Philippine Long Distance Telephone's CEO Discusses Q3 2013 Results - Earnings Call Transcript

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 |  About: Philippine Long Distance Telephone Co. (PHI)
by: SA Transcripts

Philippine Long Distance Telephone Company (NYSE:PHI)

Q3 2013 Earnings Call

November 5, 2013 2:00 AM ET

Executives

Melissa Vergel de Dios – Head, IR

Chris Young – Chief Financial Advisor

Polly Nazareno – President and CEO

Charles Lim – Head, Wireless Business

Analysts

Luis Hilado – HSBC Securities

Arthur Pineda – Citigroup

Anabelle Lim-Chua

Neeraja Natarajan – Nomura

Chate Ben – Credit Suisse

Rama Maruvada – Daiwa

Ramakrishna Maruvada – Daiwa

Operator

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 introduction. Please go ahead. Thank you.

Melissa Vergel de Dios

Good afternoon, and thank you for joining us today to discuss the Company’s financial and operating results for the first nine months of 2013. 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. Polly Nazareno, President and Chief Executive Officer of both PLDT and Smart; Mr. Chris Young, Chief Financial Advisor of PLDT; Ms. Anabelle Lim-Chua, SVP and Treasurer of PLDT and Chief Financial Officer of Smart; Charles Lim, Head of our Wireless Business; and Atty Ray C Espinosa.

Chris Young will do the presentations today, as Mr. Nazareno is just recovering from a very bad sore throat. At this point, let me turn the floor over to Mr. Chris Young for the presentation.

Chris Young

Okay. Thank you, Melissa. Good afternoon. I need to present to you PLDT’s financial and operating results for the first nine months of 2013.

Starting with the presentation on Page 2. Operating conditions in the nine months of the year have been favorable for the industry as a whole and have been given a lift from the sustained improvement in the overall Philippine economy. The competitive environment proactive has allowed for growth. Our results for the first nine months of 2013, largely reflects these improvement conditions.

Service revenues for the nine months ended September 2013 rose by PHP 2.6 billion or 2% year-on-year to PHP 121.6 billion. Our third quarter revenues grew by PHP 1.2 billion or 3%. Both our Wireless and Fixed Line businesses registered year-on-year and quarter-on-quarter revenue increases.

EBITDA was higher by PHP 2.3 billion or 4% at PHP 59.6 billion. And EBITDA margin rose to 49% from 48%. Third quarter EBITDA of PHP 19.7 billion was PHP 900 million up 5% higher than the same period last year. And EBITDA margin for the quarter of 49% was also higher than 48% last year.

Reported net income rose by PHP 600 million or 2% to PHP 29 billion. Core net income, excluding exceptional items for the period increased by PHP 1.1 billion or 4% to PHP 28.8 billion. For the third quarter, core net income were higher by 2% at PHP 9.2 billion and PHP 9.4 billion respectively.

Moving onto Page 3. Core net income for the first nine months of 2013 rose by PHP 1.1 billion or 4% to PHP 28.8 billion and continues to be in line with full-year guidance of PHP 38.3 billion. Higher EBITDA as well as lower depreciation and income tax provisions accounted for the increase.

Third quarter core income of PHP 9.4 billion dipped by PHP 400 million quarter-on-quarter due to seasonality, a moderate lift from the May 2013 elections and a gain from the sale of the third tranche of Philweb shares in the second quarter. Reported net income for the nine months was PHP 600 million, up 2% higher at PHP 29 billion mainly due to the higher core net income, a PHP 2 billion gain from the sale of our BPO business, offset by higher Forex and derivative net losses of PHP 2.4 billion and a PHP 1.3 billion adjustment arising from PAS 19.

Moving onto our subscriber base on Page 4. PLDT’s combined subscriber base grew to 78 million at the end of September 2013. Our combined cellular base rose by 2.6 million or 4% from the end of September 2012. Talk ‘N Text now has close to 32 million subscribers, Smart nearly 25 million, while Sun has just under 16 million subscribers.

Prepaid subscribers which accounts for 97% of our total subscriber base, rose by 2.6 million from year-end 2012 to 70.2 million. Our postpaid subscriber base which now stands at 2.3 million has shown significant increases reflecting greater efforts to grow this base. Postpaid subscribers are more likely to be data users and therefore key in jumpstarting mobile data usage. Worth noting, our postpaid net additions of 115,000 for each of the second and third quarters of this year.

Overall, we believe that the Philippines is still fundamentally in prepaid market with sustainable mobile data growth to come from the prepaid segment. As such, we continue to direct our attention towards going our prepaid subscriber base by making available products and services that we find both relevant and affordable.

Our combined broadband base rose to 3.3 million, of which 2.4 million of Wireless Broadband subscribers, followed by 950,000 of Fixed Broadband subscribers. We had 2.1 million Fixed Line subscribers at the end of 2013.

Moving onto Page 5 of the presentation. Consolidated service revenues for the period rose by PHP 2.6 billion or 2% to PHP 121.6 billion. The structural change in our revenue mix continues to impact consolidated service revenue growth and EBITDA margins. This year however, the cross-over has occurred. This means that our growing revenue streams are now greater than our declining revenues.

Growing revenue streams from non-SMS data services of PHP 25.9 billion which accounted for 21% of total revenues grew by 15% year-on-year or PHP 3.4 billion. This more than offset the PHP 1.4 billion decrease in revenues from our legacy businesses, mainly national long distance, inbound international long distance and satellite services, both at relative to the industry as a whole, PLDT has a greater proportion of legacy revenues.

Revenues from domestic cellular voice, cellular SMS and LEC which contributed 60% of total revenues were stable at PHP 73 billion. Despite structural change of revenue mix and an increase in handset and device subsidies, consolidated EBITDA increased by 4% to PHP 2.3 billion by 4% or PHP 2.3 billion to PHP 59.6 billion due to the higher revenues and lower cash operating expenses. As of 2012 results, included PHP 1.7 billion of MRP expenses. EBITDA margin was higher at 49%.

Now on Page 6, highlights our various businesses starting with broadband. Broadband service revenues which accounted for 16% of total service revenues continued to register robust growth with a 16% increase to PHP 19.5 billion. This includes mobile internet revenues of PHP 3.4 billion which rose by 55% and which are already higher than the PHP 3.1 billion of revenue recorded for the full-year of 2012.

Encouragingly broadband ARPUs for 2013 showed year-on-year increases. We anticipate mobile internet revenues to continue growing robustly given that lower smartphone prices and recent aggressive marketing initiatives by lower-end handset manufacturers should lead to more widespread ownership. In turn, this should expand the online community and should lead to increased usage both in terms of frequency and duration.

Smartphone penetration of our total subscriber base is about 11%, with that of postpaid higher at 59%. To complement efforts to grow our postpaid base, we are starting to the tap the growth potential of the nascent prepaid data market. This includes offering fun things such as music and games as well as access to popular messaging and social networking sites.

In addition, our offers are designed to take into account affordability, utility of an always-on experience, network utilization as well as margin considerations.

Finally, the key to growth of any data business is a reliable network that ensures quality of experience. PLDT’s network quality, strength to cover original capacity remains unparalleled and can more than fully support the requirements of our data customers.

Page 7, focusing on the wireless business. It grew by 2% or PHP 1.7 billion to PHP 86.4 billion, mainly from the continued rise in non-SMS data. Cellular voice revenues also rose as billed minutes grew by 4% from higher voice traffic of postpaid customers and as we shape customer behavior away from unlimited plans to bucket plans. Our focus is on stabilizing several ARPUs and expanding data revenues. This includes our short-term strategy of seeding smartphone ownership under postpaid plans which in the first nine months of 2013 helped to grow postpaid revenues by 15%.

Moving to Fixed Line revenues, these went higher by PHP 1.8 billion or 4% year-on-year at PHP 46 billion. Fixed broadband corporate data including data center revenues accounted for most of the increase.

Our Home and Enterprise businesses are beneficiaries of the Philippine economic growth story. This is evident in the growing demand for DSL, Telpad, Fiber-To-The-Home and other Triple-Play products, given improving individual and household incomes and a young and highly literate population who are regular social network users.

Improvement in the overall economy has also increased demand for our Enterprise solutions from SME to banking industry, BPOs and large corporates. Our data center and cloud services have registered very strong results are expected to contribute more significantly in the future.

Moving to Page 8. Free cash flow remained robust at PHP 32.9 billion, higher than our core income of PHP 28.8 billion for the period and PHP 3.2 billion higher than last year. Our free cash flow was PHP 13 billion of net proceeds from the sale of our BPO business and a third tranche of the Philweb share sale were used for dividend payments amounting PHP 37.6 billion, subscriptions to MediaQuest PDR to PHP 4 billion and PHP 10.8 billion of debt repayment.

PLDT Group CapEx for 2013 is estimated PHP 29 billion or PHP 7.4 billion lower than 2012. We continue to occupy PLDT Group’s unrivaled network which is designed to maximize the customers’ quality of experience especially in data. Implementation of the two, Smart and Sun network integration has been completed in Manila. It will now be rolled out to the rest of the country.

Network integrations not only expands our 2G and 3G coverage but result in significant cost savings. Our 4G footprint is being expanded as well. To-date we have almost 10,000 active 4G-capable base stations that operate on the HSPA, WiMax, LTE and LTE-Advanced standards. Note that PLDT has the widest LTE network in the Philippines today with about 1,200 sites.

Recognizing the importance of fiber backhaul in the delivery of data, significant additional CapEx has being further expanded by our footprint. Our domestic and international fiber network remains the most robust in the country, with almost 75,000 kilometers already in place.

Moving to our debt profile on Page 9. Net debt at the end of September 2013 was US$1.8 billion or US$100 million lower at the end of 2012. Net debt to EBITDA was also lower at 1.02 times from 1.05 times at the end of last year. 55% of gross debt is denominated in U.S. dollars taking into account our U.S. dollar cash holdings and hedges, only 39% or US$972 million of our total debt is unhedged.

58% of our debts are fixed-rate loans, while our average pre-tax interest costs for the period is about 4.5%. PLDT’s debt profile remains healthy with maturities well spread out. US$80 million of debt maturing in 2014 was prepaid within this quarter for the balance of US$200 million refinanced ahead of the maturity date. PLDT’s credit ratings with Fitch, Moody’s and Standard and Poor’s remain at investment grade.

On Page 10, we have some updates on our multimedia initiatives. Our strategic direction remains to transform PLDT into a multimedia organization and set with the comprising of the world of telecommunication, media and the internet. In line with this, we continued to pursue various initiatives across the Group.

Aside from PLDT’s Fibr, the country’s first Triple-Play offer which includes landline, Fiber-To-The-Home, high-speed broadband and connect, the PLDT Home website and Telpad are now offering multimedia services. This gives our DSL subscribers access to entertainment including movies-on-demand, music, information and games.

In addition to the recently launched online music portal called Smart Music, Smart has introduced several content bundles which aims to build usage habits and influence the purchase of music and other items.

As for CignalTV, the Direct-to-Home or DTH business of PLDT is investing in via PDRs. Its subscriber base has grown by nearly 100,000 from the end of 2012 to over 540,000 subscribers. Aside from 13 free-to-air channels, CignalTV offers 66 standard definition and 25 high definition channels.

CignalTV’s content on Smart of Triple-Play offer on the fixed line and can also be viewed by Smart and Sun subscribers on smartphones and tablets via Cignal TV-To-Go. You can expect to hear more of our multimedia initiatives in the months to come as we continue to explore new ways of providing our customers with engaging and compelling contents, which in turn will create new revenue sources that capitalize on our networks as content expand [ph].

The final Page 11 covers our guidance for 2013. And Mr. Nazareno I think will just say a few words on that.

Polly Nazareno

Thank you, Chris. With the favorable momentum that we have seen in the past three quarters, and given the early trends in the fourth quarter, we are confident of meeting our core income guidance of PHP 38.3 billion for this year. CapEx will also be within the guidance figure of PHP 29 billion.

That captures the highlights of our results for the first nine months of this year. Thank you for joining us today and we are now ready to take your questions.

Question-and-Answer Session

Operator

The floor is now open for questions. (Operator Instructions) One moment please, while we wait for the first question. Our first question is from Mr. Luis Hilado. Your line is now open. You may go ahead.

Luis Hilado – HSBC Securities

Hi, good afternoon. Thanks for the call. I had three questions, the first two operational, and the third just housekeeping. In terms of ARPU trends you’ve seen in the third quarter, it seems like the Talk ‘N Text as well as Sun Cellular prepaid and the Smart postpaid were down Q-on-Q. Just wondering is that assumption of seasonality, competition or a trend in the economy for the quarter, or you expect this to rebound in the fourth quarter? Second question is regarding the strategy in terms of monetizing data. You’ve highlighted that during the presentation that the revenues in voice were up, but revenues down because people were going towards buckets on these plans. How do you intent to shape the mentality on the subscriber base to up the data? And the last question is just housekeeping on the tax rate, corp [ph] 16% and 19% from the first nine months. For the full-year, any guidance in terms of the tax rate?

Polly Nazareno

Luis, thank you for the questions. For the first question, with decline in the ARPU quarter-on-quarter for Talk ‘N Text should be due to seasonality, really that’s what we mentioned earlier. And for the second…

Charles Lim

Okay, this is Charles Lim actually addressing your second question. Monetizing data, there are several ways that we are going. We’re heading towards monetizing data first, is as just been reported – just reported that we have acquired considerable content for us to be able to sell – to up-sell to our subscriber basically music where we have to deal with MCA, Universal and Sony Music which are now at the corner 75% of the music of data volume of the country and co-marketed with MCA and together with Sony.

So that has started already this quarter actually. We are also moving towards making data available for also our subscribers and we believe that once we are able to review further our initiatives for data that allows them more affordable services and more customized services for data, then we believe that we’ll also likely see some more revenue growth for data.

Luis Hilado – HSBC Securities

Thanks.

Chris Young

Luis, on the tax rate, the extra corporate tax rate is a bit higher than you mentioned. The thing that we’re looking at for the full-year that are some deferred tax assets relating to the Digitel Sun acquisition, which may be adjusted, but that’s a year-end review that we take. I think we would expect the net tax rate to be close to maybe what it is year-to-date, maybe a little bit higher about 19%, 20% levels, but we won’t will not assign but we completely assessment for the year-end will be – but and that sort of place, I think 20%.

Luis Hilado – HSBC Securities

Okay, thank you.

Operator

Any follow-up questions sir?

Luis Hilado – HSBC Securities

No, that’s all.

Operator

All right. Thank you. Our next question is from Mr. Arthur Pineda. Your line is now open. You may go ahead.

Arthur Pineda – Citigroup

Hi, thanks for the call. Several questions for me. Firstly, if you could tell about the Fixed Line division, you do see that your margins aren’t up significantly here. Where do you see margins going forward for the Fixed Line side? Second question I had is with regard to the Mobile division. If you could help us better understand the economics of moving to a postpaid bundle from prepaid, we see that you’ve put a big push there and you’d been able to capitalize revenues but prepaid actually declined with subsidy growth outpacing the revenue growth? When do we start to see this and actually raising EBITDA levels? Third question I had is with regard to your content. You mentioned a while ago, it’s a bigger push for you on these OTP content. If you could describe what your revenue model is for this? If this is more of a retention tool for you or do you actually recognize incremental revenues with the revenue share model with these providers? Thank you.

Chris Young

Maybe I’ll try first on the Fixed Line. We got, as you know a reasonably good result in the third quarter from the Fixed Line, in terms of both revenue growth for the full-year up 4% and then quite strong EBITDA performance in the third quarter. I think however the third quarter is probably is not indicative of the full-year, there are one or two things where accruals will made in the first and second quarter which one fully requires in the third quarter.

But I think the margin that you’ve seen year-to-date is about 38%, 39% is what we would expect for the balance of the year and in fact, as we look out to 2014 as well. So the Fixed Line is – because of the more contribution of the ILD and the NLD now looking like we currently revenue growth and probably maintaining margins in the 38%, 39% level.

Charles Lim

What’s the second one?

Chris Young

Postpaid.

Anabelle Lim-Chua

I guess I’ll start on this Charles as follows. Postpaid business for the mobile, I guess the dynamics are largely affected by particularly by the some fees involved in the postpaid slots which as you are aware we will look upfront. So in the last few quarters, you’ve seen our postpaid subscriber numbers increase by about 115,000 in the each of the quarters. So there is of course to ramping up those subscriber numbers by way of the subsidies that you book.

At some point when you settle into a more steady state I guess solution [ph], then the margins on the postpaid business somewhat look different. But you know that’s kind of a ramp-up cost involved. But clearly postpaid is now part of the whole industry dynamics particularly with the emerging importance of smartphones and its role in the data play. So there is some element of I guess shifting that is going on which helps and effect on the EBITDA margins for the very strong quarter [ph].

Charles Lim

Yes, to also follow-up to build on what Anabelle just said, moving forward we believe that postpaid will be – they are certainly the earlier reference for smartphones, the 11% penetration for the Philippine market is [indiscernible] pick-up around 15%, that’s for all that area [ph]. Basically smartphones sell for higher ARPU in the future especially as we’re able to also might take up further that will be more popular to our subscribers.

Also smartphones plan to sell for more percent purchases. Initially, we have tied it up with our content marketing that; first, we do this to differentiate ourselves in the market from our competitors; number two, it is also capitalizing on the 72.5 million subscriber base both prepaid and postpaid; and number three, it is we believe that if its revenue sharing model will also yield better revenue as we build the habit of purchasing music legitimately in the more affordable way.

So we have just launched last week or quite recently a membership program that allows members to really download music, to listen the music practically, all the music they want for a fixed days which we have made to be very affordable either as a weekly, bimonthly or a monthly basis.

Arthur Pineda – Citigroup

So can you take the revenue share from this model, or is it you make money from the data throughput?

Charles Lim

I cannot – we are bound by non-disclosure agreements, but basically we believe both each aspect of – that the whole mix so that we can extract revenues or margin from all sides. So I will have to say it’s a combination of all these things.

Arthur Pineda – Citigroup

Understood. Thank you.

Operator

Any other questions sir?

Arthur Pineda – Citigroup

That’s all. Thank you.

Operator

You’re welcome. Next question is from Ms. Neeraja Natarajan. Your line is now open. You may go ahead.

Neeraja Natarajan – Nomura

Hi, thanks for the opportunity. I have a few questions. I guess my first question is on the wireless margins. And I think you can see during 2Q to 3Q the subsidy costs have actually gone lower but your margins have continued to decline, wireless margins. So what have you seen there and I see it’s partly because of the network-related costs, so should we expect this to continue to increase? That’s my first question. And secondly, in terms of targeting the postpaid segment, in terms of the subscriber additions, it still seems to be slower than your peers, how do you see this segment is evolving for you guys? I mean should you further step up your marketing intensity, and how long would this smartphone seeding continue for you to sort of tap into this segment? That’s my second question. And then within wireless revenues, it seems like if I strip out the mobile internet, the SMS revenues have actually are declining year-over-year. Any thoughts around this, is this – are you seeing cannibalization or is it just that the yields on SMS is sort of declining? That’s my third question. And lastly the Sun ARPU seemed to have been restated lower in this quarter for both prepaid and postpaid, any thoughts on that? Thank you.

Anabelle Lim-Chua

It’s hard to remember all your questions, but we’ll try and sum up the questions. On the quarter-on-quarter EBITDA margins, I guess we reflect the factors, seasonality impact and the revenue. So the revenue was higher in same quarter last year, it’s slightly down versus second quarter, that’s [indiscernible]. Then subsidies are higher and then the other costs we have in the third quarter are really some MRP manpower reduction charges that we’re taking to integrate some of the functions for the wireless between Smart and Sun.

SMS revenues are as you rightly observe right now, but we – or second that would be higher domestic voice revenues and mobile. So we put those together under that middle standing [ph] revenue classification. In terms of SMS volumes, we’re being quite strong, but obviously with the shift to more and more limited towards unlimited packages, there is a yield curve pressure on the SMS revenues on that.

I think we both at I guess the New Year [ph] and the third quarter results of the industry, but as far as the second quarter our net adds in postpaid was higher than the industry average.

Melissa Vergel de Dios

Neera, what was your first question again with respect to network-related costs?

Neeraja Natarajan – Nomura

Yes, actually I guess I was more on the wireless EBITDA margin, so I mean do you think seasonality, seems like your rent and professional services which is I think the reason for that, so it seems to be higher this quarter. And then if I just started as part of the year and then you’re also looking into three quarters, I mean there seems to be different cost items in general, but you just said, [indiscernible] the margins are declining, so is that what you’re supposed to expect for the wireless segment is my question to you.

Anabelle Lim-Chua

So we have to take in part, but it’s not net – were sort of a labor impact, we will start to see savings on the network cost side which we put together at some of the – when you complete the Smart and Sun phase consolidation. So some of the things that you’d mentioned like higher professional fees etcetera are not so much network-related but some of it are support of the growing postpaid business as well.

Neeraja Natarajan – Nomura

Okay, thanks. And on the postpaid side, I guess my question was, I mean you said focus on the segment, but we haven’t seen like net adds pick up in a big way, so is that something that – should we expect, that’s the first thing. And how much like in terms of – I mean marketing subsidies like do you see this going into the next three four quarters or do you think its normalized? It’s my second question.

Anabelle Lim-Chua

Well, the postpaid revenues are actually up 15% year-on-year. So we’re benefiting already with respect to the increase in Fibr numbers that we have this year relative to last year. So it really depends on what your expectations are because in terms of absolute numbers of course in the context of the Philippine market, the both phase subscriber numbers will never be at the scale of the prepaid distance. So it’s really a change in mix but that’s been a shift – the business was not – or the market was not certain to postpaid markets.

At the end of the day what we’re seeing is that Philippines will remain largely seen the prepaid market therefore, the shift is particularly on data penetration for prepaid, so that’s critical we highlighted in our presentation.

Neeraja Natarajan – Nomura

Okay, got it. And my last question was on the ARPU restatement for Sun in this quarter?

Anabelle Lim-Chua

There was a bit of subscriber base cleaned up in the first quarter actually, so some in this quarter. So that naturally sort of increases the ARPU. I am not sure if you’re referring to that as something else but we can sort of take it offline [ph].

Neeraja Natarajan – Nomura

No. What I mean is I think the ARPUs look lot lower than we had in the last quarter, and the other thing is I guess I think in 1Q also you did highlighted some ARPUs that are actually increasingly, but it now looks like it’s just been flattish. So I mean does the whole introduction of higher value offerings or extending the validity date and things like that so.

Anabelle Lim-Chua

Maybe we can take that offline because our number is showing that the Sun ARPUs are [indiscernible]…

Neeraja Natarajan – Nomura

Yes, sure. That’s fine. Thanks very much.

Operator

Any other question, ma’am?

Neeraja Natarajan – Nomura

No, that’s it. Thank you.

Operator

Thank you. Our next question is from Mr. Chate Ben. Your line is now open. You may go ahead.

Chate Ben – Credit Suisse

Thank you very much. Good afternoon everyone and first of all, I wish Mr. Nazareno a speedy recovery.

Anabelle Lim-Chua

Thank you.

Chate Ben – Credit Suisse

The first one is regarding the smartphone penetration. I understand that you disclosed 11% penetrations, how much of this smartphone subscribers actually are using data and generating non-SMS data revenue for you? The second question is that we are seeing some efforts in growing the revenue base obviously in the mobile data side, but that is largely offset by the continued decline in legacy business. Do you think that going forward as we continue to see the mobile data revenue growth, should we also expect that to be associated by accelerating decline in legacy revenues and therefore we are entered a regime whereby we should expect some revenue growth, but that would be like low single-digit of sales and we should not expect further acceleration? The third question is just in term of cost picture. Should we expect a material cost pressure into fourth quarter on your EBITDA, things like subsidy would increase and maybe any other cost items that you might worried about into the fourth quarter of this year? And last question, in light of the data growth, should we expect this year CapEx to be considered at a low level and therefore we should expect quite an increase into the next few years? Thank you.

Anabelle Lim-Chua

Fourth quarter cost pressure, I think fourth quarter typically we do have a bit of increase in [indiscernible] but there are also increases in costs. Typically towards the year-end.

Charles Lim

The actual smartphone users.

Anabelle Lim-Chua

We’ve got less than half at the moment are actually seeing more data subsidies representing opportunity for us and [indiscernible].

Chris Young

On the CapEx number, that too is still in the middle of the budgeting process at the moment, but the initial cut of it looks like it’s coming out at a similar level similar to this year, about PHP 29 billion level which we run at about [indiscernible] service revenue. So we’re not seeing a sharp spike going into 2014, 2015.

Well, I think there is no doubt that there is an interplay between the two. Particularly I think if you look at what happened historically on Fixed Line. The Fixed as you are aware at one stage is very large part of its revenues coming from inbound international, but as broadband grew both in the corporate and the consumer segment, that effectively led to cannibalizations on that revenue source.

If you look at the chart on Page 5 now, you can see that the actual amount of inbound on the Fixed is getting to be a relatively small percentage of the total. Wireless probably still had to go through that process, so to the extent that we see growth on the mobile data side, mobile internet access side, wireless broadband, yes, that will be one of the factors which will then do the inbound international revenues of the wireless business. Quite what the relationship is between the two it’s difficult to know at this stage.

I think the encouraging thing that we are seeing is that if you looked at the overall revenues which are growing which is a combination of the Fixed, Wireless, Broadband and mobile internet access and the corporate data, it’s growing at double digit rate. I think they are up to about 15% in the first nine months. On the decline, it’s declining down by about 6%. So that will result in overall growth. It will probably mean as you said, that we are probably constrained to something in the 4% or 5% growth level for the next couple of years anyway and thereabout declining part of the revenue mix, against the smaller percentage. It’s down already as you can see that the 90% but it’s still a meaningful contributor at this stage.

Chate Ben – Credit Suisse

Understood. Thank you very much.

Operator

Any other question Mr. Ben?

Chate Ben – Credit Suisse

No, that is right. Thank you.

Operator

Thank you. Our next question is from Mr. Tim Bill [ph]. Your line is now open. You may go ahead.

Unidentified Analyst

Hi, good afternoon. Thanks for the opportunity to ask some questions. The first is on your LTE size. I’m just wondering how fast you think those ramp-up from the current 1,200 – of the current 1,200, how many are located in Metro Manila and how many located outside of Metro Manila? And second question, I guess what do you think is the split of your data traffic being carried by your 2Gs versus your 3G versus your LTE networks?

Polly Nazareno

Well thank you for the question, Tim [ph]. For the LTE, roughly it should be about 2,500 sites by next year. As far as coverage is concerned, we now have covered major urban areas and the initial target is a total of 174, but only concentrated on the dense areas.

Charles Lim

I think in the quarter is not really Metro Manila but urban areas, not only – Metro Manila plus other centers of the country. So that’s where our LTE roll-out will be. Outside of that, we’ll have also a healthy increase in HSPA+ in the – outside of the LTE areas to provide a corporate LTE broadband coverage.

Unidentified Analyst

Okay, all right.

Polly Nazareno

The bigger traffic on data over the wireless, on fixed wireless side, based on the dongles actually as of now at this point.

Unidentified Analyst

Right. And at the moment, overall including your Fixed Line traffic and your cellular traffic from smartphones etcetera, the split of all of that data traffic being carried by the 4G network versus the 3G network and the 2G network, what do you think that roughly is? Is the LTE network probably doing about 10% versus much extent on the other two currently or is the split now more...

Polly Nazareno

I don’t have the figures right now in front of me, but as far as I can recall, something like 23% to 25% of the traffic is there in Metro Manila.

Unidentified Analyst

Okay, all right. Thank you.

Operator

Any other questions Mr. Bill [ph].

Unidentified Analyst

No, that’s fine. Thank you.

Operator

All right, thank you. Our next question is from Kunal Vor [ph]. Your line is now open. You may go ahead.

Unidentified Analyst

Thanks for the opportunity sir. First question is on the SMS. The SMS revenue has fairly volatile till now while data revenue is picking up at 50% kind of growth rate. How would you see it going forward over the next two, three years? Do you see SMS data revenue or SMS contribution to remain flattish, or do you expect it to decline meaningfully and where do you see that decline coming? That’s question number one. Also can you throw some light on the competitive intensity in the market rate between the top two – between the two players as well as any light on the potential new competition which is Sun Digitel [ph]. And lastly on the international long distance revenue, there has been some uptick, some increase in revenue, is it because of currency or is that both of it? Thanks.

Anabelle Lim-Chua

First question. Well, as you are aware in terms of the way SMS is being consumed in the Philippines, is largely by the way of buckets or unlimited. How we’ve factored in SMS cheaply such that what I guess there is less financial incentive for what to have – what to switch to some kind of chat application. Secondly it also achieves for us basically a position where we become neutral that people are sending messages via SMS or through some kind of data application. So that’s kind of the way we’ve positioned our business. So certainly there will be shift as a behavior and community – when and if where the community moves, there will be shift, but we have achieved a situation in where we would be – especially neutral from a revenues and assuming that subsequent.

Unidentified Analyst

Okay.

Polly Nazareno

Regarding the comparative intensity, at this point it has improved a bit. It is still – the rivalry is still there, but there are no creditworthy quality pricing that you can find anymore outside except for maybe targeted areas regionally.

On Sun Digitel [ph], we do not see any expansion going on or rollouts going on the ground. However we have made some announcements that they are going to rollout certain base stations I think within Metro Manila. But at this point, we don’t see – they do need to put in their own backbone and transport which would take time and money.

Unidentified Analyst

Sure. Well just a follow-up on that, like do you believe the Sun network sharing or tower infrastructure sharing something – is that possible, can that help them accelerate or you don’t think any network or infrastructure sharing will happen in the market?

Polly Nazareno

As of now, there is no such thing mandated by the regulator or we’re wishing to do that ourselves.

Unidentified Analyst

Okay. And then last question on the ILD side?

Anabelle Lim-Chua

On the mobile ILD side, actually we are holding up quite well in terms of both the traffic and the balance greatly, helped a bit by efforts on [indiscernible] as well as some through internationally long for Sun [ph].

Impact of currency depreciation favored it a bit in the third quarter given that the peso weakened during the third quarter also it probably was strengthened in the fourth quarter than in the third quarter.

Charles Lim

But I don’t think...

Unidentified Analyst

Exactly.

Charles Lim

Yes. And the longer bound trend. I think the longer bound trend for both wireless and fixed will be that the international will continue to decline. Though that if you want to think, the pace of decline does not seem to be quite as high as it has been over the past few years.

Unidentified Analyst

Okay, great. Thank you. My question is answered.

Operator

Any other question Mr. Vor [ph].

Unidentified Analyst

No, thank you.

Operator

All right, thank you. Our next question is from Rama Maruvada. Your line is now open. You may go ahead.

Rama Maruvada – Daiwa

Hi good afternoon, couple of questions for me please. Firstly, with regards to your CapEx, the nine month seems to be flat, I think around 50% of your full year guidance. So just wondering if your guidance is too conservative or are there any timing issues here? The second one is with regards to the prepaid subscriber additions in particular for the Smart brand. There seem to be net losses. Wondering whether this is driven by the postpaid migration trend, and in particular what should we expect for this going forward? The third one is on the cost side. As you know most of your cost items are in fluxed in a quarterly basis, so just wondering if you could provide some color on whether we should expect any additional amount to be cost going forward? And on the wireless side, just to paraphrase Neeraja’s question, your wireless margins went from 50% last year to 45%. Any comments on where the wireless EBITDA margins will settle over the next couple of years? Thank you.

Chris Young

Maybe just on the first question which is probably the easier one to answer. Yes, the CapEx guidance we are sticking at the PHP 29 billion. And yes, it really is a timing issue. A number of items will be booked in the fourth quarter of the year and that will bring it up to close to the PHP 29 billion guidance number.

Charles Lim

I will address your second question on the Smart net adds for prepaid. That is only unique to the third quarter. And I mean unique because the preceding quarter was an election quarter, where during election what normally happens is that a lot of prepaid SIMs are being used by watchers in elections. So you have two, three parties building their own – there are thousands of watchers in the election booth. And of course after the elections, they don’t have need for it anymore and churn. And that is characteristics of the industry. So you see there was a spike, an unusual spike in second quarter, but you see that correcting in the third quarter. We don’t see that happening in the fourth quarter.

Anabelle Lim-Chua

The MRP for the overall sites, yes, there are some ongoing initiatives to respect to the integration effort. So there are some additional costs that we will be booking in the fourth quarter, but the amounts are not significant as they were last year. Rama, is that okay?

Rama Maruvada – Daiwa

Yes. And maybe on the wireless EBITDA margins, I mean I understand the change in business model to postpaid, but they seem to be down significantly on a year-on-year basis. So any comments on what do you expect the sustainable level to be? Is it 45% or should we expect it to go down or keep up from?

Anabelle Lim-Chua

Well, yes the most significant change if you look at the quarter versus last year, we believe in the subsidies, so actually there is an upfront cost to the ramp-up in that business. Now taken altogether in terms of our expectations that the shift in the revenue mix, the shift in the prepaid, postpaid mix, we kind of think that the margins of the business to start of – top of 1% kind of at the year, that’s kind of our guide – that is outlook for the business in the context of single-digit versus growth in absolute term. It will still increase, but the first hand margin will even decline.

Ramakrishna Maruvada – Daiwa

Okay. Thank you very much.

Operator

Any other questions?

Rama Maruvada – Daiwa

No, that’s all. Thank you.

Operator

Thank you. Our next question is from Mr. Luis Hilado. Your line is now open. You may go ahead.

Luis Hilado – HSBC Securities

Hi, just one follow-up question from me. With the push towards postpaid during the fee area, I guess PLDT’s quadruple-play when you put postpaid mobile along with the bundle for the Fixed Line as well as the PayTV?

Polly Nazareno

Luis, you’re right, our Triple-Play and it does not include mobile services as we explained, but that is something we might consider in the future.

Luis Hilado – HSBC Securities

Okay, great. Thanks.

Operator

Any other questions Mr. Luis Hilado?

Luis Hilado – HSBC Securities

Yes, that’s all.

Operator

Thank you. That concludes the question and answer portion. Before I turn the conference back over to PLDT, 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 November 19, 2013. Replay information for the 3:00 PM call, international caller number is (852) 3018-4377. U.S. toll-free is 1 (888) 566-0351. Passcode is 3525. Conference leader is Melissa Vergel de Dios. I will now turn the conference back to PLDT for any additional or closing remarks.

Polly Nazareno

Thank you. Thank you very much for joining us today. We look forward to talk to you again sometime in March when we would be announcing our full-year 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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