PLDT 2011 Core Net Income Down 7% to PhP39B

Manila–(PHStocks)–Philippine Long Distance Telephone Company (PLDT) (PSE: TEL) (NYSE: PHI) today announced its audited financial and operating results for 2011 with consolidated Core Net Income declining to PhP39 billion, or 7%, from the PhP42 billion recorded in 2011. Reported Net Income for 2011, after exceptional items including significant provisioning, declined 21% to PhP31.7 billion, from PhP40.2 billion in 2010. These results reflect the consolidation of the operating performance of Digital Telecommunications Philippines Inc. (Digitel) from its acquisition which closed on 26 October 2011.

The decline in Core Net Income was a result of lower service revenues and higher operating expenses, partially offset by a higher equity share in the earnings of the Manila Electric Co. (MERALCO) (PSE: MER). Reported Net Income was impacted by (i) the decline in Core Net Income, (ii) a one-time asset impairment charge arising from the ongoing network modernization program and (iii) lower net foreign exchange gains this year.

EBITDA margin dipped to 52%, from 54% in 2010. To align more closely with global accounting standards, service revenues have been restated to reflect the change in the presentation of our outbound revenues from net to gross of interconnect expense, which in turn is included in our expenses. Although EBITDA does not change, EBITDA margins are calculated against the adjusted service revenues. On this basis, 2010 EBITDA margin of 59% would have been 54%.

Consolidated EBITDA was lower by 4% at PhP80 billion compared with 2010. Digitel EBITDA stood at PhP1.1 billion; its lower EBITDA margin contributed to the decline in overall EBITDA margin.

Overall consolidated service revenues decreased by 1% to PhP154 billion, including the PhP3.8 billion revenue contribution from Digitel from its acquisition on 26 October 2011, and reflecting the combined effect of a 2% decline in wireless revenues, 1% decrease in fixed line revenues, and a 6% rise in BPO revenues.

In addition, approximately 30% of consolidated service revenues are directly or indirectly linked to the US dollar, which weakened against the peso in the course of the year. Had the peso remained stable, service revenues would have been higher by PhP1.9 billion and remained at similar levels to 2010.

For the fifth consecutive year, PLDT will pay out dividends equivalent to 100% of its core earnings. Earlier today, the Company’s Board of Directors declared a final dividend of PhP63 per share, fulfilling the Company’s commitment to pay out a minimum ratio of 70% of core earnings. In addition, the Board, consistent with its year-end “look back” approach, approved a special dividend of PhP48 per share thus making for a total of PhP111 per share to be paid on 20 April 2012. Added to the interim dividend of PhP78 per share paid in August 2011, total dividends for the year will amount to PhP189 per share, representing a payout of 100% of 2011 core earnings.

Consolidated free cash flow reached PhP47.2 billion, a PhP3.5 billion or 8% improvement from last year. Consolidated capital expenditures for the year amounted to PhP31.2 billion for 2011, 8% higher year-on-year. 2011 marked the first year of the Group’s PhP67 billion modernization program, which is expected to be completed by the end of 2012. Capital expenditures for 2011 were utilized on the following:

– On the Mobile Network:

• Increasing 3G population coverage to 70%
• Completing 40% of access modernization
• Completing core network upgrade
• Upgrading transport network covering up to 82% of Metro Manila sites

– On the Fixed Network:

• Continuing migration to NGN
• Upgrading transport network with over 54,000km of fiber assets rolled out, and able to carry up to 10 times more data on the DFON network
• Modernizing core network with migration to IP-IGF
• Building out of a third cable landing station

– On IT Modernization:

• Technology refresh and group-wide optimization of IT systems and platforms for Customer Relations Management, Operations Support, Billing Support, Business Intelligences, Enterprise Resources and Settlements

The Group’s consolidated net debt was $1.7 billion as at 31 December 2011. Gross debt at the end of 2011 stood at $2.7 billion, with the inclusion of Digitel’s debt amounting to $0.5 billion. Net debt to EBITDA was at 0.9x. The Company’s debt maturities continue to be well spread out, with over 66% due in and after 2014. The percentage of US dollar-denominated debt to the Group’s total debt portfolio is at 48%, up from 45% at the end of 2010. Taking into account peso borrowings, hedges and U.S. Dollar cash holdings, 32% of total debt remains unhedged. The Group’s cash and short-term securities are invested primarily in bank placements and Government securities.

“This is the fifth year in a row that we  have paid out 100% of Core EPS, a significant achievement when taken in the context of our increased investment levels and heightened competition,” stated Manuel V. Pangilinan, PLDT Chairman.

Subscriber Base

The PLDT Group’s total cellular subscriber base as at 31 December 2011 was 63.7 million subscribers, broken down as follows: Wireless subsidiary Smart Communications Inc (Smart) had 27.1 million subscribers under its mainstream Smart brands, reflecting net additions of 1.4 million for 2011, while value brand Talk ‘N Text ended with 20.5 million subscribers as a result of 1.5 million net additions for the year. Smart subsidiary CURE’s Red Mobile brand had 1.4 million subscribers, while newly acquired Digitel had 14.7 million Sun Cellular subscribers. The Group’s combined postpaid cellular subscriber base now leads the market with 1.9 million at the end of 2011, 1.4 million of whom were with Sun Cellular. As of the end of February, our cellular subscriber base exceeded 65 million.

On the other hand, the Group’s combined broadband subscriber base increased by 45% from the end of 2010 to just over 2.9 million, representing net additions of 356,000 for the PLDT Group’s various broadband services. SmartBro, Smart Communications Inc.’s wireless broadband service offered through its wholly-owned subsidiary Smart Broadband Inc., continued to expand as its wireless broadband subscriber base stood at over 1.6 million at the end of 2011, over 1.1 million of whom were on SmartBro’s prepaid service. Meanwhile, PLDT’s DSL subscribers increased by nearly 100,000 from the end of 2010, bringing the total subscriber base to over 742,000 at the end of 2011, while Digitel registered an additional 551,000 broadband subscribers.

For the fixed line business, the subscriber base grew to over 2.2 million at the end of 2011 from 1.8 million in 2010, reflecting 47,000 new PLDT subscribers and 296,000 Digitel subscribers.

Service Revenues

Wireless service revenues decreased by 2% to PhP102.1 billion for 2011, compared with the PhP104 billion recognized last year. Without Digitel’s revenue contribution of PhP3.1 billion, wireless revenues would have fallen 5% to PhP99 billion as cellular voice revenues dropped 7% while cellular data/text revenues likewise fell 4% to PhP44.4 billion. Smart continues to lead the industry in terms of both revenues and subscribers.

“The acquisition of Digitel has allowed us to expand and enhance our product offerings and thereby fortify the platform that should allow our revenues to grow. We expect neither a quick nor easy transition but we will continue to refine and redefine our products and services, in both our legacy and new businesses. In the meantime, we are pleased that our network modernization program has already raised our network performance, with our subscribers enjoying a significantly enhanced customer experience,” said  Napoleon L. Nazareno, President and CEO of PLDT and Smart.

Fixed line service revenues decreased by PhP0.3 billion or 1% to PhP58.8 billion in 2011 from PhP59.1 billion in 2010 following a 2% dip in ILD, NLD and LEC revenues. Corporate data and DSL revenues continued on their growth path on the back of a 16% increase in the DSL subscriber base and an 11% increase in third party corporate data revenues. Digitel’s fixed line revenues contributed PhP700 million. Had the peso remained stable, service revenues would have been even higher by PhP700 million.

“The Home business of the Group continues its aggressive growth performance with broadband leading the way and voice services maintaining its leading position in the market. With combined strengths in products and network, we are in the best position to serve the current and the emerging needs of our residential market. The inclusion of Digitel in our product portfolio will enable us to expand our subscriber base in the regional mainstream market,” declared Nazareno.

Total broadband and internet revenues totaled PhP18.8 billion, an 18% growth rate year-on-year, including a PhP0.5 billion contribution from Digitel; broadband and internet account for 12% of consolidated service revenues. Wireless broadband revenues, inclusive of mobile internet revenues, increased by 13% to PhP8.1 billion, compared with the PhP7.2 billion recorded in 2010. Moreover, mobile internet usage continues to grow strongly, with Smart’s mobile internet revenues increasing by 91%, from PhP900 million at the end of 2010 to PhP1.6 billion in 2011. Smart’s mobile internet revenues in 2H2011 were in fact 82% and 29% higher than revenues in 1H2010 and 1H2011, respectively. The upsurge is attributed to the increasing number of 3G/smartphones in the system and the availability of broadband packages and loads to suit specific customer preferences. In October 2011, Smart launched 2 Netphone models in the $100-200 price range and in December 2011, Smart added the iPhone 4S to its lineup. PLDT DSL generated PhP9.5 billion in revenues for 2011, up 15% from PhP8.3 billion in 2010.

Orlando B. Vea, Smart Chief Wireless Adviser, said, “As smartphones become more pervasive and more affordable, more Filipinos are able to access the Internet and social media. Clearly, we have built the most advanced network in the country. This translates to an enhanced experience and mobile lifestyle for our subscribers, most especially so for mobile Internet users.”

In 2011, the Group consolidated its business process outsourcing operations, consisting of knowledge process solutions (KPS) and customer interaction solutions (CIS) under SPi Global Solutions Inc (SPi). KPS and CIS had previously been under ePLDT, along with other ICT businesses such as data center operations, which have since been transferred to the Fixed Line business. SPi reported service revenues of PhP8.6 billion in 2011, an increase of 6% compared with 2010. KPS increased by 13% and 8% in US dollar- and peso-terms, respectively, while revenues from CIS rose 2%, with domestic sales registering a strong 10% growth.

About 86% of SPi’s revenues are dollar-linked – had the peso remained stable, service revenues for the period would have increased by PhP308 million.

Group Synergies

The recently completed review of Digitel’s operations brought to fore a number of areas for synergy, especially in the area of network, which will provide opportunities for savings in both capital expenditures and operating expenses as well as potential for incremental revenue generation. To date, those that have been identified are as follows:

• Capital expenditure optimization and cost  efficiencies which are expected to reduce capital expenditures by PhP8 billion for 2012;
• Site sharing/site consolidation which are expected to generate savings in excess of PhP500 million in annual operating expenses when fully implemented;
• National roaming which will increase Sun’s 2G coverage from 59% of all cities and towns to 100% and Sun’s 3G coverage from 6% to 60%;
• Access consolidation and transport integration/expansion which will upgrade the service quality of Digitel’s fixed line subscribers;
• Core optimization which should improve Internet experience for Digitel subscribers; and,
• Service resiliency and diversity which will further strengthen the PLDT Group’s network in terms of reliability and service continuity.

Clearly, Smart and Digitel combined have the largest and most pervasive network in the country with 10,482 cell sites, 14,876 cellular/mobile broadband base stations and 4,918 fixed wireless broadband-enabled base stations. Other areas that are being explored include marketing and distribution. Smart has in fact just launched various “tri-net” products that offer “all-net” SMS and “tri-net” call buckets in various durations and denominations.

Conclusion and Outlook

“The assimilation of Digitel/Sun Cellular into the PLDT Group, and the benefits that will arise from such integration, will take some time to complete because of the Group’s size and complexity. We had earlier foreseen this. But we are encouraged by the opportunities for both synergy and growth as we gain more visibility of these opportunities post-closing. We do recognize that there will be a need for quick wins which could help efficiencies and productivity in the short-term. That said, the more significant benefits, especially to our bottom line, will take time to realize. We therefore expect  2012 to be a year of alignment where we will implement a number of requisite changes – the positive effects of which are expected to be medium-term in nature simply because these will be permanent and long-lasting. Accordingly, we are guiding our Core Profit for 2012 lower at PhP37 billion. I am persuaded though that this figure is the bottom of this unavoidable period of integration and alignment, and we will find ourselves back on an upward growth curve starting 2013,” concluded Pangilinan.