Philippine Long Distance Telephone Company's CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Philippine Long (PHI)

Philippine Long Distance Telephone Company (NYSE:PHI)

Q4 2013 Earnings Call

March 4, 2014 2:00 AM ET

Executives

Melissa Vergel de Dios – Head, IR

Napolean Nazareno – President and CEO

Christopher Young – Chief Financial Advisor

Ray Espinosa – Head, Regulatory Affairs and Policies

Anabelle Lim-Chua – SVP and Treasurer; CFO, Communications, Inc.

Analysts

Luis Hilado

Arthur Pineda

Chi Fan

Kunal Vora

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 presentation.

At this point, I would like to turn you over to Melissa Vergel de Dios, Head of Investor Relations for PLDT for the introductions. Please go ahead. Thank you.

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 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.

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

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

Napolean Nazareno

Good afternoon. Allow me to present to share with you PLDT’s financial and operating results for 2013. In the last two years, PLDT operated within a challenging competitive environment while working to integrate Digital and Sun into the PLDT group and at the same time, undertaking a massive network transformation program, all of which impacted our financial results.

We are proud to announce that after two years of decline in our profitability, PLDT is firmly back on the growth trend. Service revenues rose by 3% year-on-year to PHP164 billion, our wireless and fixed line businesses registered increases over 2012 of 3% and 5% respectively.

Consolidated EBITDA for the period grew to PHP77.6 billion or 3% higher versus 2012 while EBITDA margin was steady at 47%.

Reported net income for 2013 was lower by PHP700 million or PHP35.4 billion mainly due to higher foreign exchange and derivative losses and the adverse impact of Typhoon Yolanda. Excluding the typhoon losses, reported net income would have been stable year-on-year.

Core net income rose by PHP1.8 billion, 5% year-on-year to PHP38.7 billion or 179 pesos per share.

On the next slide, consolidated service revenues rose by PHP4.3 billion or 3% year-on-year to PHP 164 billion as the on-going structural change in PLDT’s revenue mix continues to temper revenue growth. Revenues from cellular voice, cellular SMS and LEC which account for 62% of total revenues in 2013 remains stable at PHP101.8 billion.

The changing dynamic involves our data broadband and legacy voice businesses. Growing revenue streams from non-SMS data services of PHP35.4 billion in 2013 now account for 22% of total revenues overtaking the 16% contribution from our declining legacy international inbound voice and national long-distance businesses of PHP26.9 billion.

In 2013, the revenues from our data and broadband businesses grew faster than the decline in the legacy revenues. The very growth of data and broadband however, accelerates the decline of legacy voice revenues.

Despite the structural change in the revenue mix, and an increasing handset and device subsidies, EBITDA margin for 2013 was stable at 47% and consolidated EBITDA for 2013 improved by 3% to 2.4 – PHP2.2 billion to PHP77.6 billion.

Higher service revenues and lower cash OpEx in 2013 fully offset increases in subsidies. 2012 results included PHP3.8 billion in manpower reduction costs or expenses compared with PHP600 million in 2013.

On the next slide, core net income for 2013 grew by PHP1.8 billion or 5% to PHP38.7 billion from PHP36.9 billion in 2012. Higher revenues, EBITDA and equity share and the earnings of Beacon as well as lower depreciation contributed to the increase although partly offset by higher provisions of income tax.

In addition, this year’s core income included a PHP2.1 billion gain from the sale of final two tranches of the Philweb shares. On the other hand, PHP3.8 billion in asset sales were recorded in 2012 consisting of PHP2 billion from the disposal of Beacon preferred and PHP1.8 billion from the sale of the first two tranches of Philweb shares.

Reported net income for 2013 was PHP700 million or 2% lower year-on-year at PHP35.4 billion. Higher net ForEx losses of PHP3.7 billion, the adjustments arising from the adoption of the revised PAS 19 and PHP 900 million in losses from Yolanda offset the PHP1.8 billion increase in core income.

The PHP2.2 billion peso gain from the sale of the BPO business and the lower asset impairment of 800. Without the losses from Typhoon Yolanda or Typhoon Haiyan reported income would have been stable year-on-year. This does not just take into account however, potential recoveries from insurance.

We are happy to report that earlier today, on the next slide, the company’s Board of Directors approved the payment of a final regular dividend of 62 pesos per share representing 70% of the core income for the second half of 2013.

In addition, the Board also declared a special dividend of 54 pesos equivalent to 30% of 2013 core income. Together with the interim regular dividend of 63 pesos per share paid in September last year. Total dividends paid on 2013 core income is 179 pesos per share for 100% payout.

PLDT has thus paid out 100% of its core earnings for seven consecutive years with a total of PHP310 billion pesos paid out as common dividends in the last 10 years. As the closing share price of 2666 pesos at the end of 2013, PLDTs dividend yield is 6.7% and 6.6% based on yesterday’s closing share price of 2706 per share.

On the next slide, of the highlights of the value segments, starting with broadband. Upward momentum in broadband service revenues was maintained. These revenues represent 16% of total service revenues in 2013 and are higher by 16% year-on-year at PHP26.6 billion. Fixed and wireless broadband revenues each rose by 10% while mobile internet browsing revenues which have reached the PHP5 billion mark grew by 59% from last year.

The growing popularity of broadband in the Philippines a rich source of potential revenues for our fixed and wireless businesses. On the fixed line, we have a suite of offers including triple play services that top not only of our Passover fixed line subscribers who are not yet DSL subscribers, but also new customers.

On the wireless side our subscriber base remains largely untapped as only 15% of our subscribers own smartphones and of whom only a quarter pay for data. Efforts to grow the postpaid market are on-going. In parallel, we are working to unlock the potential of the prepaid market through low denomination prepaid data sachets or sachet adds.

For example, for 5 pesos to 10 pesos, the subscriber can have access to low network bandwidth apps for a day such as Facebook, Twitter or other chat applications. These provide improved utility to users over the internet café experience, but ensure that the telco is able to manage both bandwidth and margins.

Smartphone ownership is expected to expand as handset prices come down and with more models becoming available including Chinese manufactured handsets, the new Nokia models, and second-hand models from early adopters.

Finally, key to the growth of our data business is a reliable network that ensures quality of experience. PLDT’s network quality and coverage remains unrivaled and can more than fully support the requirements of our data customers.

On the next slide, our wireless business service revenues registered a 3% or PHP2.9 billion year-on-year increase to PHP116.7 billion in 2013 reflecting continued growth of non-SMS data and cellular voice revenues. The on-going change in our cellular subscriber mix is expected to impact service revenue growth and EBITDA margins.

Prepaid revenues representing 82% of cellular revenues were stable year-on-year. Postpaid revenues registered a 15% year-on-year increase to PHP19 billion and accounted for 18% of service revenues in 2013 from 16% in 2012.

Efforts to further increase wireless revenues are diverted towards improving ARPUs by growing non-SMS data revenues. This includes the near-term strategy of seeding smartphone ownership under postpaid plans.

We are keeping a close watch on the impact of non-SMS data growth on our SMS revenues which at the moment have not registered sharp declines. In addition to bundling data with SMS and voice loads, we are developing a few offers to keep SMS usage steady. As in the Philippine market will largely remain a prepaid market, we are focusing on unlocking prepaid data through various means including the bundling of non-SMS data with voice and SMS plans, low denomination data sachets or sachet apps, as well as leveraging content to engage the customer and encourage and expand usage while capitalizing on the strength of the PLDT network.

On the next slide, moving on to the fixed line, this segment registered a PHP2.2 billion peso or 4% year-on-year increase in service revenues, the PHP53.7 billion in 2013 net of interconnection costs.

Growth was underpinned by data revenues which accounted for 51% in total fixed line revenues. Corporate data revenues recorded a 6% increase to PHP13.1 billion. Fixed line broadband revenues were higher by 9% at PHP12.3 billion due to an 8% rise in subscribers.

In addition, datacenter revenues grew 61% to PHP1.8 billion, highlighting the increasing acceptance of cloud computing and datacenter services in the country. The continued improvement in economic conditions bodes well for PLDT’s home and enterprise businesses creating a growing demand for broadband and data from retail customers, SMEs and corporates.

Home offers integrated or integrated access content and various devices to provide a richer multimedia experience through the internet. Enterprise solutions on the other hand include Ethernet, cloud computing and datacenter services that help increase customer productivity efficiencies and competitiveness.

On the next slide, as the worlds of telecommunications media and the internet continue to converge and consistent with our strategic direction to transform PLDT into a multimedia organization, we are stepping up our efforts to integrate content with our fixed and wireless offers. We have expanded the content available to our DSL and fiber subscribers to include more on movies, TV series, music, games and sports.

To further grow broadband pick up, we now offer device bundled DSL plans that allow our customers to fully enjoy a multimedia experience using these devices and broadband access.

Among the devices available are Telpad landline phone and android tablet in one and TVolution, an android device that turns an ordinary TV into an internet TV. Our wireless computers, our wireless customers on the other hand can access music from Spinnr, the biggest online music portal in the country.

Our gamers ePINs are available from our gaming portal, GameX. Given our credit card penetration in the country is payments for these purchases can conveniently be charged through prepaid load. As for Cignal TV, the direct-to-home or DTH business that PLDT has invested in via Philippine Depository Receipts or PDRs, the growth in its subscriber base continues unabated reaching over 602,000 subscribers at the end of 2013.

Cignal TV recently won the exclusive rights to air the Winter Olympics held in Sochi and the upcoming Summer Olympics in Brazil. Cignal’s content portfolio continues to broaden part of which we are able to bundle with our fixed line triple play service and TV-To-Go, mobile offering.

We firmly believe that we can create new revenue sources by capitalizing on our network strengths and searching for new ways of providing our customers with engaging and compelling content.

On the next slide, net debt at the end of 2013 was $1.6 billion or $300 million lower than the end of 2012. Net debt-to-EBITDA was also lower at 0.93 times from over 1 times at the end of last year. 57% of gross debt is denominated in US dollars.

Taking into account our US cash holdings and hedges, only $966 million or 41% of our total debt is unhedged. 54% of our debt are fixed-rate loans. PLDT’s debt profile remains healthy with maturities well spread out.

In January, PLDT’s 7 year and 10 year peso fixed rate bonds were listed in the Philippine Dealing and Exchange Corporation or PDEX. Proceeds from the PHP15 billion domestic retail bond issued will be used for CapEx and debt refinancing.

PLDT’s credit ratings with Fitch, Moody’s, Standard & Poor’s remain at investment grades.

On the next slide free cash flow of 2013 rose by PHP4.4 billion or 12% to PHP42 billion and PHP3.3 billion higher than our core income for the year. Lower CapEx and net movements in working capital offset higher income taxes paid.

After having completed our two-year network transformation program in 2012, PLDT Group CapEx for 2013 decreased by PHP7.6 billion to PHP28.8 billion or about 18% of service revenues.

CapEx investments in 2013 fortified the company’s unrivaled network advantage in support of the delivery of data and broadband. We expanded further our 2G, 3G and 4G coverage, grew our fiber footprint to 78,000 kilometers plus attaining 100% fiber connectivity from base stations to the core, reached 2 million homes passed and increased international cable capacity.

Our 2014 or for 2014, we anticipate CapEx to remain below 20% of service revenues or between PHP31 billion and PHP32 billion. Included in the CapEx build out for the year our projects to enhance our ability to deliver data in anticipation of its continuous growth.

Among these 100% 3G coverage supplemental in-building presence, additional LTE sites, expansion of the fiber footprint to 90,000 kilometers and participation in the new international cable system. Investments in new service deliver platforms and additional network intelligence are also part of 2014 CapEx.

Note that given climate change and severe weather conditions experienced, CapEx for 2014 also includes investment to further strengthen our transport and support facilities. On the last slide, we believe that PLDT has turned the corner and is back on the growth track. Our goal remains to expand our data business while maintaining the equilibrium of our core businesses and managing the declines in our legacy services.

We will continue to invest to ensure our unrivaled network advantage, pursue further growth of our postpaid business, explore ways of unlocking the potential of prepaid data and enhance our product offers with more content. We expect our 2013 performance to be the springboard for continued improvement as we strive to achieve PHP39.5 billion in core net income for 2014.

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

Question-and-Answer Session

Melissa Vergel de Dios

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

Operator

The floor is now open for your questions. (Operator Instructions) Our first question comes from Mr. Luis Hilado. Sir you may begin.

Luis Hilado

Hi, good afternoon and thanks for the call and congrats on the results. I had three questions initially. The first two regarding fourth quarter performance and the last on full year trends. Just, firstly, in terms of the impact of Yolanda, just wondering if that’s the impact we’ve seen in terms of several OpEx lines seen to have grown quite substantially Q-on-Q and year-on-year? Is that the Yolanda effect distributed across them?

Second question is regarding the asset impairment for the quarter, it seems to be about PHP3.4 billion, could you give us some color on what are those write-offs – what were impaired in those write-offs?

And last question is, for full year, you’ve noted that F&F revenues down PHP1 billion but non-SMS data growing quite strongly at PHP2.7 billion. In terms of recent trends, are you still seeing that kind of ratio in quite the advantage towards the non-SMS data more than offsetting the SMS decline?

Napolean Nazareno

Thanks for the questions, Luis. I will try the cost one which is on the expenses. I think Anabelle will probably fix in on the asset impairment. I think there is a seasonality to the expenses that I think we’ve seen in previous years.

If you look at – I think, 2013, total expenses are rolling about on regular recurring expense by PHP29 billion, PHP30 billion a quarter for the Q4, it’s about 10% higher than that. I think there is an element of Yolanda there, due to the repairs and maintenance to somewhat higher travel costs and alike.

So, the increase maybe 25% to 30% is maybe Yolanda-related. I think the other important items there would be sales and marketing, thanks to the back-ended of it. I think the Q4 is generally when it’s highest. So probably another increase would from that area.

And then the panel, I think it’s just generally the year end where you take a review again on things like provisions for doubtful accounts, taxes and licenses et cetera, et cetera. So, I think in conclusion, partly Yolanda affected, but the majority I think is the regular seasonality that we normally see in Q4.

Luis Hilado

Thanks. One follow-up to that is, if the amount of the Yolanda expenses should be incorporated into OpEx in addition I think below the line in terms of Yolanda?

Napolean Nazareno

I think the Yolanda that it’s below the line is those are related to CapEx expenses. So if there was damage to the network, so on the wireless side, the cell site itself or on the fixed line the – we’ve recorded that as a – life expense.

We’ve estimated that's at about PHP900 million, but that would be as a one-off expense which related to impact on the network. The recovering effect on those things like repairs and maintenance, people traveling and alike are in the right expenses. We’ve taken a fairway conservative view on the CapEx side, then that amount that we provided of PHP900 million is before any insurance recoveries.

The insurance recoveries should come through in 2014, but obviously it does involves the degree of negotiation with the loss adjusters and insurance companies and alike. So, we should probably recover about maybe 50% of that total recovery we will see in 2014. As we said, we’ve taken a fairly conservative view on the CapEx side in 2013 results.

Luis Hilado

Okay.

Anabelle Lim-Chua

Luis, on the fourth quarter asset impairment charge, we basically booked PHP2.1 billion impairment charge that we have classified as non-core in the wireless segment relating to the site and consolidation and network integration of Smart and Sun.

So that’s a program that we started in 2013 and still on-going for 2014. But we’ve taken the one-time charge in the fourth quarter of approximately PHP2.1 million to recognize the related losses and write-offs with respect to the site and the equipment that would be affected by that integration.

Luis Hilado

Okay.

Napolean Nazareno

With regards to your third question, it relates to SMS versus mobile broadband. As you know, mobile broadband grew by 59% reaching PHP5 billion this year – last year and SMS went down by about 2% in terms of revenues.

But, as we go deeper in terms of volume up to the SMS went up by 1%. So, we are seeing that the broadband growth is not yet affecting the SMS in other words, we are seeing that it could be still complementary at this time. We are having a close watch. However, in how SMS would behave moving forward but we are not seeing it right now. The erosion is not seen right now.

Luis Hilado

Great, that’s very clear. Thank you.

Operator

We have any other questions?

Luis Hilado

No, that’s all for now.

Operator

Thank you. Our next question comes from Mr. Arthur Pineda. Sir, you may begin.

Arthur Pineda

Hi, thanks for the call. Three questions for me. Firstly, can you give us a better picture on the financial implications of Cignal on your books, where do you see the EBITDA margins and profit margins for the Pay TV business now, when it is profit positive?

The second question I had is with regard to your subs base, it seems have declined, although I do know that’s concrete to the revenue trends, could you provide a little more color on this please?

And last question I had is with regard to the sachet data plans. You mentioned 5 peso sachet data plans and that seems to be cheaper than your traditional and new plans for voice and SMS. How do you manage the OTT cannibalization on revenues given this? Thank you.

Anabelle Lim-Chua

On Cignal, we are essentially saying that they have factored – the EBITDA positive last year and should be net income positive this year after having achieved a subscriber base of about 602,000 at the end of last year, notwithstanding some lost subscribers due to the impact of the Typhoon Yolanda.

So, in 2013, the impact on our financials is quite small given that it was only equity accounted towards the fourth quarter, but we should see, that continue to be equity accounted going into 2014.

And your second question on the subscriber base, we – aside from the normal activity around the fourth quarter, we did redefine our basis for the inclusion of – or exclusion of subscribers whose minimum balance was derived from the accumulated rewards program. So there is a write-down if you may of some subscribers as a result of that change in definition.

Arthur Pineda

Okay, so it’s just a change in definition?

Anabelle Lim-Chua

Sure.

Napolean Nazareno

I wasn’t too aware of the third question.

Arthur Pineda

Okay, if I just repeat my third question, you mentioned previously that you started to launch the 5 peso sachet data plan to make it a lot more affordable for mass market consumption, but it does seem to be much cheaper compared to your traditional voice and SMS unlimited plans. How does this (Audio Gap)

Napolean Nazareno

We lost you there.

Melissa Vergel de Dios

Operator?

Napolean Nazareno

Hello.

Operator

Our next question comes from Mr. Luis Hilado, sir you may begin.

Napolean Nazareno

Sorry that the… we had Arthur and he had a third question I am supposed to answer.

Melissa Vergel de Dios

And I think it’s not on the line. We’ll put him once. Luis, follow-up question?

Luis Hilado

Yes, sorry, I just have two follow-ups. One, if you could give us the amount of deferred tax assets that you have from the fixed line business that have not yet been utilized and second is with the other income for the fourth quarter PHP2.1 billion is not largely Philweb or any other factors there?

Anabelle Lim-Chua

In the fourth quarter, largely the Philweb of about PHP1.1 billion, because the other tranch of Philweb was booked in June.

Luis Hilado

Okay.

Napolean Nazareno

Well, what’s the deferred tax question, Luis? How much…

Luis Hilado

You utilized – how much unutilized, sorry, how much can you still avail as I guess going forward?

Anabelle Lim-Chua

The amount utilized for the fixed line was about PHP2 billion for 2013, but since the fixed line business was already effectively further transferred to PLDT unlikely that there will be OpEx utilization anymore on the fixed line side.

But on the mobile side, there are also some accumulated tax losses, but because that, what’s not yet reporting – we are still in a net loss position from a tax standpoint. We have not recognized that.

So that’s something that we will assess in 2014, toward the end of 2014 depending on the reported profits of Sun this year in terms of how much we could utilize that deferred tax assets. But it relates to the fact that there was a significant impairment book with respect to their fixed assets of Sun.

Luis Hilado

In terms of the maximum amounts you could book over the next several years, what amount would that be?

Anabelle Lim-Chua

It’s a big picture, it would fade, it could be in the order of PHP2 billion, PHP3 billion depending on, I guess, the timing everything the recovery and so on.

Luis Hilado

Okay, thanks a lot.

Melissa Vergel de Dios

Operator, do we have Arthur back on the line? If not, we will go to the next question please.

Operator

Arthur is not yet back. So, should we proceed to the next question?

Melissa Vergel de Dios

Yes, please. Thanks.

Operator

Our next question comes from Chi Fan. Sir, you may begin.

Chi Fan

Hi, good afternoon everyone and thank you for the opportunity to ask the question. I have five questions. I hope it’s not too much. And the first one is regarding a little bit more detail on the subscriber in the fourth quarter. I noticed the prepaid subscribers actually declined by 2.5 million.

I understand that part of this is due to the redefining definition but can you actually help breakdown how much is actually the effect of the change in definition of subscribers? And whereas if we exclude that subscriber actually go on decline in some more colors and why that happened.

The second one, the second question is related to that as well. The revenue is seems to be going in the fourth quarter despite the subscriber decline. So should we expect the impact in the subsequent quarters, actually there is no impact from that?

And the third one is regarding your core income guidance. Would you actually help discuss what kind of service revenue – EBITDA you expect to drive that core income growth do you expect in FY 2014?

The fourth one is regarding your content – you mentioned that content is now part of your important strategy. Is there any updated guidance in terms of how much or what kind of content are you looking for in the market right now? I’ll ask four for now. Thank you.

Napolean Nazareno

I think, Anabelle answer the subscriber numbers. I think in terms of the revenue growth, I think we are looking at something in the region of about 3% to 4% revenue growth which would then translate through the core net income number of about PHP 39.5 billion.

And again, based on volumes presentation, this is a quite thing that we are expecting fairly robust growth in data both across the wireless and the fixed platforms. But that I would say there is a likely to be a dampening effect of the impact on both the international in particularly the inbound international business and – but that’s overall something in the region of 3% to 4%.

Anabelle Lim-Chua

On the subscriber restatement, that’s largely impacted the Talk N Text of subscriber number. So if you see the deduction in the Talk N Text subscriber numbers, that’s the one that had the effect of the re-definition of the policy. Whereas the other brands, in terms of the Smart brands, in the Sun brands for fourth quarter, that’s really more reflective on a normal offering.

Melissa Vergel de Dios

Second question was revenue growth in the fourth quarter despite the subs declining.

Anabelle Lim-Chua

Yes, the subs decline was not – let’s say revenue impacting, it was really a question of what we counted active subscribers versus you don’t count, so that does not effect on the revenues in the quarter. In fact, if you kind of look at it going forward, ARPUs will naturally increase because of that change in comps.

Melissa Vergel de Dios

The last question was what we were looking for in terms of content – growing our content.

Napolean Nazareno

In terms of content, we are exploring many pillars, one of which is music, music which is our portal which is Spinnr and that is exclusive agreement with MCA and Sony Music accounting for I think roughly between 75% to 80% of all the song tracks worldwide. And this can be accessed through our portal. So, we are really pursuing giving rich and compelling content to our subscribers.

We are also pursuing content in the gaming side which is games, our portal there is GameX where you can purchase ePINs and therefore you can in fact use your prepaid credits to do so. In terms of the fixed line and Fiber-To-Home, we are offering right now triple play and which is Cignal TV via fiber.

And also we are offering movies and TV series, video on demand, et cetera and trying to enrich the experience at the home by offering devices, various devices like Telpad which is the wired line phone and android tablet in one.

And the TVolution which is a device that will allow you to convert your ordinary TV into an internet TV. It’s actually a wireless Wi-Fi modem. In terms of e-commerce, we are very active there. In fact, we just won an award during the GSMA Conference last week and we are pursuing many alternatives there to enhance the experience of our consumers.

Chi Fan

Thank you for sharing that. Just a little bit more on content, is it fair to say that you are in the expansion mode in terms of content and therefore, would there be any like kind of larger-scale acquisitions or any certain budgets that you are looking to spend in terms of expanding your content portfolio next year or over the next few years?

Napolean Nazareno

There is none right now, but – well, we will opportunistic and the key really is to pursue to enrich the content that will go through the pipes.

Chi Fan

Right. Just one last question for me is regarding your CapEx. I understand that you emphasize a couple of times regarding your network advantage, but we can see that your peers, the industry peers is also stepping or at least keep the CapEx at quite a high level. Would you think your network advantage is actually very fast and above your peers will have a difficult time catching up?

Napolean Nazareno

The CapEx projection that we have stated in our guidance is about no less – are not more than 20% of our service revenues which would be in the neighborhood of about PHP31 billion pesos to PHP32 billion pesos for this year. It has slightly increased versus our estimate in last quarter for this year mainly because we are looking at increasing our coverage on 3G for example.

We have, right now, about 76% of population coverage on 3G were moving to a 100% 3G coverage. We will be more aggressive on the LTE rollout. We had 1200 base stations in LTE. We are projecting to increase this to roughly about 2500 base stations within the year. We also will increase our fiber footprint from 78,000 kilometers to 90,000 kilometers.

So that we would be able to – we would be ready to deal with any mobile data explosion and we are also entering into an international cable agreement or expansion moving forward. So these are the – and also, we are putting in some more service delivery platforms and expanding our datacenter businesses.

We are putting up two new datacenters as you know our datacenter business has grown by 61% last year and the demand is there and our capacity is almost fully utilized. So we are building two new datacenters, one is going to be completed mid this year and the other will be end next year, which would be nearly doubling our rank capacity as far as ICT is concerned.

Chi Fan

This is great. Thank you very much.

Melissa Vergel de Dios

Is Arthur back on the line?

Operator

Yes we do. Mr. Pineda, you may begin.

Arthur Pineda

Hi, sorry my line got cut. I must – do you need to repeat the question?

Anabelle Lim-Chua

Yes, please, Arthur.

Arthur Pineda

Okay, sorry, I actually put in another question as well. First thing you mentioned that you’ve introduced the 5 peso sachet data plan. It does seem to be cheaper than your traditional and unlimited SMS plans. How do you manage the OTT cannibalization effect on revenues given this?

I am just wondering, if this is replacement revenue or incremental revenues, we should actually be excited about. If I can also throw in another question, are there any plans for any asset acquisitions in 2014 which should require capital? Thank you.

Napolean Nazareno

Well, regarding the – let me answer the first question which is about your view. On the power app application what we are doing here really is pursuing alternatives to unlock the potential of prepaid data adoption. As you know on a data – on a prepaid environment it’s always hard to be always response.

So, what we are doing is we are saturating to stick the service on a per app basis or in a cluster of applications. For example, related to social networking we can cluster this and ring fenced it so that when you use it, you cannot go outside of what has been ring fenced and by doing this, we are able to manage the bandwidth that is being used and at the same time be able to bring down the cost and bring down the denomination of outlay plus give the customer the user experience, that he deserves for an internet access.

And what’s happened is that you can press a button that would enhance your speeds for example, we have a speed booster, if you want to go outside of what was within the ring fence which means if you want to download a picture or a video, you can just press a booster and then you will have a higher speed. But you will have to pay for this. So, in a way, what we are doing is try to align our cost curve with our revenue curve. What was the other question?

Melissa Vergel de Dios

Were they replacements or incremental revenues and then any acquisition plans for 2014?

Napolean Nazareno

Right now, there are no acquisitions in sight. But, just as I said earlier, we are – we will be opportunistic as far as this is concerned.

Arthur Pineda

Thank you. Very clear. Thank you very much.

Operator

Mr. Pineda, do you have any other questions?

Arthur Pineda

No, that’s all thank you.

Operator

Thank you. Our next question comes from Kunal Vora. You may begin.

Kunal Vora

Thanks for the opportunities. My first question is on the competition. Can you talk about the competitor you who entered into the market recently on the prepaid as well postpaid side? And some steps taken by the operators if any to attract customers, any new – like any new schemes which have been coming up on the competitive side?

That's one. Second is on your outlook for subscriber growth in the market, do you view that the market is close to a saturation level or what do you view the real penetration and where do you expect the mobile penetration to settle?

And last question is on 4G. Like the data growth in the market seems to be slightly low, do you think it’s the right time to invest in LTE right now or – well, like other plans how are you seeing the data accounts utilization levels? That’s it.

Napolean Nazareno

Perhaps, I should answer the last question which was I understood the best. The LTE rollout is timely for us, because it really depends on handsets that will be available and that we are seeing – for example the newer in GSMA Conference in Barcelona, the handsets that were in the roadmap of several vendors, for example like Nokia, which is a popular brand here in the Philippines.

As you know, handsets in the Philippines are close to 45% are still feature phones and most of them are still Nokia. They are coming out with a low entry forms that are smartphones and will be 3G and 4G capable within the year. So we are seeing that with the experience of LTE, consumer experience of LTE at a better experience and higher speeds and low latency, we feel that we should provide for this already now.

So that, the consumers would be able to take advantage of that. Right now, what is happening was, during the 2G and 3G environment, the vendors were ahead of the devices? Right now the reverse is occurring. The devices are now coming in ahead of the vendors when it comes to network capability. So, we are not going to let that push us back.

So that is why we are rolling out LTE. LTE will be rolled out mostly on the urban areas, basically metro Manila and Davao cities and will be available on a comprehensive basis on 25 other cities and municipalities in the country. That is the plan for this year.

Melissa Vergel de Dios

First question was on competition for prepaid and postpaid and what steps are we undertaking to compete in those markets?

Napolean Nazareno

There is no competition between prepaid and postpaid, or is it within?

Melissa Vergel de Dios

Within.

Napolean Nazareno

The industry competition on both…

Kunal Vora

Industry competition.

Napolean Nazareno

Well, postpaid, our growth in postpaid last year was about 15%, prepaid was stagnant or flattish in terms of revenue and we are seeing that there is still room for postpaid to grow. But we feel that there are limits to postpaid, essentially, I think the Philippines is a prepaid market.

We are looking at postpaid to be in the neighborhood of total base of about 6 million to 7 million max and beyond that you will have credit problems and you won't be able to subsidize handset entry beyond that. So, we feel that the more important thing really is to unlock that potential for prepaid data adoption.

Melissa Vergel de Dios

And the second question was what is the outlook for subscriber growth? What is the real penetration if there is still room for growth in this?

Napolean Nazareno

Right now the penetration is over 100% and if you look at the double sinning behavior in the market, roughly, in terms of individual users that penetration should be hovering between 80% to 85%.

In terms of addressable markets, I think that has still room to grow because mainly if you look at other markets, the penetration rate which includes double sinning is about 140% to 150% because of multiple handset ownerships. So, we feel that there is still room to grow in overall penetration.

However, the greater potential lies in the smartphone penetration which is at in our base, roughly 15% and if you consider that, only 25% of that 15% is paying for data usage. Then you will see that there is a lot of opportunity for us to enhance data adoption. And growth in that sense, that is why our broadband business is growing at roughly 16% and in fact, early this year we were seeing that the trend is a growth of about 19% to 20%.

Kunal Vora

Very helpful. Just a one follow-up question. How do you think the customers are not using data services in Philippines as much as in other markets, is it the data plans are expensive compared to other markets? Is it because operators are trying to protect their SMS revenues and that’s why the data plans are expensive, is that the reason or what according to you explains the low pick up of data services still now?

Melissa Vergel de Dios

Why are data plans not being used by the markets? Why there is very low usage of data by those – are they more expensive?

Napolean Nazareno

Well, below network is predominantly prepaid. So, most, I think of the users, for example, we have over 38 million Facebook accounts already in the country, they are going into internet coverage, because it’s obvious, the smartphone ownership is still much lower than that. And so in terms of data usage really – what was the question again?

Melissa Vergel de Dios

Why it’s very low, for those who own smartphones, data usage is…

Napolean Nazareno

For those who own smartphones, they are, I guess, going to where the Wi-Fi hotspots are, am I right? Yes, I have an agreement in the audience here. They are going to Wi-Fi hotspots and coffee shops and all that. And that’s why the offers have to be relevant as far as that is concerned and that is what we are trying to pursue at this point. But the key really is to unlock that experience for the prepaid environment because that is 98% of our base.

Kunal Vora

Okay, great. Thank you very much sir.

Operator

Mr. Vora, do you have any other questions?

Kunal Vora

No, I am done. Thank you.

Operator

Thank you then. Speakers, we don’t have any other questions.

Melissa Vergel de Dios

If there are no other questions from conference facility, we will now take questions from those here in the floor. There is a microphones in the aisles. No questions. We’ll go back to the conference call facility for any more questions.

Operator

Right now, we don’t have any other questions.

Melissa Vergel de Dios

Okay, if there are no further questions, let me turn the floor over to the operator for the replay information.

Operator

I would like to give everyone the replay information for today’s call. This conference will be available on a 24-hour instant replay starting today daily on through March 18, 2014. Replay information for the CPM call, international caller number, country code 852, number 3018-4331. U.S. toll-free is country code 1, number 800-839-3138. Passcode is 1799. And conference leader is Melissa Vergel de Dios. I will now turn the conference back to PLDT for any additional or closing remarks.

Napolean Nazareno

On behalf of my colleagues who are here, I want to thank you all for joining us today and I look forward to next conference call which would be sometime in early May when we would announce our first quarter results. Thank you so much. Bye.

Operator

And that concludes today’s conference. Thank you for your participation. You may now disconnect.

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