(STAR) By Mary Ann Ll. Reyes - Telecommunications giant Philippine Long Distance Telephone Co. (PLDT) reported a consolidated net income of P15.3 billion during the first half of 2006, seven percent lower than the P16.5 billion realized in the same period last year, due to additional depreciation expenses, foreign exchange losses, and a higher tax rate.

But the PLDT group core earnings (before the effects of forex gains, deferred tax assets, and additional depreciation) grew 11 percent to P15.2 billion from P13.7 billion in 2005.

PLDT chairman Manuel Pangilinan emphasized core earnings are a better gauge of the companyís performance as he expects this trend of increasing core earnings and declining reported net earnings to continue for the rest of the year, "although reported and recurring net income numbers will converge soon."

The growth in core earnings, he said, was achieved through the increased take-up of both wireless and fixed line data services, continued focus on containing cash costs, and a signi-ficant decline in interests costs.

"PLDTís performance is a creditable one if you look at core earnings, because this was realized despite a challenging revenue environment," Pangilinan said.

Forex losses during the first half of 2006 reached P200 million compared to a P2.2-billion forex gain in the same period last year, even as Pangilinan added that last year, there were no significant accelerated depreciation charges compared to this year.

PLDT is sticking to its core earnings guidance number for the whole of 2006 of P32 billion, or an 11 percent growth compared to the restated core earnings of P29 billion in 2005. "But itís difficult to predict what our reported net earnings will be for the year. There is no way to control how the forex rate will move," Pangilinan pointed out.

Second half core earnings are projected to be higher than those of the first semester period, as the company is expected to benefit largely from the robust growth in wireless subscriber numbers in the first half.

As a result of the core earnings growth, the PLDT board approved the declaration of an interim dividend of P50 per share, with record date of Aug. 21 and payment date of Sept. 21. The dividend declaration is based on a 60 percent payout of core earnings per share.PLDT expects to pay out a total of P9.1 billion of common dividends for this dividend declaration alone.

"The groupís excellent cash flow position and profits allow us to invest in future growth while continuing to attend to the needs of our various stakeholder," Pangilinan stressed.

PLDT officials also reported that consolidated service revenues rose by two percent to P60.6 billion. Group EBITDA (earnings before interests, taxes, depreciation and amortization) improved by seven percent to P40.4 billion while EBITDA margins rose to 67 percent as against 64 percent last year.

Consolidated capital expenditures increased to P12.4 billion as PLDT stepped up the upgrading and expansion of its fixed line and wireless networks. PLDT is currently upgrading about 200,000 fixed lines to the next generation network (NGN) while its wireless subsidiary Smart Communications has expanded its cellular network to support its ongoing initiatives and programs for 2G, wireless broadband and 3G. Total group capex for the year is expected to reach P20 billion, with capex as a percentage of service revenues remaining at 16 percent.

Meanwhile, the company reported that consolidated balance sheet continued to strengthen with net debt balance down by 35 percent to $1.3 billion (P70 billion).

In June 2006, PLDTís other cellular subsidiary Pilipino Telephone Corp. (Piltel) voluntarily prepaid 45 percent of its outstanding debt or an aggregate amount of $176 million, representing excess cash flows from operations and was applied proportionally to prepay $56 million to third party creditors and $120 million to Smart, Piltelís largest creditor. As of June 30, Piltelís debt balance owed to third party creditors was $71 million.

Pangilinan projects that gross and net debt levels for the group will go down to $1.7 billion and $1.3 billion, respectively, even as he expects PLDT to be under-leveraged by end of next year when net debt drops to $1 billion.

Consolidated free cash flow remained strong at P17.4 billion despite increases in capex and working capital requirements.

Officials also reported that consolidated wireless service revenues rose to P38.6 billion for the first half of 2006, six percent more than last yearís P36.5 billion. Wireless EBITDA grew by eight percent to P25.8 billion compared with P23.9 billion for the first half of 2005 while EBITDA margins improved to 67 percent.

Smart and Piltel sustained their solid performances for the quarter, recording a four percent quarter-on-quarter growth in service revenues to P19.6 billion in the second quarter of the year. Smartís EBITDA increased by eight percent in the second quarter to P13.4 billion, representing a 68 percent EBITDA margin.

Total cellular subscriber base for the first half of 2006 grew by over two million subscribers to 22.5 million. Smart recorded net additions of 980,000 subscribers while Talk Ní Text added about one million subscribers to end the first half of 2006 with 16.4 million and 6.1 million subscribers, respectively.

Cellular penetration rate was placed at 40 percent, with the country having 34 to 35 million wireless subscribers nationwide. "The market is reaching a maturing stage and the double-digit growths in subscriber numbers may no longer be there although we are optimistic that we can still hit a penetration rate of 50 percent in two to three years," PLDT president and CEO Napoleon Nazareno said.

Smart also had 58,000 wireless broadband subscribers as of the end-June 2006 under its Smart Bro wireless broadband service.

"We have been segmenting our market into smaller slices through our various SMS and voice call packages. This ability to offer attractive unlimited packages that give real value to our subscribers has enabled us to effectively defend our leadership position. These are exciting times as we begin the process of transforming Smart from a cellular company into a multi-service wireless communications company," said Nazareno.

PLDT also announced that its fixed line service revenues decreased one percent to P24.1 billion in the first half of 2006 from P24.2 billion last year as the increase in data revenues, from both corporate data services and residential DSL, was offset by declines in revenues of local exchange and ILD (international long distance) services. The peso has appreciated year-on-year by five percent, which impacted the dollar-linked revenues arising from the local exchange and ILD businesses.

PLDT DSL (digital subscriber line) continued its strong growth as broadband subscribers reached 109,000 while PLDT WeRoam had 6,600 subscribers as of the end of June 2006. Subscribers using Vibe dial-up Internet service also grew by 43,000 in the first six months of 2006 to 425,000. PLDT DSL and Vibe contributed P1.7 billion in revenues, up 43 percent from last year.

EBITDA for the fixed line group rose four percent to P14.2 billion while EBITDA margins improved to 59 percent compared with 56 percent for the same period last year.

Additional depreciation expenses of P3.9 billion were taken up in the first six months of 2006 due to a change in the estimated useful lives of certain fixed assets as the migration to NGN progresses, officials emphasized.

"The ongoing upgrade to NGN is expected to result in a simpler network architecture of fewer network elements but with a greater capability to provide data services at lower costs. The completion of the NGN upgrade will result in immediate reduction in power consumption and insurance costs as well as opportunities to do space rationalization," Nazareno pointed out.

He also noted that with the cellular industry moving past its rapid-growth phase, the need to shift into broadband and data services has become increasingly apparent. "Management understands the complexities and challenges of the changing market environment and we will manage new technologies in the context of our subscribersís needs," Nazareno said.

For his part, Pangilinan pointed out that the mobile industry on 2G will continue to grow but not as spectacular, although still single-digit growth rates. But double-digit growth rates are expected to be realized from the data and broadband Internet business.

He expects the data side of the business as well as information and communications technology (ICT) to be the main drivers in terms of revenue growth. Out of the P61 billion in service revenues realized by the group, about 43 percent were realized from data compared to only 39 percent last year. "By next year, half of our revenues will be data-driven and by 2008, data will be exceeding voice," he added.

Consolidated data revenue increased by 12 percent during the Jan. to June 2006 period to P26.1 billion, offsetting a five percent decline in traditional voice revenues.

Pangilinan added: "Over the medium term, our goals are to continue achieving growth in our core businesses while establishing new revenue streams from recent investments, principally SPi. Our strong cash flows provide us with this "triple play" ability - new investments, sustained capital expenditures and increasing dividend yields. In this way, we address shareholder needs both for the present and for the longer term."

He added that this year will be a year to lay the foundation for earnings growth in 2007 and onwards.

He revealed that PLDT will expand its coverage and enhance its broadband and data capabilities through the NGN upgrade and roll out of multi-purpose cellular network elements. A large part of the P12.4 billion capex in the first half went to the ongoing upgrade of about 200,000 lines to NGN and the expansion of the DFON network and it is estimated that about P20 billion more will be invested for NGN over the next two years. As for 3G, Smart has invested $60 million so far, and any new investments will depend on how the public will respond to the new service.

Nazareno for his part disclosed that the Smart network now has the biggest text messaging capacity in the world, capable of handling over one billion text messages a day.

Meanwhile, ICT arm ePLDT reported service revenues of P1.8 billion for the first six months of 2006, a 36 percent increase from P1.3 billion realized in the same period last year, mainly driven by the continued growth in the call center business (ePLDT Ventus).

ePLDT recently acquired SPi Technologies, the second largest pure-play business process outsourcing (BPO) company and the ninth largest independent BPO service provider in the world.

ePLDT president and CEO Ray Espinosa revealed that they are exploring the acquisition, through SPi, of a US-based medical transcription company with a revenue base of about $20 million, to further SPiís goal of becoming a significant player in the growing health care outsourcing industry.

Chief News Editor: Sol Jose Vanzi

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