PLDT Inc. Q2 FY2021 Earnings Call

Good afternoon, and thank you for joining us today to discuss the company's financial and operating results for the first half of 2021. A copy of 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. Also, a podcast of this briefing will be available on our website after the call. For today's presentation, we have with us our Chairman, Mr. Manuel Pangilinan; Al Panlilio, our President and CEO of PLDT and Smart; Ms. Anabelle Chua, Chief Financial Officer and Chief Risk Officer; as well as other members of PLDT management. At this point, let me turn the floor over to Mr. Panlilio to begin the presentation.

Thank you, Melissa, and good afternoon, Chairman MVP and colleagues in PLDT and analysts in the room, thank you for joining us this afternoon. I'm here to report the first half 2021 financial report. I have a few slides, and I will pass it on to Anabelle. Again, as you know, we continue to face big challenges, but we remain steadfast in our commitment to deliver the needs of our customers. And I am happy to report that in the first half of 2021, we ended the half at PHP 15.2 billion telco core income, which is 10% higher than the same period last year or PHP 1.3 billion in cash terms. Our net service revenues for the first half also reached an all-time high of PHP 89.9 billion, an increase of PHP 7 billion or 8.5% versus last year. PHP 45 billion was in the second quarter, which once again was an all-time high for PLDT Smart. Our expenses also grew by 9% at PHP 42.3 billion, and our EBITDA is at a very healthy PHP 46.6 billion, an increase of 8%, which translates to a 51% margin. Just some key highlights, key performance drivers for the first half. Despite the fact that the pandemic is still around and we're about to get into another lockdown starting tomorrow, and the behavior of customers is shifting towards home broadband connectivity, and the hyper-competition in the wireless space, we are still happy to report that our wireless top-up growth is at 13% year-to-date versus last year, and in revenue terms, we're still up 7% as of the first half of 2021. For our fiber net adds, which is our home, our home will be the star of the year, growing at the clip of about 23%. We have actually installed 478,000 new fiber installs and migrations in the first half of 2021. We have also grown our migration in the first half, averaging 182% as we continue to shift or migrate our ADSL customers to fiber. For our enterprise, despite the challenges that they face, especially for the MSMEs, we continue to grow our data center revenue. Colocation net service revenue is up 22%. As a whole, our data revenues now constitute 76% of our total revenue offline. So having said that, we continue to elevate our customer experience and invest in our network, creating the strongest and most extensive digital infrastructure. We have doubled our coverage in 2021 while strengthening our LTE sites. We have expedited our fiber optic rollout to address market demand. We are now close to 524,000 kilometers of fiber nationwide and continue to pass homes amounting to 11.3 million. Anabelle will show the details of our network improvement this year. We continue to increase our data center capacity with 9,100 racks available; 61% of that is already occupied, and we plan to increase the number of racks by another 800 by the end of the year, which will increase the occupancy to about 69%. For our global infrastructure expansion, we remain the largest capacity player in the country, with 16 terabytes per second capacity from our international submarine cable systems, and we are looking to expand this with three more cables, potentially doubling our capacity to about 32 to 33 terabytes by the end of 2023. Our network monitoring indicates that Smart has sustained recognition as the fastest mobile network and the fastest 5G network in the Philippines for the first half of 2021. Looking at the second half, we will focus on four key fulcrums to drive our business segments. First is ensuring the continued growth of our data products. Home will keep ramping up installations and migrations, alongside enhancing our branding efforts to ensure we reach more customers. Second is digital transformation, which has been our path since 2016, spearheaded by Chairman Pangilinan. We aim to enhance customer engagement and the overall customer experience. Our third fulcrum is continuing to improve customer experience and efficiency across operations, which will lead to a transformative culture where every PLDT Smart employee serves as an ambassador for our brand. Lastly, our fourth focal area is sustainability, with initiatives like carbon footprint reduction and introducing electric vehicles into our fleet. The success of these efforts will rely on the transformation of our people and culture, and we will continuously monitor and measure their progress moving forward. We are also dedicated to CSR initiatives, education, disaster resilience, and pandemic response. For instance, we have offered 100,000 AstraZeneca vaccines to various LGUs and our outsourced partners to ensure that our service delivery continues safely. You may also be aware that our employee vaccination program is underway, with over 10,000 employees vaccinated as of July 24, and we aim to vaccinate a greater proportion of our staff. That's it for me, and I will pass on to Anabelle to continue the presentation.

Hi. Good afternoon, everyone. Thank you for joining us this afternoon. Let me run you through the details of our financial results for the first half of the year. We have seen increased revenues of 8% in the first quarter, and our second quarter revenues have also risen by 9% to PHP 45 billion, bringing our total for the first six months to PHP 89.9 million, which is an 8.5% increase of PHP 7 billion. The individual business continues to be our largest customer segment, growing 7% year-on-year to reach PHP 43.8 billion in the first half of the year. The home segment performed the best with a 27% increase in the second quarter, combined with a 23% growth in the first quarter, contributing PHP 4.2 billion to total revenues and hitting PHP 22.7 billion. The enterprise segment, despite the various challenges, still shows a healthy 2% year-on-year increase. However, the international segment, which constitutes the balance of our revenues, is down by 8% owing to the pandemic's impact on travel. With the 8.5% increase in revenues, we saw our EBITDA grow by 8% to PHP 46.6 billion, yielding an EBITDA margin of 51%. On a telco core income basis, our telco core income for the first half of the year is at PHP 15.2 billion, a good 10% higher than last year. When reviewing our revenue trajectory over the last ten quarters, we started 2019 with approximately PHP 38 billion in revenues, and today we reached PHP 45 billion for the second quarter, marking a record high for PLDT's quarterly performance. Analyzing the revenue split between data and non-data revenues reveals that data continues to be a key growth driver; it has increased by 16% in the first half of the year. The growth from data predominantly came from mobile data contributing PHP 35 billion out of PHP 68.3 billion, up by 12% driven by increased smartphone penetration and data usage. Home broadband has also risen by 32% to PHP 20.3 billion in the first half of the year. Corporate data revenues reached PHP 10.7 billion, with ICT revenue contributing PHP 2.3 billion. The individual business is thriving despite the pandemic, with first-half revenues up by 7% year-on-year. Mobile data traffic increased by 17% from last year as well. We continue to promote our GIGA Life app, which includes a GIGA Pay feature in collaboration with PayMaya. To look at the Home revenues over the last six quarters, the quarterly growth is evident. With the migration from legacy voice and DSL to fiber, we expect our fiber subscriber base to grow by 1 million to 2.4 million by year-end. In the enterprise sector, opportunities continue to emerge despite economic challenges. We’ve recently secured multiple deals that are expected to reflect in the second half of the year. Although international revenues experience downward pressure due to travel restrictions, we have identified bright spots in certain segments. The overall subscriber base for PLDT Smart stands at 78.4 million, excluding our 3.6 million Cignal pay TV subscribers. Notably, mobile subscribers amount to 71.7 million and broadband subscribers close to 3.5 million. During the first quarter, we averaged about 80,000 new broadband connects per month, which increased to about 90,000 per month by the second quarter. Currently, in July, we are approaching 100,000 monthly new connects and anticipate surpassing that milestone shortly. Our fiber-only net adds of 478,000 include migrations from copper, contributing to a decrease in copper DSL numbers. In terms of the fixed broadband subscriber split, approximately 1.77 million are fiber while about 770,000 consist of a combination of copper DSL and DvDSL. Overall, we remain optimistic about our revenue trajectory, given that our telco income for the first half of the year has benefited from a lower corporate income tax rate under the CREATE tax law while managing higher depreciation and financing costs due to our ongoing investments in the network. Our gross debt currently stands at approximately USD 4.87 billion, with net debt at about USD 4.32 billion.

Let me now read some of the questions that we received via email. The first set of questions are from Arthur Pineda. Mobile revenues are slightly softer compared to the previous quarter. Do you attribute this to macroeconomic factors, or do you think competitors like Globe and DITO are capturing more market share? I am curious if the new entrants are disrupting growth or if consumer spending is simply sluggish.

I think there may be factors that we have to consider. First of all, I think I mentioned earlier that the change in behavior of our customers is significant — we are starting a lockdown again tomorrow. Mobility is the one area that is affected by the lockdowns. But up until this point, growth is being delivered by Home broadband. Therefore, we see the benefit of being an integrated telco where we offer both services. Yes, there is hyper-competition happening in the market, with very aggressive pricing that we are a bit concerned about. It’s very saturated, and certainly DITO is positioning themselves with claims of having 2 million subscribers. The question remains how many are active. However, at the end of the day, after demonstrating our major investments in network and the customer experience we wish to provide, we believe that the best experience should dominate in the long term.

Arthur's follow-up question is, how do you see the early trends into July and August in terms of consumer spending? Are people reducing spending levels?

There is certainly an impact due to job losses resulting in an affordability issue, which I believe is leading to attractive prices in the market. People are gravitating towards offers with lower price points. Additionally, many mobile customers are now sharing a single broadband connection at home, meaning that multiple users are relying on one service. Hopefully, with more widespread vaccinations, we will see an improved economy, allowing for mobility to return and increased growth for wireless top-ups.

Next set of questions comes from Gio Dela-Rosa of Regis related to the news about the spinning off and selling our tower assets. Would you care to comment on the veracity of this? PLDT used to view them as strategic and thus not open to selling them. Has that view changed, and would PLDT consider the possibility of REIT-ing them?

Let me take the question. Previously, we valued our network elements highly and were not open to external negotiations regarding these assets. However, given recent circumstances, we are now open to discussions. We have begun preliminary discussions with banks for a potential sale-leaseback arrangement concerning non-strategic towers within our network. We are exploring various global tower operators and private investment equity firms interested in this opportunity. Consequently, our stance has evolved, and we are indeed considering a sale-leaseback for a portion of our towers. However, nothing has been finalized. Today, we presented this possibility to our Board and will further esit on this topic at our next Board meeting.

The next question comes from German de la Paz of Abacus Securities. Would you have any comments on MNP and its effectiveness by September 3?

We are looking forward to the implementation of Mobile Number Portability (MNP) and are well-prepared for it. Overall, it's beneficial for customers as it provides them choice on a preferred network while retaining their phone numbers. Many of my colleagues inform me that they wish to switch but retain their existing numbers. Therefore, providing better options is key.

The next question is from Miguel Ong of Papa Securities. What are the potential constraints or challenges for satellite broadband? Will this require higher price points in plans or global offerings? And are there any patents to state that only offerings in the mobile suites?

We are still in the early stages of exploring satellite broadband partnerships. We have signed an MOU and need to evaluate the technological viability of bringing this service to the country. Our commitment remains aligned with the aim of connecting every Filipino. Given that we have over 7,000 islands, some of which are only reachable via fiber, we view satellite solutions as a potential pathway, provided they can deliver affordability and compatibility with mobile devices.

The second question, are there any plans to introduce data-only offerings in the prepaid mobile space?

Yes. We recently launched Smart Bro as a fully data plan option.

On the CapEx of PHP 90 billion, would it be adjusted according to operating cash flow, such that the company would still be able to maintain positive operating cash flows?

The EBITDA for the year may surpass PHP 90 billion. However, we also anticipate that operating cash flow will continue to improve in alignment with the returns from our CapEx investments. Hence, while this year’s CapEx is quite high due to investments in various areas such as 4G, 5G, fiber optic ports, and transport, we believe that next year we should be able to reduce CapEx expenses closer to previous year's levels. We will focus on optimizing network quality to enhance customer acquisition and increase revenue while managing cash flow effectively.

On Slide 13, the fixed broadband subscribers, specifically fiber-only, noted 478,000 net additions in the first half of 2021. Is this included in the 511,000 gross additions for that same period?

The 478,000 is a net figure. The total adds show 265,000, which indicates that the difference represents a net reduction in copper DSL figures.

A related question on the fiber net adds from German de la Paz. Regarding the 478,000 fiber net adds, how many of these were conversions from copper and how many are new customers?

About 120,000 of the net adds were upgrades from copper, which averages approximately 21,000 migrations per month in the second quarter. Jeremiah can probably provide the exact numbers.

107,000, Anabelle. So you're very close.

107,000, yes. But from a broader perspective, our aim in showcasing the total subs and additions to fiber is to recognize the new connections as well as the migrations from DSL to fiber. While these migrations may not generate immediate revenue impact, they create opportunities for PLDT Home to market upgrade plans and push more content. The experience with fiber is fundamentally different from DSL. From an additional perspective, both net adds and upgrades influence revenue, and we can provide those data points as needed.

Still on the subscriber base for fixed broadband. With your current subscriber base, what is the share or split between copper and fiber?

Out of the roughly 2.5 million subscribers, about 1.77 million are fiber, while approximately 770,000 consist of a combination of copper DSL and DvDSL.

The next set of questions comes from an analyst at BPI Securities. Congratulations to the PLDT team for another strong set of results. The first question is about data yields. In the previous earnings call, management mentioned the strong performance of the value brands for mobile. Are you noticing any recessionary effects from the pandemic that might be impacting mobile consumption and potentially builds?

I think...

Speak louder. I can't hear you.

I'll read the question again. Could we get color on what you're seeing in terms of data and yields? In the previous earnings call, management noted the outperformance of the value brands for mobile. Are you seeing the recessionary effects of the pandemic weigh on mobile consumption and perhaps yields?

It's not primarily due to economic effects but rather the pace of data usage growth outstripping revenue growth. Thus, we have seen some compression in the yield. The current yield stands at PHP 21 per GB in the first half compared to PHP 22 per GB last year. This is on the foundation of 39.4 million active mobile data users consuming over 7GB per month. Moreover, our data revenues for mobile increased by 12%, while traffic has grown by 17%.

Second question, with the 182% growth in migrated subscribers and ramp-up in gross connects in the second quarter, what pace do you expect for the migration of the remaining ADSL customers? Are we still looking at the end of the year? Or should we expect a faster pace of migration?

We intend to expedite the migration process for ADSL customers; our goal is to eliminate ADSL subscriptions entirely by the end of the year, with about 80,000 still remaining as of now.

So PLDT will be on equal footing with competitors claiming they are entirely fiber for home broadband.

A follow-up question from Fullerton is whether the 2021 CapEx is the peak level.

Most likely, yes.

For the total year, yes, most likely.

The last question is from Myles Aniceto of SB Equities. Do you see the growth in wireless and fixed line segments somehow offsetting the depreciation of the peso on PLDT's net foreign currency denominated debts?

Regarding our unhedged debt, it has been reduced to 5%, which diminishes its impact compared to previous periods. Additionally, our revenues are predominantly peso-based now, in contrast to earlier periods when international settlement constituted a more significant portion of our PLDT operations.

Also from Myles, do you see a sustained growth in your EBITDA margin to help maintain your competitive advantage in the long run?

Certainly, benefits associated with scale become evident as we expand. Our goal is to replicate that while undertaking initiatives for operational efficiency. We believe ample opportunities for productivity improvements remain through increased automation and digitalization, along with several areas for cost optimization.

The next question is about Voyager. Post-money valuation of Voyager implied by the most recent funding round, how much is PLDT's stake now?

We are not prepared to disclose that number. However, we recently invested an additional $25 million, and we now own approximately 38.5% of Voyager. The general plan is that potentially within the next two years, Voyager could become an IPO candidate.

So we remain Voyager's largest shareholder.

Next question, congrats on a strong set of wireline numbers. Any color as to why PLDT adjusted broadband plans recently, the speed boost in the 1,699 plan and the price cut on the 5000 Mbps?

We continuously evaluate the plans we have in the market to meet our customers' needs effectively. It's essential that our offerings remain competitive and directly relevant to various use cases. We have observed a significant uptick in demand for higher speeds from customers working or studying from home, leading us to assess our pricing and data offerings.

Next question is also related to fiber. Where geographically are the new FTTH connections strongest?

We are seeing strong demand for FTTH connections throughout the country, whether in Luzon, VisMin, or GM. The pandemic has significantly impacted all regions, increasing the necessity for reliable connectivity, and we continue to expand our footprint to meet that demand. To specify, we have close to 500,000 ports available in both the Visayas and Mindanao regions.

We're at the final question now, so please enter any questions you might have in the Q&A section. This question comes from Rachelleen at Maybank. When do you anticipate Voyager will begin to show positive income growth?

We are aiming for profitability by 2023 as we expand our service offerings, including higher-margin products such as lending.

A question on hyperscalers. Any update on the hyperscaler interest?

Regarding the hyperscaler market, there is significant interest. We have successfully closed opportunities with two major hyperscalers now colocated in our VITRO Makati data center. Additionally, we are engaging with several global cloud providers and working closely with the government to build the Philippines into a hyperscaler hub in Asia. This growth may necessitate building a new data center; we are currently in the assessment phase given the scale's potential—projecting around 30 megawatts.

There are no further questions.

Do you want to add to it?

Well, I think we should add a bit more color. As a general point regarding hyperscalers, this is potentially a new growth avenue. It all depends on how significant it can be for Enterprise. PLDT has a competitive advantage through its international facilities and existing data center scale. Geopolitical factors are also influencing this situation. Hyposalocyte trends suggest that some hyperscalers are hesitant to establish operations in regions like Hong Kong due to governance issues and the recent regulatory limitations on data center growth in Singapore. As a result, this places the east coast of the Philippines in a prime position for data center installations, especially with the current government’s commitment to becoming carbon-neutral. This scenario also benefits from our relationship with Meralco, whose focus on renewables is critical for data centers, making it a potential area of significant growth for our business.

We don't seem to have any more questions in the queue. If there are no further questions, we'll now turn the floor back to Mr. Pangilinan for closing remarks.

Well, I think there was a question asked about the satellite. It's primarily a niche market rather than a mainstream broadband solution. We explore it because Cignal is a significant consumer of satellite capacity, offering the potential to deliver broadband in remote Filipino areas. However, it’s costly, both in transformation and service, and won’t likely replace traditional broadband for the foreseeable future. Nonetheless, should the need arise for rural education efforts, we are equipped to provide essential connectivity. Thank you for joining us this afternoon. We look forward to connecting again regarding our third-quarter results. For the second half, enterprise growth looks promising based on transactions from the second quarter, and PLDT Home has also shown significant momentum. July and August figures appear strong, indicating that PLDT Home could contribute as much as 60% to the overall revenue improvement for the year. Conversely, we are monitoring the wireless segment as we noticed some softness in its figures, possibly due to ongoing recessionary pressures. The degree to which this affects us is uncertain, but the emerging competition raises concerns about price-driven market behaviors. We must watch this closely, as maintaining market share is crucial.

That concludes today's briefing. As always, should you have any further questions or clarifications, please reach out to PLDT Investor Relations. Thank you for your participation. Stay safe.