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Philippine Long Distance Telephone Company (NYSE:PHI)

Q4 2012 Earnings Call

March 5, 2013 2:00 AM ET

Executives

Melissa Vergel de Dios – Head, IR

Manuel Pangilinan – Chairman

Napolean Nazareno – President and CEO

Christopher Young – Chief Financial Advisor

Ray Espinosa – Head, Regulatory Affairs and Policies

Anabelle Lim-Chua – SVP and Treasurer; CFO, Smart

Analysts

Sachin Salgaonkar

Luis Hilado

Arthur Pineda

Tien Chau

Chi Fan

Rama Maruvada

Neeraja Natarajan

Surabhi Khanna

Operator

Good afternoon, everyone, and welcome to the PLDT Conference Call to discuss the Company’s Financial and Operating Results for 2012. 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 Ms. Melissa Vergel de Dios, Head of Investor Relations for PLDT for the introductions. Please go ahead.

Melissa Vergel de Dios

Good afternoon, and thank you for joining us today to discuss the Company’s financial and operating results for the full year of 2012. As mentioned in the conference call invitation, today’s presentation is posted on our website. For those who have not been able to do so, you may download the presentation from www.pldt.com.ph, under the Investor Relations section.

Today’s presentation, we have with us members of the PLDT Group management team; namely, Mr. Manuel Pangilinan, Chairman of the Board, Mr. Poly Nazareno, President and Chief Executive Officer of both PLDT and Smart; Mr. Chris Young, Chief Financial Advisor of PLDT; Ms. Anabelle Lim-Chua, SVP, Treasurer of PLDT and Chief Financial Officer of Smart; and Atty Ray C Espinosa.

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

Napolean Nazareno

Good afternoon and thank you for joining us today. Allow me to present to you PLDT’s financial and operating results for 2012. Our financials for 2012 reflect full year results of Digitel for the first time as well as our successful navigation of the largest challenges we faced during the year.

The intense (audio gap) of Digitel and Sun operations into the group will continue to push for the growth of broadband and IPC, the competition of network transmission, the completion of our transformation plus rollout of FTTH and NLPE, the rationalization of our business portfolio leading to the sale of the BPO businesses and beginning of our involvement in the media space.

We are happy to report that we are starting to see some improvements in the 2012 results. Consolidated service revenues rose 10% or Php15.4 billion to Php169.3 billion in 2012 EBITDA dropped by 3% to Php77.3 billion, reflecting the impact of Php3.8 billion in manpower reduction expenses incurred during the year. EBITDA margins stood at 46%.

Reported net income rose by 12% to Php35.5 billion, in line with guidance before income excluding exceptional items declined to Php37.3 billion from Php39 billion in 2011. There appears to be stability, if not improvement in the financials particularly if we exclude the impact of the manpower reduction program expenses, we incurred as part of holding Digitel into the PLDT group.

EBITDA and core income the second half of 2012 would have been higher first half 2012 and second half of 2011. Moreover, fourth quarter 2012 results would have shown growth over the third quarter of 2012 and over the fourth quarter of 2011.

On the next slide, today the Board of Directors declared a dividend of 112 pesos per share consisting of the final regular dividend of 60 pesos per share and a special dividend of 52 pesos per share. Inclusive of the 60 pesos interim dividend paid in August, total dividends for 2012 is 172 pesos per share or 100% of core earnings.

This is the sixth consecutive year that PLDT declare 100% of its earnings as dividends. Based on PLDT’s closing share price of 2920 on March 4, PLDT’s dividend yield in 5.9% one of the highest in the market today.

On the next slide, our combined cellular subscriber base grew by 10% or 6.2 million to 69.9 million at the end of 2012. Sun Cellular subscribers stood at 15.7 million growing by 1 million from the end of 2011. The combined Smart and Talk N Text subscriber base hit 54 million or 6.4 million of net adds for the year.

This represents the highest annual net adds of the combined brands since 2003. TNT subscribers rose by 8 million subscribers to 28.4 million overtaking the number of Smart subscribers, now of 25.5 million. Smart is being positioned as our premium brand while Talk N Text will move – will more clearly be positioned as our no fields brand and Sun Cellular will continue to be a franker brand and the vehicle for unlimited offers.

Prepaid subscribers, accounting for 97% of our total subscriber base grew by 5.8 million or 9% year-on-year to 67.6 million. While the market will remain to be largely prepaid, greater effort has been recently directed towards our postpaid business in order to be well positioned to capture the early adopters and heavier users of data.

As a result, postpaid subscribers registered an 18% increase to 2.3 million in 2012. This represents net adds of about 400,000 for 2012. Worth noting is that the net adds in smart postpaid subscriber base of 133,000 in 2012 is a ten year full-time high.

On the next slide, our broadband subscriber base continues to grow double-digit year on year to reach 3.3 million at the end of 2012, more than double that of competition. There were 1.7 million postpaid subscribers and 1.6 million prepaid subscribers.

Wireless broadband subscribers accounted for over 72% of total subscribers and registered a 14% increase to 2.4 million at the end of 2012. Worth noting is that the net adds for each of the third and fourth quarter of 2012 was maintained at over 90,000.

DSL subscribers rose by 5% to about 900,000 representing nearly 45% of total fixed line subscribers and nearly three times that of competition. Total fixed line subscribers for 2012 stood at 2.1 million.

In 2013, the remaining digital fixed line subscribers will be migrated to the PLDT fixed line network to give them access to better facilities. This expected to provide an uplift in fixed line revenues. On the next slide, core net income for 2012 of PHP37.3 billion was 4% lower than the 39 billion in 2011.

This reflects the impact of the pressure on revenues resulting from aggressive pricing and product offers in response to intense competitive pressures. Our margins were reduced by higher subsidies and selling and promotion expense.

In addition, we took the opportunity to streamline the BODT Digitel, Smart and Sun organizations following the acquisition of Digitel giving rise to manpower reduction expenses of PHP3.8 billion. It is worth noting that the core income of PHP18.7 billion for the second half of 2012 was stable, compared with that of the first half and a 4% improvement over the core income of PHP18 billion in the second half of 2011.

Reported net income for 2012 grew by 12% or 3. PHP8 billion year-on-year to PHP35.5 billion. This was due to lower core income by PHP1.7 billion, higher net forex and derivative gains of PHP1.8 billion and lower asset impairment of PHP5.6 billion.

On the next slide, consolidated service revenues rose by 10% or PHP15.4 billion to PHP169.3 billion, 27% of service revenues are dollar linked. Has the peso remains stable, consolidated service revenue would have been higher by about 1% or PHP1.2 billion.

Voice revenues grew by 8% to PHP77.8 billion, domestic voice revenues were 13% higher at PHP53.9 billion. In contrast, international voice revenues were lower by 2% of PHP23.1 billion. SMS revenues rose 7% to PHP48.5 billion. Non-SMS data revenues increased by 22% to PHP30.5 billion.

Consolidated EBITDA dipped by 3% or PHP2.7 billion to PHP77.3 billion at the end of 2012. EBITDA margins stood at 46% and excluding MRP expenses or manpower reduction expenses of PHP3.8 billion booked during the year EBITDA would have been PHP1.1 billion higher and margin would have been 48%.

On the next slide, for the highlights of the wireless segments broadband, BPO which registered double-digit year-on-year growth in 2012. Broadband service revenues contributing 13% of total revenues and paying this growth momentum with 26% year-on-year rise the PHP23.7 billion. This includes mobile internet browsing revenues of PHP3.1 billion which was an 83% increase from 2011.

Social networking continues to gain popularity even, given a relatively young population with increased purchasing power, high literacy rates and a growing number of Filipinos overseas. With our superior network ready for the exponential growth of data, we are confident of capturing a significant amount of data usage as prices of access devices including smart phones reduced.

Moving to our BPO business, service revenues for 2012 grew by 15% year-on-year to PHP9.9 billion in line with the overall industry growth. In February, we announced that we agreed to sell our BPO business to Asia Outsourcing Gamma Limited or AOG and our intention to take a 20% stake in AOG.

These transactions are expected to close by end March or early April and will provide net cash in excess of $300 million. On the next slide, our wireless business also registered double-digit service revenue growth increasing by 15% to PHP117.4 billion from 2011 with Sun contributing PHP20.9 billion in revenues.

Even as we defend market share by matching competition offers, we have also pursued several initiatives aimed at growing our revenues amidst price-focused competition. These include making available, higher denomination and longer duration volumes to stabilize ARPU.

In addition, greater effort has been directed as growing the postpaid business as postpaid users are rigor users of data and also for stickiness and retention. We are innovating postpaid services that allow for postpaid growth with minimal acquisition costs such as freedom plans, which do not entail handset subsidies.

Moving to the fixed line, this business grew 4% year-on-year to PHP61.3 billion in 2012. Here we continue to see the concession between legacy revenues such as ILD and NLD to new revenue streams such as DSL and corporate data. Growth momentum in fixed lines will be further fueled by initiatives focused on the home and the enterprise.

These include FTTH or fiber-to-the-home, triple play offers, video on demand, all made possible via our super charged network. In addition, varied business solutions customized for large corporates BPOs SMEs and micro SMEs are being made available.

On the next slide, PLDT completed its 67 billion peso, two-year network transformation program in 2012, resulting in a super charged network that is unrivaled in the Philippines. We have in place a network that is future capable, scalable, resilient and cost efficient. For 2013, CapEx will reduce by PHP7.4 billion to PHP29 billion as most of the major network investments have already been completed.

This year’s CapEx will include investments in additional 5,000 kilometers of fiber, expansion of 3G and LTE coverage, construction of three domestic cable lending stations, build out of service delivery platforms for IP-based multi-media content and expansion of international capacity. We will continue to invest in fortifying our network advantage in order to ensure the best quality experience for our customers.

On the next slide, let me now update you on our plans in the media space. In May last year, we announced that the Board approved a 6 billion peso financial investment by ePLDT in MediaQuest in the form of Philippine Depository Receipts or PDRs. The money has since been advanced as a deposit for future period subscription.

The PHP6 billion investment will give ePLDT a 40% interest in MediaScape, which operates the DTH PayTV business under the brand name CignalTV. Cignal has 441,000 subscribers at the end of 2012 of which about 85% are prepaid. The monthly ARPU for the business is about 337 pesos.

Skycable is its main competitor who had about 500,000 subscribers prior to the acquisition of Destiny Cable which had about 180,000 subscribers. The PLDT Group’s investment in MediaScape is consistent with the overall strategy of broadening the PLDT group’s distribution platforms and increases its ability to deliver multi-media content to its customers across the Group’s broadband and mobile networks.

Today, the PLDT board approved additional investments this year amounting to PHP5.65 billion consisting of PHP3.6 billion for a 40% economic interest in SatVentures which holds the residual 60% economic interest in MediaScape and.95 billion pesos for 100% economic interest in Hastings Holdings, which holds print-related investments including minority positions in the Philippine Daily Inquirer, Philippine Star, and BusinessWorld.

On the next slide, this provides some insight into Philippine Pay-TV market which remains underpenetrated with just 11.3% of TV homes subscribing to cable or direct-to-home service. There are a total of 1.7 million Pay-TV subscribers in the Philippines with Cignal’s market share of 28%.

Revenues for the Pay-TV industry are estimated at PHP11.6 billion in 2012. Key success factors for the Pay-TV business are acquisition of key contracts, coverage and critical mass of subscribers. Cignal’s competing strength is its ability to expand coverage, faster than competition given the ease of rollout of DTH which is Direct-to-Home over satellite compared with cable.

At this point, let me turn over the floor to our Chairman, Mr. Pangilinan for this year’s outlook and beyond.

Manuel Pangilinan

Thank you, Poly and good afternoon to all of you. Taking all of the items that Poly described to you earlier, we are guiding record net income for PLDT for 2013 to improve by 1 billion pesos to PHP38.3 billion for this year versus 37.3 billion pesos in 2012.

This was up to two of profit decline reflect in 2011 and 2012 numbers and we take off from the fact that the first two months, flash numbers of the group are quite encouraging showing increases in both revenues improving and the bottom line core profitability for the first two months.

So we can say that we are likely to be at the growth path and we expect to continue on this trajectory for 2013 and beyond.

As to cash flows, we foresee improving cash flows or improved cash flows for 2013 arising from improving EBITDA margins, lower CapEx of PHP7.4 billion which Poly said earlier and the balance was sales proceeds of the Philweb shares which we expect to receive in 2013 and of course the proceeds of 80% divestment of SPI which will amount to over PHP300 million of which closing we expect to do by early April.

As to dividends, we are confident about maintaining the regular dividends of 70% and the 30% special dividends out of the 2013 core profitability. I believe that’s end of presentation today. Thank you again for joining us and I would like to turn over the microphone to Melissa.

Melissa Vergel de Dios

We are now ready to take your questions. We will first take questions from those who have joined us with the conference facility before we take questions from the floor. Operator, can we turn the floor over back to you.

Question-and-Answer-Session

Operator

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

Sachin Salgaonkar

Hi, thank you for the call. I have three questions. Firstly, is it possible for you guys to provide any targets for the service revenue and EBITDA number for 2013? That would be very helpful. Second, but it looks that ILD revenues are getting impacted or if I could use the word slightly cannibalized given by the data uptick.

Any thoughts on how the decline in ILD revenues could be arrested going forward? And lastly, I just wanted to understand from you to get an update on competition, but as could we see the revenues getting rebounded or to that matter when competition going down from currently the sort of so-called intense competitive environment? Thank you.

Christopher Young

Hello Sachin, I will try to answer I think the first two and then Poly may comment on the competitive situation. I think in terms of revenues and EBITDA I think we are speaking to our position, but as we are expecting both to grow but both in low single-digit. We are seeing growth, I think both on the wireless and fixed line side as well running at about the same rate.

On the outlook for ILD, I think it’s a trend actually that we’ve seen for quite a number of years, now I think the fixed line with the national revenues have been in decline for a close to ten years. I think there is quite a bit that we can do to mitigate the decline and we’ve been quite active in promoting our services outside the Philippines through PLDT global selling both the combination of a fixed and the wireless services.

But I don’t there is much we can do to arrest that completely. It’s really more a case of mitigating the pace of decline. The very fact that broadband is growing double-digit percentages across both the fixed and the wireless business does mean that it tends to even to the ILD revenues. So it’s a side effect about our cannibalization as you mentioned. Poly, may comment on the competitive situation.

Napolean Nazareno

With regards to the competitive situation I am going to just state that the cellular market has – in terms of market – revenue market share has remained stable in the last four quarters. Our market share was hovering in about 61% to 62% and we are not seeing new offers which are pretty ugly or – the service.

So we see that while competition will still be intense moving forward, there will be no predatory initiatives moving forward. So therefore it looks like with reinforced and supercharged network that we have today, we are ready and preparing for any – we can react to any negative offers if there will be any. But we don’t expect that to happen, but nevertheless we are prepared.

Sachin Salgaonkar

Okay, great. This was very clear. Just one follow-up question, more so from the opportunities coming from Cignal, so in two, three years what could be the sort of percentage amount of revenues coming from the media related investment? So anybody will have to target a number which you could give us?

Napolean Nazareno

For Cignal we are looking at the – right now the subscriber base it 441,000 at the end of the year last year and we are looking to increase that to roughly about 650,000 by year end this year. And we are expecting Cignal to deliver – already in fact last month they had delivered positive EBITDA and we are seeing by the second half of this year Cignal should start to make money in terms of core income.

And I think the 2014 target for Cignal is about 1 billion in bottom-line for next year.

Sachin Salgaonkar

That’s very helpful. Thank you.

Operator

Any other follow-up Mr. Salgaonkar?

Sachin Salgaonkar

No, thank you.

Operator

Thank you. We will now move to our next question from Mr. Luis Hilado. Your line is now open. You may go ahead.

Luis Hilado

Hi, good afternoon and thanks for the call. I also have three questions. The first one is, you seem to notice that for the fourth quarter your SMS use have increased but voice average revenue per minute has come down, just wondering is that’s a strategic move or a seasonal uptick in the SMS usage?

The second question is a bit of housekeeping. On the fourth quarter OpEx there seems to be quite lapse I think with the significant decline it was up due to the discontinuation of operations for BPO or is it – and is it’s something that’s we’ll have to carry forward going into this year or we should look at the full year 2012 as the base?

And last question is also housekeeping the asset impairment for the fourth quarter was that for the wireless network or the fixed line network?

Christopher Young

Maybe I will try the easiest question which is the last one. The asset impairment is in respect of the wireless side. This is really a year end assessment of the stage of integration between the Sun and the Smart network.

I think as you know, the idea is both to consolidate the number of sell-sides and share the number of sell-sides. So we made a very specific review of the network provided that to us and we then looked at the impact on items which were no longer be used in the network and secondly items were that would be a sharper like and we took an impairment accordingly.

But that really just reflecting the defined integration of the networks on the Sun and the Smart side going forward. And Manuel would you try SMS use?

Manuel Pangilinan

Sorry, what was your – the first question? Yes, it’s slightly seasonal and I guess in the fourth quarter there was spike in voice usage typical of associated with Christmas period. So we had improved usages all the day.

Luis Hilado

Okay, thanks.

Christopher Young

I think on the expense side Louis, it’s really just that certain expenses will fall into particular quarters. So I don’t think there is any particular issue. I think the main item which we have discussed during the year that there has been quite a significant amount of reductions across the business which affected both the fixed line and to a degree the wireless business.

And they have been partly taken in the first half of the year and then the balance in the second half of the year. But other than that, I think there is nothing more than just certain expenses falling into certain quarters. If particular items, maybe we can follow them up with Melissa a bit later. Bye.

Luis Hilado

Trying to look at – look forward this year’s forecasting, I should look at the full year I think rather than the quarter?

Christopher Young

I think the best way to look at it, I guess and then you then need to factor in take into account the impact of the MRP. That doesn’t mean to say that there won’t be some reductions going into this year as well 2013, but certainly nothing on the scale that we saw in 2012 if any at all much, much smaller impact.

Luis Hilado

Thanks.

Operator

Any other follow-up questions Mr. Hilado?

Luis Hilado

No, no. That’s all.

Operator

Thank you, we will now move to our next question from Mr. Arthur Pineda. Your line is now open. You may go ahead.

Arthur Pineda

Hi, thanks for the call. Three questions for me as well. Can you talk about the financial position of MediaQuest, particularly TV5 and Cignal? What are your profit expectations on this side and has it changed from your original assumptions? There is very limited clarity on the media business and business sustainability taking up capital for the company?

Second question I had is with regard to the costs, you booked a total of 3.8 billion pesos for MRP at the yearend versus PHP1.7 billion in the first half. How much would this actually reduce cable charges going forward? Third question has regards to the profit guidance for 2013 of PHP38.3 billion, how much would be for mobile, fixed, media and BPO contribution lost? Are there any asset sales included in this PHP38.3 billion? Thank you.

Christopher Young

Okay, I think on the last point, the guidance really is the consolidated guidance; we haven’t broken it by line of business. So I don’t think that it’s early stage in the year. So that is something that we normally do. The only asset sale that is anticipated there is and I think you will recall that the Philweb sale was partly in 2012 and partly in 2013.

The Philweb contribution I think in 2012 is about PHP1.65 billion or PHP1.7 billion. We are expecting a similar, if not slightly higher amount in 2013. So that’s the only anticipated item there. On the media side, I think in terms of clarity, I think, we have set out what the investments are effectively the PHP6 billion plus the additional PHP3 billion going into Cignal.

Cignal as Mr. Nazareno said should breakeven on an EBITDA basis in the early part of this year and in the second half alone it should be profitable. So really the metrics are reasonably clear. It’s adding subscribers which we expect to close to 600,000 by the end of the year and it’s really driven by the ARPU that the subscribers generate.

So it’s a combination of fixed – combination of prepaid and postpaid. So the idea in both cases is to see ARPU improvements during the year. In case of the investments into Hastings which the news network investments, were profitable and they are also cash generative.

It will generate probably close to the 100 million pesos of dividends for us in 2013. Now what MediaQuest, the money that it gets both – most of the funding for 2012 and the bulk of the funding for 2013 is effectively to fund this investment into TV5? And TV5 at the moment, PLDT will not have a direct investment in.

The PDRs that are issued are in given the economic interest in Cignal and an economic interest in Hastings, TV5 will remain an investment of MediaQuest for the moment.

It’s possible if the additional funding required by TV5 into 2014, but PLDT will need to invest directly but we are not doing so at this stage.

Napolean Nazareno

With regard to the PHP3.8 billion MRP costs last year, that relates to over 2000 people that availed of the program and we don’t expect as what Chris has mentioned earlier, we don’t expect the same scale of Manpower Reduction Program this year. It would be much, much smaller than that.

Arthur Pineda

Great, just to clarify, I was just trying to reconcile the PHP1 billion increase in profits versus the cost savings that you could potentially generate from the various exercises just as MRP and collocation. I am just trying to understand, if you are potentially seeing significant cost savings on labor, significant cost savings in the network collocation why is that not filtering down to the bottom-line yet?

Napolean Nazareno

I think the other item you need to take into account is also as well as the Philweb sale in 2012, so was also the Beacon transaction during the first half which would I think you would recall generated a gain for us close to PHP2 billion. So I think, if you take that into account, then the numbers will broadly work.

Arthur Pineda

Understood. Okay, thank you very much.

Christopher Young

As also being pointed out, that SPI will be included in the core number for 2012 but not for 2013. I think if you take these factors into account, you’ll broadly get to the guidance number of 38.3.

Arthur Pineda

Understood. Thank you.

Operator

Any other follow-up questions Mr. Pineda?

Arthur Pineda

No. That’s all. Thank you

Operator

Thank you. We will now move to our next question from Mr. Tien Chau. Your line is now open. You may go ahead.

Tien Chau

Hi, thanks very much for the opportunity to ask some questions. The first question again is on Cignal. I think Chris mentioned that the improvement in profitability in 2014 and 2013 would be driven by ARPU increases and so wondering where there was ARPU increases is that coming from – that is from the content or that is from a better mix of prepaid versus postpaid where is that rise coming from? I think that Poly you also mentioned PHP1 billion in net income in 2014, I am just wondering what level of subscribers that assumes by the end of 2014?

Napolean Nazareno

We can’t seem to get you clearly here. Can you please speak a little slower and more clearly, and a little bit louder?

Tien Chau

Sorry, I was using a headset. Is that better, I am now using a handset rather than a headset. The first questions are on Cignal. I think Chris mentioned that you are figuring on ARPU is improvement in 2013 and 2014 I am just wondering were those ARPU improvements are going to be coming from?

Is that you just selling better content to these guys or this is a change in the prepaid, postpaid mix? Where is that ARPU improvement going to come from? I think you also mentioned PHP1 billion in net income in 2014, I am just wondering what level of subscribers that assumes by the end of 2014 versus the 600,000 you mentioned in 2013.

The second question is on CapEx the PHP29 billion, the population coverage for 3G and for 4G that PHP29 billion gives you and how fast would you see that increasing in 2014? And the third question is just on prepaid and migrating these guys up to postpaid. I think that looks like the key battleground for both you and Globe.

Both of you seem to be concentrating on that area. So the level of competition in specifically in that area have you seen predatory plans, what’s the level of competition at that moment within that specific area?

Christopher Young

On the Cignal ARPU there is a plan to move the Cignal ARPUs higher over this year and next year. It will be a combination of pushing the postpaid. We have seen very good traction on postpaid sales starting in the last quarter of the last year and in the first two months of this year.

So we are changing the mix increasing the postpaid mix over the prepaid mix. We are also marketing moving some of our prepaid to the higher plans, prepaid plans and the highest prepaid plan to the lowest postpaid plan. So it’s a combination of serving to our existing customer base and pushing for increased sales on our postpaid.

Napolean Nazareno

I think we answered question which I understood which was the 3G and 4G coverage. The CapEx for this year includes an expansion of both the 3G and the LTE coverage and – competitions of LTE on two band which is namely 2.1 gigahertz and the 1800 band. And so, the coverage is basically limited to the urban areas, metro Manila who were focused on metro Manila for LTE and both Cebu and Davao. For the 3G the coverage, that we are targeting for this year would be in the neighborhood of about 85% to 90%.

Tien Chau

All right, okay. And then the final question on the key background of higher end prepaid and trying to migrate them to postpaid, the level of competition there?

Napolean Nazareno

Postpaid, if you look at the market Tian, last year it grew overall in terms of revenues by 20% and our market share on postpaid is roughly at about 42% 43% on the revenue terms but on subscriber base we are about 56%, 57%. So with the increase in our subscriber base, we feel that this is a good platform for us to increase our revenues,

In terms of being able to migrate them to higher plans and giving them more value to their subscription and that is the strategy that we are looking at for next year. Postpaid is very crucial to us because most of the subscribers who are early adopters to data are in the postpaid service and this is very crucial at this point, because the smartphone penetration is now increasing. As you know our smartphone growth for the total industry or the net adds of smartphones last year was about 3.5 million which is one of the highest in Southeast Asia.

Tien Chau

Okay and just a final question on the Cignal, again the sub base that you would hope to have by the end of 2014 to enable you to that PHP1 billion core net income figure?

Napolean Nazareno

We are looking at last year, we ended up with 431,000, we are looking at about 650,000 by the end of this year.

Tien Chau

And then by end of 2014?

Napolean Nazareno

Maybe close to 900,000 by the end of 2014.

Tien Chau

Okay, thank you.

Napolean Nazareno

Well, it’s frankly increased the targets…

Operator

Any follow-up questions Mr. Chau?

Tien Chau

No, that’s absolutely fine. Thank you.

Operator

Thank you. We will now move to our next question from Mr. Chi Fan. Your line is now open. You may go ahead.

Chi Fan

Hi good afternoon and thank you for the opportunity to ask the question. I have four questions. The first one is going to be related to the media investment. On the bigger picture would you be able to share with the big strategic picture here around the media business?

Should we expect you to continue to develop it as a separate service and really go the Pay-TV business on how would that be synergies with your existing business and would we expect like more mature – what area that you see? Other three questions are more housekeeping questions. Just regarding the sale of the BPO business, the gain on sales, is that expected to be booked into FY in 2013 earnings guidance as well and how much?

The next one is on tax, I understand in the fourth quarter it actually does about tax when if it’s – is my calculation is correct, there is no tax expense at all what’s that from and what should we expect in terms of tax in terms – in FY 2013? And the last question is regarding the media business, I understand it is being recorded in ePLDT business, right now, I just wonder whether that’s part of the line business or would there be a separate disclosure on that going forward? Thank you.

Christopher Young

Maybe in terms of the last question, Fan, I think the IPO would be that when we turn to the segment reporting it will be initially under others, but over time if it becomes a more substantial part of the business that it may have its own segment. But initially we will put it under the others. In terms of the tax, you are correct the tax is a low percentage for the year.

That seven of the transactions during the year, particularly the Philweb and Beacon are not subject to income tax, they are subject to certain capital gains taxes and other taxes as stock exchange transactions but not capital gains type. So the fourth effectively looks at the full year and comes up with the required tax channels for the year.

But it is low but this has some update, certain of the gains this year are not subject o income tax. In terms of the SPI transaction there will be a one-off gain. We probably report that in the second quarter and we’d expect that to be a few hundred million pesos. It depends a bit how the exchange rate moves. It may be closer to 1 million pesos that sort of range.

But we will treat that as a one-off item given it’s the sale of a whole segment of the business. I think maybe…

Napolean Nazareno

In terms of Cignal, there remains to be very strong demand for the Cignal service both postpaid and prepaid. As I said earlier, we have seen more increased demand for postpaid given that the TV market in the Philippines especially move from a CRT market to flat screen HD market.

So that is driving us with the sales of Cignal. We have the most number of HD channels available in the country today of around 22 HD channels, the top most plan. So, in terms of our growth it will come from increased activations as we gain more subscribers nationwide.

Then we see a number of bundling opportunities with our telco affiliates particularly with PLDT and even with our mobile affiliate Smart and Sun. And thirdly we are looking very closely together with our telco affiliates on basically in connected screen services and we will make an announcement perhaps sometime this year on one development project to be able to launch, way about that time.

Chi Fan

Thank you. Just two follow-up questions from me. The first question is regarding the sales of SPI, again could potentially reach PHP101 billion, I understand, so that is included or excluded from the core income guidance? And the second one is on the media investment again, I understand that your effective interest rate now in Cignal is beyond 50%. Do you still continue to – it could be a cover or how it works against the contribution? Thank you.

Christopher Young

The Cignal gain is excluded from the guidance and sorry the SPI gain is excluded from the guidance number 38.3. Then, Cignal we will at least as far as 2013 is concerned we will probably account the Cignal investment even if it does go above 40%.

Chi Fan

Okay, thank you very much.

Operator

Our next question is from Mr. Rama Maruvada. Your line is now open. You may ahead.

Rama Maruvada

Hi, good afternoon. Two questions from me please. Firstly, with regards to the overall cash OpEx, it’s about PHP84 billion for 2012, you said about PHP3.8 billion are the MRP charges. So, longer term, just wondering how you expect the cash OpEx to trend maybe two years out, do you expect any significant reduction in the cost base or do you expect stability here, any comment there would be good.

Secondly, with regards to the media business, you said you are going equally account it but about a year ago, I think you said that you will be fully consolidating the investments, just wondering what has changed.

Christopher Young

No, I don’t think we ever said we would fully consolidate the media business. While it’s the more 50% it’s clear that it’s equity accounted, even if we go above 64%, if we go above 50% to the 64% that’s anticipated for Cignal. It will probably still be equity accounted, because we are investing through the PDR. And the PDR structure allows us to take an economic interest.

However the holding rights remain with MediaQuest. So at least thus far as of discussions with our auditors are concerned, it will be equity accounted for the moment and whether it’s 40% or whether it’s 64%. That could change if the accounting guidelines change going forward.

But as it is at the moment, it’s equity accounting. In terms of the costs, again we would expect some stability now after the management reductions which Mr. Nazareno referred to earlier, that’s not to say there won’t be some, but in a much lower level in 2013. But I think you could factor in the cost increases probably in the 4% to 5% type level before.

Rama Maruvada

Okay, thank you very much.

Operator

Any follow-up question Mr. Maruvada?

Rama Maruvada

No, thank you.

Operator

Thank you. Our next question is from Neeraja Natarajan. Your line is now open. You may go ahead.

Neeraja Natarajan

Hi, thanks for the opportunity. I think I am still confused about the EBITDA outlook for next year. You did mentioned there is some more MRP that’s going to be – that could be there, but I am surprised that you are not something or a lot more up in the stick, I just did for the sale of the discontinued business. If you can throw some color over there, that should be very helpful.

And secondly, more on the wireless EBITDA margin, even if you, for example this quarter say adjust for the MRP that you highlighted, it looks like margins are still moving on the down trend, so are you more comfortable that this could be defended probably improve from here on and my last question is, once again on competition it seems that between quarters to quarters.

The message that’s coming from the company seem to be very different and also based on what your competitor is saying versus what you are saying. So, and they’ve also – the sales and promotion expenses in this quarter, so any thoughts around that would be very helpful? Thank you.

Napolean Nazareno

First of all the EBITDA margin appears to be low mainly because of the entry of Digitel into the Group. Their margin prior to the entry was EBITDA margin was about 39. Let me just point out that it is already increasing and towards the end of this year, it was hovering at around 35%. And we are looking at the margins are improving. And therefore that is why we mentioned that if you take off the MRP expenses, the average of 46% EBITDA margin would improve to 48%. But that is the level that we are in now, given the acquisition of Digitel into the Group.

Moving forward, we can look at increases in our average EBITDA margin based on the improvement at the Digitel level and hopefully if the market would move towards higher denoms and longer durations, that would improve further the margin on prepaid.

Christopher Young

But I think maybe the other thing you need to take into account is the changing revenue mix. I think this is something that we’ve been communicating for quite a number of years, now that as the revenue mix changes, we see strong growth across the Group in broadband be it fixed or wireless.

But offsetting that and again it’s a trend we’ve seen for many years now are declines and things like the international inbound revenues to an extent on the fixed national long distance revenues. And these are somewhat higher margin businesses in the Group above the margins on data are improving, it’s unlikely that in the long-term, they can replace what we are seeing – awarded in the ILB and NLB.

So, I think that’s another fact that when you are projecting, you need to take into account. So, yes, there are good cost savings from lower level MRPs going forward or all the good things that Poly has indicated that are happening at Sun and Digitel which are improving ARPU.

But you also have to look at how the revenue mix has been changing in recent years and in fact it’s probably going to – at least on the wireless side that change is going to accelerate over the next two to three years as we see more smartphones out there. So I think that’s maybe why we are a little cautious on the outlook for the EBITDA margins looking into 2013, 2014.

Operator

Any follow-up question Ms. Natarajan?

Neeraja Natarajan

Yes, sorry, I just had one more on, just on the competition. No just meant to say that, Globe has sort of saw a big spike in promotional expenses in the last quarter. But from, I guess PLDT is indicating to a more moderating environment. Just wanted to get your thoughts around that?

Manuel Pangilinan

Yes, I think in the postpaid arena, what has happened was that in terms of the marketing cost and the subsidies combined our competition on spend more per subs, per net adds, much larger than ours, almost double compared to ours and that is where the competition is as far as the postpaid arena is concerned. And we are looking at that continuing this year and if it’s really our strength there is the network, and with the 54,000 kilometers of fiber that we have connecting most of our base stations, we feel that as far as customer service and satisfaction is concerned, we are prepared to deliver more value to our customers.

Neeraja Natarajan

Thanks, very much.

Operator

Our next question is from (inaudible) your line is now open. You may go ahead.

Unidentified Analyst

Good afternoon. I just have a couple of questions. The first one is, for the past few years, the revenues for wireless and fixed line as you know have been declining, whereas revenues from broadband have been growing.

But essentially the growth in broadband have not been enough to compensate further declines in the wireless and fixed line. Do you foresee that changing, like do you foresee the growth in broadband revenues exceeding the decline in the wireless and the fixed line? And how soon would that be?

My second question is about essentially the OpEx savings like for this year, given the benefits of the integration with Digitel, can you give us a ballpark figure on the savings and operational expenses which will include general and administrative and network expenses as a result of that integration? Next question would be, can you give us an idea on the EBITDA margins for the Cignal business? That’s it for now.

Christopher Young

Yes, I think the first one is really where we think we’ve gone through particularly in terms of the fixed line, if you look at what’s happening on the broadband and data. If you go back several years, the total parts of the business, the ILB, the NLB were more than 50% of the total and were really declining.

Now what’s happened is that if you look at these now they are about – I think they are only about 25% of the total. And even though the decline is still in the region of about 10%, the other parts of the business in particular the growth in the consumer DSL is up by about 12% year-on-year and if we look at the data business, the datacenter the investments we have there in the corporate side it’s even somewhat higher up to about 90% year-on-year.

So I think that’s why we are looking at the turnaround happening from what we are – you had relatively flat at the declining revenues the one where you will be beginning to see a bit of increase as we go into 2013, 2014.

Again I would stress that, it’s maybe relevant also to that earlier point on the EBITDA trend that change in revenue mix, while it is encouraging to see that when moving towards growth there has to be an appreciation that the DSL. The corporate data and the datacenter business is a somewhat lower margin business than the historic ILB and NLB businesses.

In terms of the cost savings, I think what we are seeing is that the cost reductions would allow us to cap the increases as we go into 2013 and 2014 to again a relatively low single-digit level. I don’t think we will see cost declines, but we should see cost increases similar or maybe a little lower than the increases in the revenue going forward.

But, it’s more to cap the increases that we are looking at rather than see the declines year-on-year. I think the EBITDA margin for Cignal if you look to 2014, 2015, it would be – for this year the EBITDA margin for Cignal is forecasted at the 20% growing to 28% in 2014.

Unidentified Analyst

Can I have just some follow-up questions? I think for the EBITDA margin, I just recall that it was mentioned earlier that the EBITDA margin now is 48%. I think, do you foresee that like assuming that there is full integration of value is Digitel and you get the full benefits of the integration.

Do you foresee that increase? How do you project that to be in the future under equilibrium conditions? And another question would be, right now, do you foresee VoD to be a major contributor to wireless revenues, because right now it’s really on the high-end users postpaid. So, they have plans to democratize that to broaden the subscriber base.

Christopher Young

Maybe I will try to parse it again, because I think it’s similar answer. I said later a lot of initiatives in terms of cost savings, as again Mr. Nazareno mentioned the headcount reductions last year, somewhat more anticipated this year, but at a much lower level. The integration on the network side in terms of cell site consolidations, cell site sharing and alike.

Whoever, I think you do have to factor in what was raised I think in the very first question is that there are reductions in ILD NLB happening. To some extent, because the broadband business is growing, if broadband effectively facilities VOIP calling services like Skype and Delight exists, can exist when there is a broadband connection in the originated country and terminating in Philippines.

So we are encouraged as I said to see data revenues growing at double-digit. The ILB and NLB revenues now down to relatively small percentage, 25%. So that we are getting an overall increase. But that does affects the margin going forward. So, we do not discontinue to work hard on the cost side and to attack our product over the next couple of years allowing us to see some stability in margins around of at the levels that we are disclosing for 2012.

On the wireless side, I think you will see it’s a more plan to develop. Smartphones, facilitate the wireless internet access, there is a range of products out there which people, subscribers find the useful but some of these will tend to eat into our legacy networks as revenues and as a result, impact the margins going forward. So it’s important because I think that we continue to recognize and to be tight on the cost control going forward.

Unidentified Analyst

All right, thank you very much.

Operator

Any follow up question Mr. (inaudible)

Unidentified Analyst

No. that’s all.

Operator

Thank you. We will move to our next question from Ms. Surabhi Khanna your line is now open you may go ahead.

Surabhi Khanna

Hi, thank you for the opportunity. I have three questions. First I wanted to touch upon the three year outlook for the company that you had earlier provided. Can you share any devised outlook considering that the 2013 core income guidance is likely lower versus, the earlier remarks that you had made of around 39 billion pesos.

Second question, you mentioned in your opening remarks that the trajectory has improved in the first two months. Can you share a bit more on where you are seeing growth coming from? And lastly, just wanted to check on the smartphone penetration for the company now and the data usage per subscriber and how has this changed in the last 12 months? Thank you.

Napolean Nazareno

Well let me try what I, because I couldn’t understand the question, I couldn’t hear clearly. First I think it’s got to do with the smartphone penetration. Roughly the number of smartphones within the total market today is about in the neighborhood of six million smartphones.

And the growth in the past 18 months has been about 3.5 million to 4 million which is one of the largest growth or the highest growth in Southeast Asia as I mentioned. And it looks like, it is nearing the rise point that is desired in the market, specially because the Philippine market favors more the branded type of smartphones, it seems to have been used the Nokia brand on the 2G market before. So it looks like, while it is low, it is increasing steadily and we hope that once we reach maybe about 15% penetration that should trigger a tipping point by which data traffic would increase tremendously, and then hopefully revenues will follow if the business model in place will be the right pricing models.

I think in terms of the guidance, we haven’t gone as far as three years. I think what we have done before was to look out the two years. If the trend that we see in 2013 play out as we expect, then we would – which is basically growth on more data growth both consumer and corporate.

If it’s increasing smartphone usage and data on the postpaid, on the wireless, then we would expect a similar growth in the bottom-line going into 2014. So that would bake up some in terms of the guidance stated 39.3 billion pesos, 39.5 billion pesos as an outlook for 2014.

Operator

Any follow-up question, Ms. Khanna?

Surabhi Khanna

Yes, sorry, I had one follow-up question on the smartphone penetration, can you share the number for PLDT today in terms of handsets? And one other question that I had was your first two months growth trajectory in terms of which segments are you seeing growth? Thank you.

Napolean Nazareno

The number of smartphones that we can see in our network that’s visible in the switch at any one point in time, I think the latest count was about 3 million to 3.5 million in a busy hour. These are unique smartphone numbers.

Christopher Young

I think we are seeing growth on both major segments which across both the traditional fixed and wireless business. I think we are seeing, particularly strong growth in the Sun business, I think both in prepaid which is seeing increase in subscribers.

And in fact I think the ARPU also is somewhat higher at the Sun level year-on-year, plus there is quite strong growth, continues to be quite strong growth in our postpaid business. On the Smart, Talk N Text business, I think growth across all lines of business, but particularly strong growth I think in the postpaid side. But prepaid also increasing. On the fixed line, I think it’s been an encouraging start. The DSL consumer broadband revenues growing and the corporate is also growing I think particularly on the solutions side of the business which is where a lot of the focus is at the moment on SME. We made a strong start with the SME business as well.

Surabhi Khanna

Thank you.

Operator

There are no more questions on queue over the phone. Let me turn the floor over to Ms. Melissa de Dios.

Melissa Vergel de Dios

If there are any questions from people who are here in the hotel there is a microphone. If there are no more questions I am turning over the floor to the operator for the replay details.

Operator

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 March 19, 2013. Replay information for the CPM call, international caller number, is 852-3018-4396. U.S. toll-free is 1-866-350-3606. Passcode is 9510. Conference leader is Ms. Melissa Vergel de Dios. I will now turn the conference back to PLDT for any additional or closing remarks.

Napolean Nazareno

Thank you once again for joining us today and we hope to see you on May the 7th when we report our quarterly improved first quarter results. Thank you.

Operator

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

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