating results for the first six months of 2014. On slide 1, the upward trajectory in data and broadband revenues continued to underpin the Company's performance in the second quarter of 2014 keeping PLDT on the growth track and in a favorable position to meet our full-year guidance. Service revenues for the first half of 2014 improved by 2% year-on-year to PHP82.5 billion. Our fixed line registered a 5% year-on-year growth while our wireless business remained stable. EBITDA for the period increased by 1% compared with the second half of 2013, but declined by 4% or PHP1.6 billion year-on-year to PHP38.2 billion. Service revenue increases were overtaken by the rise in subsidies, particularly in our wireless business, and higher cash operating expenses.

Consequently, EBITDA margin declined to 46% from 49% in the first half of 2013, but improved from 45% in the second half of 2013. Reported net income for the first half of 2014 was higher by 2% year-on-year and 27% compared with the second half of 2013. Core net income grew by 2% or PHP400 million year-on-year to PHP19.8 billion. On the second slide, consolidated service revenues rose by PHP1.5 billion or 2% year-on-year to PHP82.5 billion at the end of June 2014. The upward momentum in our growing data and broadband businesses resulted in a 20% year-on-year increase to PHP20.3 billion in revenues. These now account for a quarter of our total service revenues, significantly higher than the 15% contribution from our declining legacy international voice and national long distance revenues of PHP12.7 billion.

During the period, the combined revenues from cellular domestic voice, SMS, and LEC reduced by PHP1.2 billion or 2% to PHP49.6 billion, mainly due to the PHP2.6 billion decline in SMS revenues which exceeded the PHP1.3 billion increase in LEC and cellular domestic voice revenues. EBITDA margin for the period stood at 46%, higher than the 45% in the second half of 2013. Consolidated EBITDA decreased by 4% year-on-year to PHP38.2 billion due to higher cash expenses resulting from operating an expanded network, residual post-typhoon Yolanda restoration expenses and increases in subsidies and other selling expenses resulting from a greater push to grow our postpaid business. This is on page 4. As previously discussed, PLDT expects core income to rise from PHP38.7 billion in 2013 to PHP39.5 billion in 2014.

For the first six months, core net income rose by PHP400 million or 2% year-on-year to PHP19.8 billion, of which PHP10.1 billion was recorded in the second quarter. The increase was due to higher revenues, lower net financing costs, and the recognition of gains from the sale of Meralco shares by Beacon. These more than fully offset the rise in subsidies, operating expenses, and income taxes. Reported net income at the end of June 2014 was PHP300 million or 2% higher year-on-year at PHP20 billion due to higher net ForEx derivative gains during the period and the contribution from discontinued operations in 2013. On the next slide, you will be pleased to note that the PLDT Board of Directors today approved the change in PLDT's dividend policy increasing the regular dividend payout rate to 75% from 70% of core earnings while maintaining the look back where we determine the possibility of a special dividend.

In line with the revised dividend policy, the Board of Directors declared an interim regular dividend of PHP69 per share representing 75% of core earnings for the first six months of 2014. The dividend per share is PHP6 or 10% higher than the interim dividend for 2013. The record date for the dividend is August 28 while the payment date is September 26. Next slide, let me now discuss highlights of the various businesses starting with broadband. The growth momentum for broadband resulted in a 22% or PHP2.7 billion year-on-year increase in broadband revenues to PHP15.4 billion for the first six months of 2013 or 19% of total service revenues. The PLDT Group's broadband subscriber base grew to over 3.6 million at the end of June 2014 consisting of over 1 million fixed broadband and 2.6 million wireless broadband subscribers.

Fixed broadband grew by 13% to PHP6.7 billion following an 11% rise in subscribers. Wireless broadband revenues improved by 7% to PHP4.9 billion as a result of a 12% increase in subscribers. Strongest growth was generated from mobile Internet usage with revenues higher by 77% or PHP3.7 billion as smartphone ownership among our subscriber base grew to over 20% and usage up by 121%. On the next slide, wireless service revenues for the first six months 2014 were ahead of last year by PHP300 million at PHP57.9 billion mainly due to the sustained rise in broadband and mobile data revenues. In addition to the PHP1.6 billion rise in mobile Internet revenues as mentioned earlier, domestic cellular voice revenues of PHP18.4 billion increased by PHP1.2 billion partly compensating for the PHP2.6 billion decrease in SMS and VAS revenues.

The reduction in SMS count in the first half of 2014 was due to some shifting to voice calls under postpaid plans and the use of alternative messaging services. We are closely monitoring this downward trend in SMS revenues although it should be noted that the quarter-on-quarter decline in SMS revenues for the second quarter of PHP300 million is significantly lower than the PHP800 million quarter-on-quarter decline for the first quarter 2014. Our postpaid subscriber base expanded to 2.6 million at the end of June generating revenues of PHP10.4 billion or 20% of cellular data and voice revenues. Postpaid revenues registered PHP1.3 billion increase over last year, which exceeded the PHP500 million rise in subsidies. Wireless EBITDA for the first semester of 2014 decreased by PHP2.6 billion or 9% to PHP25.5 billion.

As earlier mentioned, this was due to higher subsidies and operating expenses related to an expanded network, residual post-typhoon Yolanda restoration costs, and the push to grow revenues. EBITDA margin dipped to 44% from 45% in second half 2013 partly due to the structural change in the wireless revenue mix and the greater proportion of postpaid revenues to total revenues. On the next slide, moving now to the fixed line. This segment posted an increase in service revenues of PHP1.5 billion or 6% year-on-year to PHP28.1 billion net of interconnection costs. Data revenues, which accounted for 53% of total fixed line revenues, underpinned the growth. Corporate data revenues registered a 7% increase to PHP7 billion. In addition to this, data center revenues hit the PHP1 billion mark reflecting an 18% increase from last year.

Fixed line broadband revenues grew by 14% to PHP6.7 billion due to an 11% rise in subscribers. At the end of June 2014, fixed line EBITDA grew by PHP1.2 billion or 11% year-on-year to PHP12.6 billion. EBITDA margin rose to 39% from 35% for the second half of 2013 and from 36% for the full year of 2013. PLDT ended the first semester of 2014 with 2.2 million fixed line subscribers, of which over 1 million or 47% have fixed broadband subscription. On the next slide, we are elated about the largely untapped potential that data and broadband holds for the individual and home markets. Our initiatives to harness this potential includes growing the cellular postpaid base, low denomination data subsidies, and the use of content for greater customer engagement that would help build habit and increase frequency of data usage.

The unrivaled integrated fixed and wireless network of the PLDT Group has the capacity, resiliency, and reach that will allow us to respond to our individual and home customers' communications needs. On the next slide for the enterprise segment, the overall sustained improvement in the economy has triggered business expansions for corporates, SMEs, and BPOs; which in turn have generated demand for greater Telco services. We offer enterprise solutions that include Ethernet, cloud computing, and data center services among others. In response to the increasing awareness of the importance of cloud computing and data centers, we are building two more data centers to cement our position of having the largest rack capacity in the country. By end 2015, our rack capacity will expand from over 2,200 today to over 6,600. Key to our market leadership in the enterprise space is our ability to enable businesses using the power of the PLDT Group network.

On the next slide, turning now to the balance sheet. Net debt at the end of June 2014 was $1.8 billion with net debt to EBITDA of 1.05 times. 44% of gross debt is denominated in US dollars. Taking into account our US cash holdings and hedges, only about $900 million or 32% of our total debt is unhedged. There is a natural hedge provided by our dollar linked revenues, which amounted to $400 million [or] about 20% of service revenues. 61% 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. PLDT's credit ratings with Fitch, Moody's, Standard & Poor's remain at investment grade. On the next slide, free cash flow for the first half of the year was lower by PHP2.6 billion or 13% at PHP18.1 billion, largely due to higher CapEx and income taxes paid.

For 2014, we expect CapEx of between PHP31 billion to PHP32 billion or between 18% to 20% of service revenues. At the end of June 2014, CapEx amounted to PHP8.1 billion. Ongoing network activities include expansion of our data network with our combined 3G HSPA plus and 4G population cover now at 82%. Extending the fiber optic network to over 88,000 kilometers. Increase in FD and TD LTE coverage to around 1,800 base stations. Reinforcement of existing network infrastructure to improve resiliency against severe weather conditions; this includes buried fiber links, deployment of super-sized base stations, and the construction of elevated equipment shelters among others. Enhancing the Group's multimedia capabilities through additional VDSL coverage and building out of additional FTTH and NGN lines. We continue with the integration of Sun and Smart networks as well as various projects aimed to enhance our multimedia and IP capabilities.

That ends my presentation. Let me now turn over to our Chairman and VP for outlook for the rest of the year and beyond. Thank you.

Thank you, Poly. Good afternoon to all of you. In respect of guidance for 2014, we are maintaining our core net income number at PHP39.5 billion, which was the number earlier conveyed to you I think sometime in March this year. So, that's about PHP800 million higher or 2% higher than the 2013 core income. In CapEx, it's similar to what we had earlier conveyed, PHP31 billion to PHP32 billion for the year, no more than 20% of service revenues on a consolidated basis. In capital management, we have adjusted somewhat our interim dividend policy, now being 75% of interim core instead of the usual 70% and [slightly] we can maintain 100% dividend payout for the full year of core and if that were to happen that too in the eighth consecutive year, that PLDT has given out dividends being 100% of core income.

We'll now open the floor for questions. We will first take questions from those who have joined us from the conference facility before we take questions from the floor. Operator?

(Operator Instructions) Luis Hilado, HSBC.

Congrats on the results. I have three questions. The first one is regarding outlook for the second half. You've reaffirmed your guidance for the full year, just wondering in second half whether this will be boosted by further sales in Meralco or it's going to be cost reduction driving it or revenue push. The second question is, as Mr. Nazareno mentioned about SMS, the erosion seems to have slowed down in this quarter versus the previous quarter. What would you attribute this to? I think in the previous quarter you mentioned the free Facebook promotion was part of the pressure behind it, is that now the reason why it's not as bad? And last question is the lower financing costs for the quarter, is that a sustainable trend that we are going to see going forward?

On the financing costs, I guess it will be partly a function of where the exchange rate will be because we still have some dollar liabilities and dollar interest expense. But on a general basis, we don't see a significant sort of spike in our financing costs in the second half.

I think, Luis, there is no additional sales planned in respect of the Beacon position. That's not to say there might not be some transactions in the second half, but it won't involve Beacon. I think Poly will address the issue on the outlook for the SMS.

Luis, you are right. The free Facebook added to the pressure on the SMS, downward pressure, and that was stopped sometime towards the end of April this year and therefore the ensuing reduction on SMS revenues went down to PHP300 million from roughly about PHP800 million the previous quarter when this was in effect. We see that there will be further erosions, but not to the same magnitude when there was free Facebook. We recently launched certain service offerings that would enhance the quality and the relevance of SMS and the sexiness of SMS and right now we have offered as a first salvo the text chat, which you can do now on text, and therefore we are really catering to the more than 45% of feature phone owners still in our subscriber base and at the same time, manage the long tail of SMS.

Great. Just had one follow-up question regarding the second half. Since it's not likely to be a Meralco gain too much, is it going to be more of cost reduction driving performance in the second half or you're more bullish in terms of revenue outlook?

I think that's correct, Luis. We are looking at our cost structure now and especially because we are undergoing a shift in our business structure or in the dynamics of our services. Firstly, there is more postpaid so there is a shift from the high-end prepaid to postpaid and secondly, the international inbound is also going down creating the pressure on our SMS.

Okay. Thanks a lot. Very clear.

Rama Maruvada.

Firstly with regards to your wireless business, just trying to get a better sense of what's driving the volume trends. If we were to look at even the voice call, the volumes were down; subscribers, you seem to have lost subscribers for the quarter; SMS count is down. So just trying to understand is it a function of competition or how should we think about the volume as well as subscriber trends going forward? That will be good. The second one is with regards to the wireless EBITDA margins, again you seemed to have a little bit of a margin erosion this quarter. If you could just point towards what you think would be sustainable EBITDA margins for the wireless business and if there are any one-offs in this quarter that will be good?

Rama, the voice calls regarding the domestic voice, our revenues have increased by 7% and this is largely due to the shift of prepaid to postpaid and the shift from unlimited to bucket price products and these are consciously driven by our marketing people. So not necessarily an increase in minutes, but the yield has gone up from about PHP0.63 to PHP0.70 plus per minute. Well, we are looking at reviewing the costs at this point and on the cellular side, our margin is right now at 44% and we're hoping that this would be enhanced in the second half as we review our costs and we look at how we can restructure ourselves to adjust with the new dynamics of the business.

Okay. That's fine. Yes, that should be sufficient. Thank you.

Neeraja Natarajan.

I know that there was already a question on cost and margins and things like that. I just want to understand in this pickup in sales and marketing, are you also booking some of the subsidies under that or is it just purely advertising campaigns? That's my first question. And secondly, just on the cost side of things, I know you said you [have to] look at this cost structure; but where do you think there's room to sort of improve the cost structure better and how long will it take for example to see that transition come through if at all? The second question is also on the competitive side of things. I know that there was a Facebook free promo offer and perhaps because of that there has been some SMS impact, but it just seems like I know PLDT has this whole we need to price offerings kind of approach, but then how do you sort of react to when competition does this even if it's not on a sustained basis, but if it's on a one-off sort of offers, but it keeps consistently coming up. Do you feel like you need to review your strategy? And my last question is last year in the back half, you had a low tax rate. Should we expect something like that in the back half of this year as well? Thank you.

On your first question on the selling expenses, that doesn't include subsidies which are really booked in the cost of sales versus whatever you call that in non-service revenues, but there are some costs related to subscriber acquisition. So for example if you're paying commission to sales agents, those types of costs would be in the selling and promotions costs aside from A and B and other sort of selling agents that you may deploy. In terms of where there is scope for improvement on the cost side, I guess there is a continuation of the integration of the networks of Smart and Sun. So we are proceeding with respect to that and there should be some savings with respect to rents, utilities, maintenance, et cetera as we try to put the networks together and some of also the [parts] and other back offices. And the low tax rate, just I will keep to the last question for the competition question. We think that generally the tax rate should probably be around where we are in the first half. There's always scope to review towards the year-end, particularly as there are some tax losses in some of the vehicles where we can try to look at.

Just to come back on the S&P question. So even if a subscriber is recontracting and going in for a new smartphone, that still comes under the subsidies rather than the selling and promotions?

Yes, that's correct.

Okay. And then just on the cost side, I mean you said network cost, but it seems like that's where sort of the costs have actually picked up. Also if I look at in the last six quarters or so, your rents are up, your repairs and maintenance are up. So, is there like any new timeline that we can look at?

Well, there are several things. Like on the rent side, we are obviously expanding the number of sites, we are expanding our scope of coverage, and also by delivering data you also have certain rent expenses with respect to delivering from the international circuits. There are expenses related also in the aftermath of Yolanda. So post Yolanda; there is higher fuel costs, higher I guess some extra rental costs that we had to bear as a result of the typhoon sort of aftermath.

Okay. Got it.

Your second question on competition, what was your question again?

I just said like for example, your SMS sort of got impacted based on these short-term promos from competition and it seems like from time to time they do rejig this. I'm just wondering like if you have to sort of review your competitive strategy as well versus I mean going ahead and just wanted to get your thoughts on that.

Well, it is pretty dynamic in terms of the short-term sort of promotions and offers that are being offered by the different brands. So you're right, we do respond to what competition does in that respect.

Alright. Thank you.

Do you have any other questions?

No, that's it from me. Thanks very much.

Chate Ben.

The first one is again related to revenue and competition. Basically if you look at in terms of number of subscribers in conjunction with the volume as well, it seems like you're losing subscriber market share to your peers and therefore that translates into a loss of revenue market share as well. So would you think at the current point in time, you should try to do something to gain that subscriber momentum back in order to kind of catch up on the revenue growth line? Should we expect that to pick up? The second question is regarding your change in the dividend payout.

I understand that and this has partly been clarified as well, but I just would like to understand you have been paying 100% payout over the past seven years and as much as that's not called as regular, seems to be perceived by the market as being kind of regular and best case assumption already. What's the rationale behind changing from 70% to 75% and will that have any implication on your 100% payout? The third thing is your statement seems to be talking about reviewing exciting opportunities in broadband and ICT and that you expect to announce some details of that soon. Is there anything that you can share right now, what kind of opportunity or assets you are looking and what kind of timeframe we are looking at? Thank you.

Let me try to answer the first question, which is the subscriber base. We had a cleanup in the subscriber base, an additional one, which is the final shoe that has dropped on Talk 'N Text. This is in relation to its Alkansya promo of a reduction of 1.4 million subscribers. But let me just point out, and this is very important, that the VLR active subscriber base grew by 4% in the first half of this year compared to last year. So in terms of utilization of the network and in terms of actual usage, there has been a growth from 60% utilization to 67% utilization of the network, which is the more important thing because the VLR is something that we constantly monitor on a daily basis. So, that gives you an indication of activity in our subscriber base. The 1.4 million that we have reduced from the base of Talk 'N Text additional one is they did not have any revenues at all anymore. This is the second question, I think dividend?

I think Chate, there's no big change in the dividend policy. I think it remains a split between a regular dividend and a special dividend. I think we're just moving it up a little bit by 5% given that we have been paying close to 100% for the last I think six, seven years now. So, really more a reflection of that. I think Manny might say one or two comments on the Internet opportunity.

We have been looking at the rather broad spectrum of investment opportunities in the Internet space and we have come down to two possible candidates for both investments and strategic partnerships. One of the two, we're in an advanced state of discussion and so I think there is reference to an announcement that could be made quite soon. So, I think that's all I could say at the moment. I think it's actually a quite exciting opportunity for us. It's not just making an investment in that particular Internet company, but also striking strategic initiatives with them in various activities.

Just follow-up questions on two things. Regarding the dividend, just to put it in the simplest terms so we should continue to expect 100% payout or should we not? Whether the new M&A activities would have any bearing on that? And recapping the acquisition opportunity, If I may ask, are you looking to strike a deal that would actually be supporting the revenue generation of existing revenues or we are talking more of a new revenue stream altogether from the new business? Thank you.

I think in terms of the dividends, it remains broadly the same position that we have this concept of the regular dividend and the look back. I think, Chate, the move from 70% to 75% doesn't change that. It remains that we will pay the regular dividend at the end or beginning of the following year and then see if the 100% can be paid. And I think as Manny said in his remarks, I think our target remains to pay that. In terms of any transaction that we are looking at, I think again you may recall we still have a fair amount of the proceeds from the SBI transaction that have not yet been utilized and the Beacon transaction in 2Q will and we have some initial payments and we had some additional payment will also generate additional funds for us.

So, we are more looking to reallocate these funds rather than to use regular current cash flow for the acquisition activity. On whether it will generate new revenues or enhance existing revenues, I think what Manny said again was that this is not just an investment for us, it is an opportunity for us to make a strategic investment. And again, we can't say too much at the moment, it will just probably be hopefully in a few days' time, but you will see I think it's an opportunity for us to actually enhance some of our existing businesses. But again, we have to be little bit cautious on what we say at this stage.

Alright, perfect. Thank you very much.

Arthur Pineda.

You mentioned a cleanup of the [subs] in the mobile space. I just wanted to get some clarity on where that subscription should be if we exclude such cleanup activity. So I'm wondering if the end of Globe's prepaid promotion in April and May had resulted in any subsequent usage or subscriber migration back to PLDT in June or July or you have seen no signs of that? Second question, wondering what's the key difference on the SMS between yourself and your competitor. They seem to have a much more stable SMS revenue momentum, any major differences between your offers and theirs which is driving this difference? Lastly, just to clarify on the sales and promotional trends. Given that this result includes handset subsidies, what's been driving significant increase year-on-year and quarter-on-quarter? Are you seeing elevated levels of competition materializing in the market now, which necessitates the additional spending? Thank you.

I think as Mr. Nazareno indicated earlier in terms of what is termed VLR or active subscriber base, there's about a 4% increase in VLR notwithstanding that the headline subscriber numbers are down because of the cleanup in the base.

If you were taking that at a QonQ basis, would we have a better matching? How does it compare with the QonQ?

That was the 4%.

The 4% is QonQ, okay.

The 4% increase is our active subscribers that come out in the switch at any one point in time and so right now, we were looking at about 45 million coming out in the switch, which was an increase of 4% compared to same period last year. So, that is the measurement.

I think frankly we sort of talked about this thing in many respects. I think the whole paradigm was that a measure of how you're growing is the number of subscribers you have in each quarter, whatever, each semester and I think those days are gone. Increases of sub base I mean given in the context of a changing paradigm of the business particularly in the cellular side, it's not a real measure of how revenues and profits could grow. So there was a cleanup I think end of last year, there was a further cleanup within the first half this year, that's why the sub base has gone down to about 68 million. And what Poly's saying that the ratio of the active subscribers in the subscribers base has actually risen this past 12 months and that's because those are your active and revenue generating subscribers. That's the real measure of what counts in terms of revenues and bottom line. So, it's not the old days where you grew your sub base by X million each period. So, I think that's what we're saying.

Understood. On the SMS side?

Generally along the SMS side, the voice and SMS promos are generally in line with each other given that these are more I guess traditional variants that we offer. And your question on the selling and promo higher expense in the second quarter, I (inaudible) last year, the spend on [ASP] and some other selling expenses were more back-ended in the second semester whereas in this year we deliberately did more even of spending program.

Okay, understood. Thank you very much.

Navin Killa.

First with regards to this free Facebook promotion of Globe over the period of the last six, nine months, would you have an estimate of the number of customers that you might have lost to Globe because if we look at their numbers, both their voice as well as SMS revenues have been growing so I would imagine that they've probably taken some traffic from your network? And then the second question which has been asked in different forms before. With regards to the revenue market share, it continues to inch down, could be promotions from the competition, could be other factors; but is there a number which you would consider your threshold and which would trigger a more significant reaction from PLDT? I guess the question is again how long can this trend of market share loss continue and how do you address it over the longer term?

On the free Facebook promo, our analysis of the impact is that some of our subscribers did take on a second SIM to take advantage of the free Facebook promo of the competition. So they didn't give up their SIM from our side, but they did take on a second SIM. So to some extent, their usage of text and voice did get diluted from our end towards the other side given that they had now two SIMs that were active.

I think also what is important to note is that in terms of subscriber base, our unique subscribers in the second quarter of this year compared to the first has remained more or less the same and in fact it has improved slightly. So therefore, it's not so much the subs moving to the other side, but it's more the usage has gone down mainly because of the free Facebook. They started taking advantage, that's what Anabelle was saying, of the Facebook SIM of the other side.

So would that then mean that as promotion has been taken away, have you seen the usage come back to you or have they stayed on the other side?

To a certain extent, yes because if you look at the SMS revenues in the second quarter, the decline is now just even less than half of the decline of the first quarter which was PHP800 million whereas the second quarter was PHP300 million.

Okay. And any thoughts on my second question I guess with regards to longer-term trends around market share and how do you stop that?

Question is market share, the ratio which we will get we will go berserk, is that the question? I guess there will be a pressure under which we will be alarmed if the market share were in some numbers or in revenue terms, it will get to a point of concern. But what that number is, I don't know, I don't think we do. We focus on that. I think if you look at the results for the first half, (inaudible) and full-year results; the fixed line business is doing very well, probably one of the few fixed line businesses in the world where growth is coming both in terms of the revenues and in EBITDA contribution. Revenues are up by PHP1.5 billion for the first semester net of interconnect and expenses are flat so that's why the EBITDA margin in fixed has risen from 35% to about 39%.

Now the opposite phenomenon has happened on the cellular side where revenues have gone up by about PHP1 billion I think for the first half and expenses have gone up by PHP3 billion. So, our focus is really on managing the expense base as we speak because that's where we got hit in terms of the margins of the cellular business and uplifting whatever constraints there might be on the revenue side and part of that is the free Facebook offering of Globe, I may say that, which should terminate pretty soon. So, that has had an adverse effect on the SMS volume for the first half of this year. But I think we have to address as well the expense side because clearly the business model of the cellular business, it's changing very fast and it's upon us already.

So we have to really look at our expense base and how we should be better organized in order to accommodate not only the changing revenue mix, but as well the expense base moving forward. We just cannot accept that this expense base will continue in a business where the margins are dropping as we switch from legacy, which we are trying our best to long-tail SMS and voice which are higher margin business into data broadband, which are lower margins. And the only way to improve that will be not only the revenue and the sub base, but as well the expense base. That's the reality. Is there a panic bottom level? Well, maybe we will focus on that, but I think we have to focus first on what's happening on our cellular business, which is changing. It is changing and changing very rapidly.

Got it. Thank you.

(Operator Instructions) Kunal Vora.

First, can you provide some insights on the media broadcasting business television; how it's done in the first half, what kind of losses are incurred, and how it's being financed? That's one. Second is if I look at your mobile Internet revenue, the growth in mobile Internet revenue in absolute terms is lagging the decline in SMS revenue. When do you expect this to change? I mean are we like pricing data right, the data growth seems to be slower compared to the cannibalization in SMS? Thank you.

Insights on the media business in the first half, losses and how they are financed.

Well, in terms of the media assets, I think that we have drilled down a bit in the specifics. In terms of the --.

More focus on the broadcasting TV side.

No, but you have to get the full picture. Number one is that the depressed assets are doing quite well so no problem, they're making money and they're dividend paying. Number two is the Cignal television, which has already broken even in the first semester this year in not only EBITDA, but in terms of the bottom line on a accrual basis and is growing truly fast. As we speak, we are at least 750,000 subs and more likely by the end of this month 800,000 subs on Cignal. So it is in sub numbers about equal to the combined Sky Cable and Destiny Cable sub base of ADS CDN. Where the problem is, is really on the TV5, which is your bete noire. Now the losses are continuing, but on a declining basis so we have managed to increase somewhat the revenues on a modest way on the TV5 broadcast seeing that expenses have gone down. So I think we're being more efficient in terms of how we manage the TV5 business, but it won't be a quick turnaround. I think we've said that so it will probably take about two to three years before we can see a breakeven position for TV5. So that is a moment of concern for us and it's being addressed, but it will have to be addressed and will have to be a medium term solution.

I think with regards to the mobile Internet revenues, as mentioned earlier, the revenues grew by 77%. And let me point out that in terms of volume in the first half of this year, the traffic that went through mobile Internet was over 15,000 terabytes, which is roughly 121% more than same period of last year. So the volumes are going up and the revenues are also following, but not as much so we're looking at how we can modify even further the volumes that are coming through. Now with regards to your statement that it's lagging behind the erosion in SMS, well, that is true in the first quarter; but in the second quarter erosion or decline, it is no longer lagging but this is a continuing balancing act for us. As the smartphone penetration goes up, right now we estimate that the total penetration may be at 27% including the smartphones that do not come up in our switch because they are not under the 3GPP standards. So, it is moving up already and therefore that is the thing that we have to balance.

Okay. Sir, just one follow-up. On TV5, would it be possible to give us some guidance on the loss for this year?

Basically the funding, I think if you're going to the funding, I think we are looking maybe between now and the end of the year there will be an additional funding of about PHP2 billion to PHP2.5 billion, but that is not direct funding by PLDT. The actual TV5 assets are owned by the PLDT retirement fund so PLDT will contribute additional amounts to the retirement fund to partially fund that, but it's not a direct accounting from the PLDT perspective.

Okay. Thank you, sir.

Thank you. As of the meantime, we don't have any more questions. I'll hand the call back to Ms. Melissa.

If there are questions from people in the hotel, there are microphones in the aisles. Anyone? If there are no more questions, I will turn the facility over to the operator 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 August 19, 2014. The replay information for the 3 PM call, the international caller number is country code 852, number is 30184365. A US toll free number of 1-888-566-0360, the passcode will be 8087. The conference leader is Ms. Melissa Vergel de Dios. I will now turn the conference back to PLDT for any additional or closing remarks.

Thank you all for joining us this afternoon and we look forward to seeing you in respect to the third quarter results. Thank you.

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