Earnings Call Transcript - PHI Q1 2024

Operator, Operator

Good afternoon, and thank you for joining us today to discuss the company's financial and operating results for the First Quarter of 2024. A copy of today's presentation is posted on our website. For those who have not been to do so, you may download the presentation from www.pldt.com, under the Investor Relations section. Kindly note that this briefing is being recorded. A podcast of this event will be available on our website after the call. A QR code for the presentation is on the screen and the confirmation notices detailed to you. For today's presentation, we have with us our Chairman and President, Mr. Manny Pangilinan; Mr. Danny Yu, Chief Financial Officer and Chief Risk Management Officer; Ms. Marilyn Aquino, our Corporate Secretary and Chief Legal Counsel; Mr. Orlando Vea, Founder and CEO of Maya Philippines; as well as other members of the PLDT Group's management team. At this point, let me turn the floor over to Mr. Yu to begin the presentation.

Danny Yu, CFO and Chief Risk Management Officer

Good afternoon, everyone. Allow me to share with you PLDT's financial and operating results for the first quarter of 2024. Consolidated service revenue for the first quarter grew by 3% to ₱48.7 billion year-on-year. On a gross basis, service revenues were higher by 5% compared to the same period last year. Expenses grew moderately by 1% to ₱21.4 billion. Consolidated EBITDA rose by 5% to ₱27.3 billion with the EBITDA margin standing at 52%. Telco core income, excluding the impact of asset sales in Maya, expanded by 8% to ₱9.3 billion. The strongest growth was registered by our Individual or Mobile business, having grown 7% or ₱1.3 billion to ₱21.1 billion in the first quarter. The Enterprise segment recorded a 3% revenue increase to ₱12.1 billion. While Home segment revenue was stable year-on-year at ₱15 billion, Fiber revenues were higher by 7% or ₱900 million compared to the same period last year. In the Individual segment, mobile data accounting for 88% of the total segment revenues grew by 11% year-on-year versus segment growth of 7%, which reflected the impact of the drag from legacy SMS and voice. Fiber-Only revenues, which account for 92% of Home segment revenues, rose by 7%, while the overall Home segment revenue was stable year-on-year. Corporate data and ICT, the growing revenue streams under the Enterprise segment, were higher by 8%, stronger than the overall segment revenue increase of 3%. Service revenues for the Individual segment jumped 7% in the first quarter, reflecting strong data monetization. Blended ARPU was higher by 21% compared with a 10% rise in average usage. Other indicators of improvement in segment performance are: the increase in mobile data users to 39.4 million, an 11% growth in mobile data revenues, and a 7% rise in each of prepaid and postpaid revenues. Among the initiatives to accelerate growth are: locking in customers for longer periods, driving retention with eSIMs, growing the adoption of 5G, and structured price laddering for prepaid. 92% of revenues in the Home segment are now from the Fiber business. Fiber-Only revenues continued to improve, recording a 7% rise year-on-year to ₱13.7 billion. Home Fiber ARPU saw improvement year-on-year and remains at around the 1,500 level. Increased focus on quality of services sought to reduce churn. Fiber churn improved to 1.82% for the first quarter of the year. PLDT views that there are unserved and underserved markets in the home broadband space, including new areas and potential customers at the lower end of the market, as well as niche markets at the higher end. PLDT continues to leverage its unique advantage of having an integrated network, enabling it to offer a suite of fixed and wireless services at different price points to cater to various market segments. PLDT enjoys strong brand equity and superior network quality, making it a formidable competitor in the market. While the Enterprise segment registered a 3% year-on-year growth in the first quarter of the year, the growth from Corporate data and ICT was stronger at 8%. Core connectivity grew 2% due to higher fiber and managed IT data revenues; higher ICT revenues from cloud services; ePLDT managed services as well as technical solutions. Worth noting is the growing revenue contribution from A2P or application-to-phone services, which are SMS OTP or one-time password messages related to online transactions. Included in our enterprise offers are differentiated SD-WAN, managed networking, and IoT platform portfolio of services. We continue to expand our capabilities in AI and cloud. The Sta. Rosa data center remains on track with the first 10 megawatts capacity expected to come on stream by July this year. Full capacity is expected to be a year ahead of competition, making ePLDT well positioned to serve the existing robust demand from hyperscalers. Total cash OpEx was moderately higher by ₱600 million in the first quarter, offset by decreases in cost of services, provisions, and subsidies, resulting in a minimal 1% rise in total OpEx. Consolidated EBITDA for the first three months of 2024 rose 5% to ₱27.3 billion, setting a new record mainly from higher revenues. EBITDA margin stood at 52%. 2024 registered a strong start with telco core income for the quarter of ₱9.3 billion, higher year-on-year by 8% from ₱8.6 billion in 2023, reflecting the impact of higher EBITDA, partly offset by higher financing costs and tax provision. PLDT's balance sheet remains healthy with net debt to EBITDA at the end of the quarter at 2.29x, marginally better than the end of 2023. We remain focused on achieving our target leverage of 2.0x, expected to attain with anticipated increases in EBITDA and the balance of the tower sales proceeds. Total CapEx for the quarter stood at ₱15.7 billion, with our CapEx guidance for 2024 being ₱75 billion to ₱78 billion, consistent with our aim to continue to reduce CapEx. The growth in the number of unique 5G devices and 5G data traffic continues in 2024. Smart was recently awarded the 5G Coverage Experience Award by OpenSignal. I'll turn you over to Shailesh for Maya.

Unidentified Company Representative, Maya Representative

Thank you, Danny. So Maya continues to be at the forefront of driving digital financial services in the Philippines, and we achieved very strong growth by leveraging our robust ecosystem across both consumers and enterprises and by putting Maya Bank, our digital bank, at the heart of it. Within two years of launch, Maya Bank is now the largest digital bank in the Philippines, achieved through delivering innovative banking solutions by leveraging our very large and diverse customer base. By the end of March 2024, we had 3.4 million depositors, nearly double the number that we had at the end of Quarter One in 2023. Our deposit balance grew to ₱29 billion, a substantial increase of over 40% from the same period last year. Importantly, our loan disbursement from the launch of our loans has crossed ₱34 billion in total loans disbursed. On the Enterprise side, where we provide end-to-end merchant acquiring and payment processing solutions, we continue to solidify our status as the Philippines' payment backbone by enabling large, small, and micro businesses to accept digital payments. Maya processes 45% of all transactions by account and 49% by value for QRPH, the common QR standard in the Philippines, in the first quarter of 2024. We have started providing banking services to various businesses, allowing merchant partners to open their business deposit accounts digitally and offering uncollateralized short-term working capital loans to the merchants of up to ₱2 million. On the Consumer side of the business, we are pioneers of high-engagement banking, giving customers a high interest rate on savings accounts based on their activities on payments, transactions, bill payments, and the like, which provides us deep insight into their behavior and informs our credit scoring models. Combined with a strong update on our new product, Time Deposit Plus, we've seen significant growth in our depositor base to 3.4 million customers. As of December 2023, based on the data published by the Central Bank, Maya accounted for 51% of the depositor base of the digital banks in the Philippines. Now, Maya Credit leads in providing fast, convenient, short-term, unsecured loans for customers, introducing new lending products like Personal Loans for mobile device financing for Smart customers and PLDT Home subscribers. We continue to drive financial inclusion across the Philippines by signing up for loan channeling deals with qualified and certified digital lenders, starting with the global fintech company, Tala, and we will continue to expand such partnerships. Overall, we continue to see month-on-month and quarter-on-quarter strong performance and robust revenue growth, with reduced expenses and a goal of attaining positive cash flow by the end of this year.

Danny Yu, CFO and Chief Risk Management Officer

Our outlook for 2024 is optimistic. We anticipate mid-single-digit growth, underpinned by robust increases in data and broadband revenues across business segments. Supported by the expected top-line growth and continuous focus on operating efficiencies and cost management, we expect EBITDA to grow by mid-single digits, and we're aiming to expand EBITDA margin beyond the current level. We're also looking to end 2024 with telco core income north of ₱35 billion, consistent with our commitment to lower the CapEx headline number and intensity over time. This includes fresh CapEx for the year and the deliveries of prior year's commitments, reiterating our commitment to a 60% dividend payout and a continued focus on deleveraging back to our target of 2.0x net debt-to-EBITDA and achieving positive free cash flow after dividends, which we expect by 2026. That ends my report.

Operator, Operator

We are ready to take your questions. You may also send your questions via email to [email protected]. We can start with the questions that were sent through email. Can you describe the competitive landscape in the wireless sector?

Manuel Pangilinan, Chairman and President

I'll respond to the question on the wireless space and the competitive landscape. We see continued emphasis on service quality. We can sense that in the growth in the network built, not just from Smart, but from others in the industry. There’s also substantial emphasis on ensuring we remain relevant to customers with behavioral shifts observed in the customer base. We understand that with the current issues on heat index, employment, and other macroeconomic indicators, we now have to consider offers that promote longer validity and higher bandwidth, particularly for customers facing difficulties on a 15 or 30-day payday schedule. So we have to accommodate these customer needs to provide not only value but also ensure enhanced customer experience.

Operator, Operator

Ranjan, you may unmute your mic?

Unidentified Analyst, Analyst

Can you hear me? Hello. Can you hear me?

Operator, Operator

Yes, we can hear you, Ranjan.

Unidentified Analyst, Analyst

Hi, thank you for the presentation. It's Ranjan from JPMorgan. Two questions from my side. Firstly, on your guidance on telco core income of ₱35 billion or more, you've already achieved ₱9.3 billion. So is it possible to tighten the guidance further? Like how should we be thinking about it? It could be ₱36 billion, ₱37 billion, ₱40 billion? If you can give some more color around this. And secondly, on your guidance of positive free cash flow to dividends in 2025. But if you think of 2024, would you be in positive free cash flow before dividends? Thank you.

Danny Yu, CFO and Chief Risk Management Officer

For your first question, we have to consider the seasonality of the revenues. So for now, we're still looking at north of ₱35 billion. For the second question regarding free cash flow?

Manuel Pangilinan, Chairman and President

We showed free cash flows in the first quarter. So is it likely...

Unidentified Analyst, Analyst

So the question is: Can you expect PLDT to be free cash flow positive before dividends in 2024?

Manuel Pangilinan, Chairman and President

Certainly, mathematically, you're correct. However, the world doesn't operate perfectly in terms of mathematics. The internal target here is higher than the ₱35 billion that you have indicated. I think we'll provide a better fix on the numbers once we announce our first half results sometime in late August. Our internal targets are certainly approximating the numbers you've indicated. If the wireless business maintains the momentum it established since the fourth quarter of last year and the first quarter of this year, then that will help. We need the Home Broadband segment to grow starting this second quarter, as well as the Enterprise segment. Second quarter is typically the best quarter for Smart and for the industry. We'll strive to achieve numbers close to what you suggested. Regarding free cash flows, it's likely we will produce free cash flows before dividends for the whole year.

Unidentified Analyst, Analyst

Got it. Thank you.

Operator, Operator

Luis?

Unidentified Analyst, Analyst

Hi, good afternoon. Thanks for hosting the call and congrats on the results. Three questions from me, please. The first one on the mobile side. Just a bit of color. As you've mentioned, the blended ARPU is higher by 21% year-on-year and only 10% due to usage. Could you remind us if this was driven by subscribers moving up to higher plans or did you reduce promotional items, which effectively increased your yield? Second question is on the fixed broadband business side. Just looking at Slide 31, you had net growth because of fixed wireless, which offset the net disconnections at fiber. Is this only internal migration, essentially? Or is fixed wireless really driving growth while there are net disconnections at the fixed broadband side? And lastly, related to the data center monetization that you've seen in the press, if it does push through, would you look to reinvest all of the funds, or do you think you'll allocate something for any special dividend?

Danny Yu, CFO and Chief Risk Management Officer

Luis, a quick answer to your question on mobile ARPU: Yes, we have seen over 22% growth in ARPU due to growth in mobile data revenues and an increase in the number of daily active customers who are reloading. On the second question, fixed wireless actually saw a 4% growth in its base in the first quarter. We had 14,000 net customers for the fixed wireless business, while for the fiber business, we had approximately 37,000 net adds, excluding a one-off cleanup. There's no drag from fixed wireless to fiber or specific migration between the technologies. We are actually seeing fixed wireless improve. The drag in the Home business is mainly coming from our legacy business.

Unidentified Analyst, Analyst

Thanks.

Danny Yu, CFO and Chief Risk Management Officer

Regarding your third question, any proceeds will likely be used to pay off debts. So I don't think there will be special dividends for now.

Manuel Pangilinan, Chairman and President

It's fair to say that most of the proceeds from the data center sell-down will go towards debt reduction. There have been comments from ratings agencies regarding PLDT's debt position and cash flow aspects. The bulk of proceeds from any sell-down should prioritize debt reduction. If there’s a fair amount of cash received, we will consider issuing dividends.

Operator, Operator

There's a question in the Q&A box from German de la Paz: They asked for the reason for the huge jump in mobile data traffic in the first quarter.

Danny Yu, CFO and Chief Risk Management Officer

Yes. The increase in mobile data traffic is attributed to the installed devices that have grown significantly, particularly for 5G. Additionally, we are addressing LTE congestion for users, especially those with high data utilization. We're focusing on moving high-demand customers to 5G, so we can improve overall network utilization.

Operator, Operator

Is that okay? Sorry, that was from German. There's a raised hand from John Te.

Unidentified Analyst, Analyst

Hi, thanks Melissa. Thank you for the opportunity. Just two quick follow-up questions. First is on broadband. I see on Slide 6 that the churn rate for fiber was actually stable, so it would imply that because net adds were negative, gross adds for fiber weren't as high as in the second half of last year. So maybe you could provide some color on why is that the case? I'll stop there first.

Jeremiah De La Cruz, Management

We actually recorded a positive net adds for fiber of 37,000, despite the onetime cleanup. Net of the onetime cleanup, churn has been stable, and we've seen improvement compared to the previous year. The drag in the Home business is mainly from our legacy business.

Unidentified Analyst, Analyst

Thanks, Jeremiah. Just a quick follow-up. I'm just trying to make sense of the revenue growth in the first quarter. So Home Broadband was flat. How would you ascribe this trend?

Jeremiah De La Cruz, Management

The growth derives mainly from the Fiber business, which grew by 7% year-on-year or ₱900 million. The decline is primarily due to our legacy copper and voice businesses, which we aim to address by ramping up our fiber deployments and acquiring new customers. The legacy business drag has been more pronounced this quarter than in the second half of last year.

Unidentified Analyst, Analyst

Okay. Thank you. That's very clear. Just one quick housekeeping question. Is it safe to assume depreciation in the first quarter is relatively flat from last year?

Danny Yu, CFO and Chief Risk Management Officer

It's most likely to increase slightly toward the latter part of the year due to newly capitalized assets.

Unidentified Analyst, Analyst

Okay. Thank you very much. And again congrats on the results.

Operator, Operator

Thanks, John. There's a question emailed: What is the rationale for the Radius acquisition?

Danny Yu, CFO and Chief Risk Management Officer

The strategic synergies from both PLDT Enterprise, PLDT Home, and Radius are very important. Radius has a strong enterprise brand. We aim to simplify operations and provide secure data connectivity options by leveraging both PLDT's and Radius' networks. This aids in CapEx reduction, as we won’t need to build in the same area. There are best practices in Radius that we can leverage within the Home business as well. So we see a substantial advantage in this acquisition.

Manuel Pangilinan, Chairman and President

Radius has faced issues due to independent initiatives contrary to PLDT’s interests, impacting our CapEx management. We need to coordinate efforts regarding fiber initiatives, especially in retention for individual homes. There’s also been a focus on migrating the Home customer portfolio from Radius to PLDT Home Broadband as we aim for coordinated efforts to expand and reduce losses.

Operator, Operator

Any color you can provide on the competitive landscape for the Home business?

Jeremiah De La Cruz, Management

The competitive landscape remains quite active. We observe various moves from competitors which include price reductions, increased speeds, certain data allowances, and the introduction of prepaid services. While we've managed to hold our ARPUs quite high, we plan to explore how we can address various market segments. We aim to expand our base, switch customers from competitive networks, and target different segments within our existing footprint this year in a value-accretive manner.

Operator, Operator

Any updates on the data center sale?

Manuel Pangilinan, Chairman and President

Discussions with several interested parties regarding our data centers are ongoing. One potential investor, NTT DOCOMO, expressed strong interest in investing, valuing the centers at over $1 billion, though they seek majority control, which we are hesitant to grant. We'll also consider private equity funds willing to take significant minority interests. Additionally, we are considering a REIT option, which could help expand the data center business while keeping control. We aim to have clarity on this by the end of June.

Operator, Operator

There’s a question from Stephen Oliveros: How much of the tower sale deals are we looking at for this year?

Danny Yu, CFO and Chief Risk Management Officer

We have received around ₱84 billion out of the total ₱98 billion. We have yet to transfer around 1,088 towers. If all go as planned, the sale of these towers will amount to approximately ₱14 billion this year.

Operator, Operator

Any other questions?

Unidentified Analyst, Analyst

There are no further questions, and I’ll turn the floor over back to Mr. Pangilinan for his closing remarks.

Manuel Pangilinan, Chairman and President

Thank you for being with us this afternoon. It's a pleasure to answer your questions. We look forward to talking to you again towards the end of August for the first half results. We hope to provide you with a better picture regarding full-year numbers and special interests.

Operator, Operator

Thank you. Thank you for joining us today. Have a good afternoon.