PLDT Inc. Q3 FY2021 Earnings Call

For today's presentation, we have with us our Chairman, Manuel Pangilinan; Mr. Al Panlilio, our President and CEO; Ms. Anabelle Chua, Chief Finance Officer and Chief Risk Officer; Mr. Shailesh Baidwan, President of Voyager Innovations and PayMaya Philippines; as well as other members of the PLDT management team. At this point, let me turn the floor over to Mr. Panlilio to begin the presentation.

Thank you, Melissa, and good afternoon to everyone. I appreciate you joining us for this call. I will share some highlights from our Q3 and nine-month performance before passing it along to Anabelle for a detailed financial discussion, followed by SB covering PayMaya and Maya Bank. I'm pleased to announce that for Q3 2021, PLDT-Smart achieved a performance of PHP7.9 billion, the highest this year. This is an increase from PHP7.5 billion in the first quarter and PHP7.7 billion in the second quarter, resulting in a PHP786 million growth, which is an 11% increase. Additionally, our net service revenue for the third quarter reached an all-time high of PHP46 billion, which is PHP2.3 billion more than the same period last year, reflecting a 5% growth, while expenses amounted to PHP21.5 billion, a 3% increase, or PHP0.5 million. Our adjusted EBITDA also hit a record of PHP24.5 billion for the quarter, surpassing last year's performance by PHP1.7 billion, representing an 8% rise, maintaining a 51% margin. As of the end of September, for the first nine months, we recorded PHP23.1 billion in Telco Core income, an increase of PHP2.1 billion or 10% from the previous year. Our service revenues reached PHP135.9 billion, marking another all-time high, while expenses totaled PHP64.8 billion, and adjusted EBITDA stood at PHP71.5 billion, up 8% or PHP5.1 billion compared to last year. I want to highlight some key areas we focus on. First, we've seen a strong performance in the Home segment, with a revenue rise of 25%, driven solely by our PLDT-Fixed business. Specifically, our fiber revenue increased by 17% year-on-year. By the end of September, we recorded a record high of 114,000 installations, which surpassed January 2020 figures of around 33,000. We also exceeded this number in October, achieving over 120,000 installations. We are committed to serving the underserved market, and we aim to reach at least 1 million new fiber subscribers by the end of the year. In the wireless sector, we've faced numerous challenges this year due to lockdowns that affected customer mobility, but we're anticipating modest growth, with 80% of our revenue coming from data. Since Q4 2020, we've seen a 20-fold increase in 5G traffic, and we reached 1 million fixed wireless subscribers in September. For our enterprise segment, we made significant advances in the third quarter, reporting PHP10.7 billion, the highest ever for the enterprise sector, boosted by our ICT business with cloud and colocation revenues from data centers growing by 26%. Our integrated telco business continues to thrive as we enhance our network capabilities. We have the most extensive fixed network in the Philippines, with 615,000 kilometers of fiber, a 17% increase since June. We have now passed 12.7 million homes, which represents about 50% of total households in the Philippines, and we see substantial growth opportunities in the Home business. From these homes, we have 5.29 million available fiber ports, a 30% increase. In mobile, we are strengthening our presence with 6,400 live 5G base stations, a 96% LTE network coverage, and a total of 72,000 base stations. We are also making progress with our roaming arrangements in anticipation of renewed travel. Our fixed network is recognized as the fastest in the country, and we have been acknowledged as the most reliable 5G network by Ookla, standing as the only Filipino telco in the Global Leaders for 5G Experience. Alongside our integrated telco initiatives, we continue to build the PLDT ecosystem to support our future growth. GIGA Life is our digital platform for wireless customers, now with 10 million registered users and 6.25 million active users. PayMaya plays a crucial role in driving broader financial inclusion, and with our newly acquired Digital Bank License, we are on a vital path in that direction. From a people and culture perspective, it's worth noting that 95% of our workforce at PLDT and Smart is fully vaccinated, and we are also vaccinating dependents and household members. Now, I'll hand the floor to Anabelle.

Thank you, Al. Good afternoon, everyone, and welcome to our 9-month results presentation. As Al mentioned, total service revenues for the 9-month period reached PHP135.9 billion, reflecting a 7% increase year-on-year. This comprises approximately PHP65 billion from the Individual segment, PHP35 billion from Home, and another PHP35 billion from Enterprise and International combined. In terms of year-on-year growth, we observed a PHP9 billion increase, primarily driven by Home, contributing PHP7 billion of that uplift. Specifically, our fiber-only segment within the home business is experiencing significant growth, soaring at 78% year-on-year with an increase of PHP10 billion for the period. Alongside the PHP7 billion decrease from Home, we've also seen a PHP2 billion rise in our Individual business, which has grown by 3% compared to last year, and a PHP600 million increase from our Enterprise segment, showing a 2% year-on-year growth. Looking at the revenue progression over the 3 quarters of 2021, third-quarter revenues increased to PHP46 billion from PHP45 billion in the second quarter and PHP44.8 billion in the first quarter. This represents a 5% growth compared to the same period last year, which is equivalent to PHP2.3 billion. Notably, the Home segment demonstrated a strong 29% increase in revenues during the third quarter compared to the same timeframe last year, while the Enterprise segment also posted a 2% growth, reaching an all-time high of PHP10.7 billion for the quarter. Meanwhile, the Individual segment is facing challenges due to limited mobility during the pandemic, impacting consumer spending and introducing increased competition in the market. However, the group achieved a record high of PHP46 billion in revenue for the third quarter this year. As we analyze the data and non-data revenues, our data revenues have increased by 14% year-on-year, accounting for 76% of the total service revenues for the 9-month period. For the quarter, data revenues represent 77% of total revenues. Within the PHP104 billion in data revenues, mobile data constitutes about half, showing a 9% year-on-year growth, while home broadband achieved PHP31.5 billion, marking a 32% increase year-on-year. Corporate data and ICT registered around PHP20 billion, with improvements of 4% and 11%, respectively. When reviewing the full P&L for the 9-month period, we noted EBITDA rising to PHP71.1 billion, resulting in an EBITDA margin of 51%. This is an 8% increase, equivalent to PHP5 billion compared to the same period last year. Although depreciation and amortization expenses along with financing costs have slightly increased due to our investments in network CapEx, our Telco Core income stood at PHP23.1 billion, reflecting a 10% or PHP2.1 billion increase over the PHP21 billion reported last year, aided by lower income tax rates due to the new law. Throughout the three quarters, our cash OpEx has remained relatively stable, ensuring that the EBITDA for the third quarter benefited from the higher income figures, leading to an EBITDA outcome of PHP24.5 billion, another all-time high for us. Our Telco Core income has progressively improved over the quarters, reporting PHP7.5 billion, PHP7.7 billion, and PHP7.9 billion in the third quarter. In terms of our total subscriber base, we have reached 77.8 million customers across mobile, broadband, and fixed-line voice businesses, including almost 3.8 million broadband customers, around 1 million in fixed wireless, and 2.8 million in fixed services. Our fiber segment saw an increase of 800,000 customers in the 9-month period. Notably, we recorded an average of 114,000 new connects in the third quarter each month, surpassing the previous records, and even achieved approximately 120,000 new connects in October. Unfortunately, our Individual wireless business is facing some challenges due to pandemic-related restrictions, which have limited mobility and impacted service demand. Furthermore, tighter consumer wallets from job losses and increased competition from Globe and Dito are noted. However, our data usage remains robust, with 40 million data users by the end of September, averaging 7.9 GB per month, with a 16% rise in data traffic over the 9-month period. Moving on to the Home business, we see upward momentum in installs that have accelerated revenue growth, with third-quarter revenues reaching PHP12.6 billion, an all-time high with PHP9 billion from fiber revenue. The overall market performance shows almost threefold growth from early 2020. In the Enterprise sector, despite the ongoing pandemic challenges, we have witnessed significant growth, including wins through our SD-WAN service for banking clients and government contracts, notably with DepEd. We're optimistic about the prospects from 5G, IoT, and our hyperscaler data center business as we plan the 11th data center with substantial capacity. Recapping, our revenue increase of PHP9 billion corresponds to an EBITDA growth of approximately PHP5 billion, with provisions lower this year, although we incurred higher cash, CapEx, and subsidies. Also, depreciation and financing costs increased due to our network investments, but our benefits from reduced income tax rates, as per the CREATE tax law, helped balance this. We have recorded 5 consecutive quarters of EBITDA growth, hitting PHP24.5 billion for the third quarter and achieving a record EBITDA margin of 52%. Our Telco Core income reflects a consistent upward trend, positioning us well to achieve our full-year guidance. On the balance sheet, net debt stood around $4.5 billion at the end of September, with most maturities well spread out. We have managed our average cost of debt to 4.37%, with a net debt-to-EBITDA ratio of 2.4x, slightly elevated due to CapEx and investment cash flows. For the 9-month period, CapEx totaled PHP63 billion, with a year-end guidance of PHP88 billion to PHP92 billion, leaning towards the lower end of that range. A significant part of the expenditure has fueled growth in Home and Broadband installations. We are also actively expanding our cable capacity and expect the Jupiter Cable Systems to enhance our international data traffic capacity significantly in early next year. On our network side, we have reached more than 12.7 million homes capable of connection. Currently, we have 5.3 million active ports, and we expect to build an additional 500,000 by year-end. Our fiber infrastructure is unmatched in the country, with 650,000 cable kilometers deployed—a 43% year-on-year increase. For our wireless operations, we have a total of 72,600 base stations covering 96% of the country and have begun our 5G rollout. Our current 5G active devices stand at about 760,000, which is expected to grow as more affordable handsets enter the market. Recent data traffic shows growth, with the average mobile download speed leading the market at 51 Mbps. We are also proud of our network performance, as shown in various metrics where Smart outperforms competition in multiple dimensions. In summary, our PayTV affiliate, Cignal, has reached 3.77 million subscribers, an annual increase of about 1 million, largely due to the closure of a major competitor. Financially, service revenues increased to around PHP7.5 billion, with notable growth in EBITDA and Core income. Now, I will hand it over to SB or Shailesh for the PayMaya digital bank discussion.

Thank you, Anabelle. If we can go to the first slide, please. So just to remind everyone, at PayMaya, we are a digital financial ecosystem, where we serve consumers, we serve enterprises, and we serve communities across our 3 businesses in PayMaya. Whether you're a first-time account holder or someone who wants the payment convenience of doing this digitally, we have our consumer business or our PayMaya digital wallet. Whether you're an MSME looking to sell goods out of their house or a large enterprise needing an omnichannel payment acceptance solution or government, we provide that through our merchant acquiring business. And if you're not quite ready for your own digital journey yet, but you still need to do bills payments, and money, top up your airtime, you can go to our on-ground network on Smart Padala and do that. So we are able to move people seamlessly between online and face-to-face. We are able to unite the consumer and the enterprise part of the business in a unique way, which creates value propositions and a dataset that's very rich and unique to us. And now we've got the Maya Bank license given to us by BSP. Some key metrics of our performance throughout the course of 2020, 3 quarters. Our number of registered customers across our consumer, both on the wallet side and our on-ground network is now at 41 million, which is a 2.7x growth over where we were at the start of 2020. When we look at our 3 businesses, and we add that up, the gross transaction value will grow by over 50% through the course of 2021 versus last year. And when we look at our enterprise business, where we are processing payments, providing merchant acceptance solutions, we are the #1 in every day category whether in pharmacy, gas, or online. And we continue to add to the number of digital touch points in the country to enable them for digital payments and processing. Today, we have over 380,000 of those. Can we go to the next slide, please? So just on the wallet side, the PayMaya wallet makes it extremely easy and convenient, whether you're a first time ever user of financial services to download eKYC and set up your wallet all in a span of seconds. And with that, you can then put in cash easily into the wallet so that you can start using it. So we have created the largest touch point of over 90,000 locations where you can add cash to your wallet. A number of those are accessible to you at free-of-cost to make it extremely convenient. And then, of course, you want to use your wallet for sending money but also for paying your bills, buying goods and services and by making sure that we make those available in the wallet with one of the most extensive sets of billers, digital items to purchase, or goods to buy within the app itself. On the next slide, please. On the enterprise side of the business, this is where the enterprise is our client. We want to make sure that we are able to provide them a one-stop shop, whether you're online, face-to-face, or omnichannel. We process Visa, MasterCard, JCB, BancNet, QR, all kinds of transactions, whether it's the government or a micro-merchant or a very large enterprise. We've seen massive growth in this business. The number of merchants that we have enabled with points of acceptance has grown by 220% year-on-year. In fact, as part of our expansion and embracing the common QR standard in the Philippines, 160,000 of our merchant locations are now enabled to accept QR. We continue to grow this business with transactions growing at over 100%, and we are pretty much today the de facto provider of payment solutions for government; for everyday categories across pharmacy, gas, fast food, QSRs and the likes of that. Our third key business, if you go to the next slide, please, is on Smart Padala, our on-ground network. This has expanded rapidly from about 30,000 that we had as of last year to 60,000. This network now covers pretty much the length and breadth of the Philippines. People can walk in customers, walk over there to send money, buy a time load, pay their bills, and the like. And we're expanding that now with this network being able to receive your international remittances directly from Western Union, and we also started our first loan product of lending, providing short-term working capital to this base through the course of 2021. If you go to the next slide, please. So that's our core business. And what we absolutely know is that people look at our digital solutions to the other payment side as convenient, accessible, as something that they can reach out to and use for their everyday transactions. Now we have the BSP license as the 6th awardee of the digital bank license. Maya Bank now brings the credibility of being a bank to our payment network. And between the two of them, we create an absolutely compelling and unbeatable value proposition. We have the customer base, as I mentioned to you, 41 million across PayMaya, and we have 1.2 million MSMEs that we can tap into. And when we marry that with the data that we already have today of customers and enterprises and bring with that the ability to create a digital customer interface that will be seamless and create new products that are relevant across lending and deposit taking. And as Al mentioned earlier, our ability to tap into the MVP network, Smart, PLDT to provide lending products, deposit products is something that gives us access to an even larger base for us to grow out this unique combination and unbeatable combination of PayMaya plus Maya Bank. That is the update that I had. Over to you, Mr. Chairman.

Thank you, SB. My role here is to give an outlook for the full year 2021, starting with Core profitability. Anabelle has confirmed our profit guidance of PHP30 billion for the year. We anticipate EBITDA to reach around PHP96 billion, reflecting over 10% growth. As Anabelle mentioned, we expect CapEx to be around PHP88 billion, on the lower end of our previous guidance. Dividends will remain at 60% of core profits, influenced by cash flows and full-year profitability. Regarding PLDT's share price, it's been increasing recently, and we feel that PLDT is undervalued. To illustrate, Convergence’s market value is about PHP235 billion, while ours is between PHP350 billion and PHP355 billion. This gives a difference of about PHP120 billion, assuming the value of Home broadband is aligned with Convergence, even though we believe we are significantly ahead in that sector. Our revenue from fixed home broadband is nearly double that of Convergence, and we have seen strong growth that we expect to continue for several years. The PHP120 billion difference reflects the value of our wireless and enterprise business along with some revenue from our international operations. We believe the market prices should align with this valuation. We recognize that GCash has been valued at around $2 billion, but it’s unclear how much of that is factored into share prices. We are aware that PayMaya's valuation has been rising as well, with our last fundraising valuing it at approximately $747 million earlier this year. The landscape has been changing, especially with the approval of a digital banking license for PayMaya. We expect this segment to grow even more rapidly next year. Now, let’s move to questions. Thank you.

We're now ready to take your questions. The first one we received is from Arthur Pineda of Citibank. Can you please provide any insights on how mobile revenues have trended on a monthly basis in July, August, and September? And are we seeing any improvement in October with the lifting of the ECQ?

Go ahead.

Yes. Over the past three days, we've noticed a slight increase in top-ups. The rise in mobility appears to be positively impacting these top-ups. Although they haven't reached our desired levels yet, there is an upward trend. We believe that as the economy continues to open up, mobility will gradually increase, leading to further growth in top-ups. We're also observing a boost in postpaid activations. With malls reopening, we've seen more visitors, which is resulting in more people entering stores to acquire their postpaid lines.

Great. The next question is on Maya Bank. Are there any targets on the digital bank front that can be disclosed?

We definitely want to first work towards launching it in record times. So we're looking at early part of next year to launch Maya Bank. Although the BSP gives us a year from giving us the license, but we want to get there fast. We would ideally at least be looking at 1 million customers that we will be providing deposit services, and 1 million customers that we will be providing loan services to. And then from there, we continue to build out with access to the existing set of customers on MSME and retail consumer side that we have, and of course, across the MVP PLDT ecosystem.

Related question of PayMaya from German de la Paz, Abacus Securities. What is the dollar amount of expected GTV for PayMaya in 2020?

We won't share that number just ahead. We are looking at still growing the business, launching a number of new services. So we're talking about growth, like we said this year. And our GTV's very different. If you look at the merchant acquiring business, as you can imagine, the GTV of that is very different from a GTV of a wallet; it's very different from a GTV that will be there from a banking customer. So we're looking at a growth of ending this year at 50% over last year, and we want to pass on that trajectory even further and potentially look at doubling our growth through the course of 2022 over 2021.

Again, from German de la Paz. Just to clarify, PayMaya evaluation from the last funding round was $747 million, when was this?

When we raised the last within investors was in June this year. So this was the most money valuation.

And lastly, may I ask for PLDT's stake in PayMaya?

38.5%.

There's a question. Is the group looking at Starlink or low satellite as an option to enhance data network, or will you focus on using traditional towers in these stations?

Yes. We also that is satellite, but we will be using more of the traditional at the moment. But there are certain opportunities where this satellite and where revenue is in discussion with them, as we speak.

I just may add, I think we are working with various satellite companies since a number of years already. Starlink is just one option. They have a very specific solution, which enables existing phones to connect to satellites. So that could be very interesting in particular in areas where we do not have coverage, rural areas, islands, and so on and so forth. So it will be a tool in our toolbox, but not necessarily carry a large part of our traffic.

Your next question comes from Tekwani Morales of IGC Securities. Congratulations on the results. My questions relate to the broadband business and are as follows: Does the company have a target date to complete the migration from copper to fiber, and with 100,000 plus new fiber connections per month, be sustainable after completion of the migration?

The first question was about the timeline for completing the migration from copper to fiber. We expect to finish this migration in the first quarter of 2022, and we are on track with that schedule. Regarding demand, our current monthly volume is over 100,000, which we anticipate will remain sustainable. The 114,000 connections we reported in September were only for new customers and do not include any from the copper to fiber migration. If we factor in the migration, that adds another 23,000 connections. Therefore, we see the copper to fiber migration as additional capacity. Once the migration program is completed in the first quarter of next year, we plan to use this extra capacity to connect more new customers to our fiber network.

Related question on Home broadband. How much larger can the Home broadband margin be?

Look, I think if you have a look at fixed line and broadband penetration in the Philippines, the market for fixed line broadband penetration is still quite low. Depending on the number of subs count, if you look at, it's somewhere between 20% and 25%. If you look at other ASEAN markets, fixed broadband penetration is somewhere between 50% and 60%. I think the last time I checked, Vietnam was already sitting at about 60%, with other markets like Thailand sitting at about 48%. So clearly, when just on a desktop exercise perspective, if you look at that, there is still a significant amount of growth available for fixed broadband penetration in the Philippines.

Next question is from MNP. Could you provide additional color on MNP?

Yes, just on MNP, I think we've got the initial numbers that there are more gross adds to Smart compared to Dito and Globe, but really, the numbers are still very small. Nothing to really talk about. I think the problem is that it's scaling that switching program. I think it's been very difficult for customers to port out, and port in to a new service. So I think regulators have to help here in terms of how we can make that process easier. But yes, it's early stages, but numbers are not huge at this point.

Next question is from Ken Gotianse of ATRAM. Could you provide some color on the discussions of a possible sale and leaseback of your towers and how that will potentially affect your operations?

Well, as you know, we're undergoing a process on the sale and leaseback. Obviously, that will cover us in terms of operations and maintenance that will definitely help us. And I think it's really the value of the towers that we will sell and have that money, I guess, given to PLDT as we lease back almost at the same level of OpEx that we pay every year. But again, the advantage there is as there are more locators in those towers, we also get a discount in our leasing arrangement. So OpEx, hopefully, will go lower, but we will get value for the towers that we will sell upfront.

Let me add, we are also looking at the new build out for our towers to be through the tower companies as well. So we have an active engagement with some of the tower companies for the undertaking of the build-out for our new requirements for this year, next year. And when we look at it, there's, of course, the cash flow savings from the CapEx avoidance and the onset and even on an NPV basis to the life, there is something like 10% to 15% NPV savings for us if we undertake the build-out or the new tower rollout through the tower company share arrangement versus building it out.

The next question, what is your outlook for CapEx for next year?

Well, we're still undergoing our budget process. We have not completed that yet. We should have those figures towards our December Board meeting as we present the budget to our Board, but we don't have an indication at this point.

We have a question on our OpEx. Selling, general and administrative expenses rose by 15% year-on-year to PHP19.5 billion in the third quarter. May I ask the reason for this?

There are many factors contributing to that. Part of it is related to the ramping up of activities across the businesses. Another factor that has increased our operational expenses compared to prior years is the cost of maintaining the networks, including repair costs, due to our expanded network footprint. However, this is something we will continue to manage.

The next question is on the data center business. How big is the hyperscaler market? And when do you expect to see revenues from that?

We are still evaluating the total addressable market for the Philippines. Based on markets like Singapore, the hyperscaler data center market there is approximately PHP1 billion annually, with a growth rate in the double digits year-on-year. We believe that the Philippines has the potential to achieve similar levels in a few years. Regarding the timeline, we are already in discussions with a couple of companies. Additionally, with our new data center, we aim to secure our first anchor tenant in Singapore by the end of 2022.

There are no additional questions in the queue. Could you explain your plans for 5G?

Well, we're in the early stages of the 5G and also trying to be granular about where the users will be. So it will be a very targeted rollout of 5G for 2022, although we did have a big pickup. I mean, a big increase in 5G towers this year. We will be more granular next year matching that also with the demand and availability of handsets available in the market. So very granular on the rollout.

There are no further questions in the queue. Anybody else with questions? Otherwise, we turn the floor over to Mr. Pangilinan for his comments.

Well, thank you for joining us for this afternoon's presentation for third-quarter results. We look forward to seeing you again early next year for the full-year results. We wish you a Merry Christmas. Happy Thanksgiving. Happy Diwali.

Happy Diwali.

Thank you, everyone. Thank you.

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