Remarks at the 2013 PLDT Annual Stockholders Meeting

By Napoleon L. Nazareno

President and Chief Executive Officer

PLDT and Smart Communications, Inc.

MR. CHAIRMAN,

BOARD OF DIRECTORS,

MY FELLOW SHAREHOLDERS,

COLLEAGUES AT THE PLDT GROUP

LADIES AND GENTLEMEN

GOOD AFTERNOON!

The year 2012 was a year of transition for PLDT.  We undertook the integration of Digitel and Sun Cellular into the group.  We completed ahead of schedule our network transformation program, fortifying our advantage in the delivery of data services over our fixed and wireless networks.  Faced with intense competition, the group strengthened its position in the mobile business.  We rationalized our business portfolio leading to the sale of our outsourcing business and moved towards greater involvement in the multimedia space.

Our financial and operating results were shaped by this transition process.

Service revenues from continuing operations rose 10% year-on-year to P160.2 billion in 2012, following a 13% increase in wireless business revenues to P108.9 billion and a 4% rise in fixed line revenues to P51.3 billion.  The BPO business registered revenues of P9.1 billion in 2012.  With the intended sale of the BPO business, its financials were classified as discontinued operations.  

Consolidated EBITDA dipped by 3% to P77.3 billion mainly due to higher selling and promotions expenses and subsidies which formed part of our response to competition in the wireless space, as well as a P3.8 billion charge in connection with various manpower reduction programs. Consequently, consolidated EBITDA margin declined to 46% from 52% last year.  Excluding the MRP charge, EBITDA would have been higher year-on-year by P1.1 billion, and EBITDA 48%.

Reported net income rose by 12% to P35.5 billion in 2012.  Core net income, excluding exceptional items, declined by 4% to P37.3 billion.

Despite challenging operating conditions and a high level of capital expenditures this year, free cash flow remained robust allowing the declaration of 100% of core earningsas dividends.  A total of P172 per share was paid out to shareholders representing 2012 core earnings, consisting of P120 or 70% regular dividend and P52 or 30% special dividend.  This is the sixth consecutive year of 100% dividend payout.  The dividend yield enjoyed by PLDT’s shareholders remains one of the highest in the region.

Allow me now to cite a few highlights of 2012.

PLDT remained market leader with a combined subscriber base that grew to about 75.3 million at the end of 2012, consisting of 69.9 million cellular subscribers, 3.3 million broadband subscribers, and 2.1 million fixed line subscribers.  At the end of March this year, our combined subscriber base rose to 77 million. 

In 2012, we completed our two-year network transformation program which involved a total investment of P67 billion, and which has resulted in an unparalleled network with the capability and capacity to deliver quality service. This included the upgrade of our access networks with the deployment of single RAN or radio access networks, expansion of 3G coverage to over 70%, and 1,000 operational LTE sites. 

Almost 100% of our Metro Manila sites are with fiber and IP-ready, while 68% of our provincial sites are IP-ready. Our core network has been re-architectured to integrate the PLDT, Smart, Sun and Digitel networks.

Ourtransmission network remains unmatched by competition with 54,000 kilometers of fiber projected to reach 60,000 kilometers by end-2013 comprising our domestic fiber optic network or DFON. Our four cable landing stations provide us with our international capacity.

High-speed broadband is simply not possible to grow and sustain without an extensive, robust and resilient fiber network.  That is why PLDT’s fibernetwork advantage gives us a decisive edge not only in the traditional fixed and mobile business, but more importantly, in data which is the sunrise business of today and the future.  This has for example enabled us to rapidly roll-out PLDT’s fiber-to-the-home service and Smart’s LTE. That is why we say in PLDT that: The Future is in our Fiber.

Another milestone for PLDT in 2012 was the upgrade of the company’s credit ratings to investment grade by three major credit ratings agencies, namely:  Fitch Ratings, Moody’s, and Standard and Poor’s.  PLDT is the first Philippine corporate to achieve this.   The company’s investment grade status reflects the company’s market leadership in the cellular, fixed line and broadband businesses, as well as its strong financial profile, including high EBITDA margins and healthy leverage position.  At the end of 2012, PLDT’s net debt stood at US$1.9 billion, with net debt to EBITDA at 1.05x.  At the end of the first quarter of 2013, net debt was lower at US$1.8 billion and net debt to EBITDA less than one times.  Debt maturities continue to be well spread out.

Let me now describe to you the outlook for PLDT, beginning with our existing  businesses.  We are seeing a structural change in our revenue mix as legacy revenue streams from international and national long distance continue to decline. Cellular voice and SMS revenues remain relatively stable as the market approaches maturity. 

Broadband and data remain the bright spots for the business, growing double digit year-on-year, and as such, will be our focus going forward.

The outlook for broadband in the Philippines remains very attractive with the Philippine population entering a ‘demographic window’ where a large part of the population is young, have improving purchasing power, are literate and many are already enthusiastic users of data services.

Though smartphone penetration remains low, take-up has increased and there are signs that greater adoption may take place as more affordable handsets become available in the market.

At the end of 2012, broadband revenues for the group amounted to P23.7 billion, representing 15% of total group service revenues.  With the completed network transformation program, PLDT is well positioned to tap the potentials of broadbandand can expect a greater contribution from this business in the coming years.

As part of future-proofing the business, PLDT is pursuing an overall strategy of broadening the PLDT group’s distribution platforms and increase its ability to delivery multi-media content to its customers across the group’s broadband and mobile networks. 

PLDT is very optimistic about the potential of the pay TV industry in the Philippines, and CignalTV’s competitive advantages that can give it a strong position in the market.

As of this time, CignalTV has already signed up half a million subscribers.  CignalTV’s channel count stood at 87, of which 65 are standard definition (SD) and 22 are high definition (HD).  CignalTV is expected to be EBITDA positive in the second half of 2013.  We are now working on making Cignal TV content available to customers of our fiber-to-the home offering.  Moving forward, there will be more and more opportunity to bundle content with our cellular and fixed line business offerings. 

Let me now conclude by assuring you that 2013 is the year when PLDT returns to growth.  Our first five months’ preliminary results are already pointing in this direction. Our acquisition of Digitel and the network transformation program had a dampening effect on our 2012 financials.  However, these investments, combined with our multi-media strategy, should now put your company back on the growth path and in the best position to profitfrom the far-reachingchanges that are happening in the converging worlds of telecoms, the Internet and media.

We will continue to strive to maintain market leadership, provide superior services to our customers, deliver healthy returns to you, our shareholders, and help propel the development of our country.

Thank you and good afternoon.