Business Context and Reporting Period
Company: Philippine Long Distance Telephone Company (PLDT Inc.)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2007
Accounting Standard: International Financial Reporting Standards (IFRS) – First-time adoption for 2007; 2006 data restated for comparability.
Business Overview: PLDT is the leading telecommunications provider in the Philippines, operating through three primary segments: Wireless (Smart, Piltel), Fixed Line (PLDT), and Information and Communications Technology (ePLDT). The company holds dominant market shares in both fixed-line (approx. 59%) and cellular (approx. 37% via Smart) sectors.
Key Financial Metrics (2007 vs. 2006)
| Metric (in millions PHP) | 2007 | 2006 | Change |
|---|---|---|---|
| Total Revenues | 151,862 | 139,724 | +9% |
| Net Income | 39,274 | 32,581 | +21% |
| Operating Cash Flow | 77,418 | 69,211 | +12% |
| Total Assets | 240,158 | 241,904 | -1% |
| Total Debt | 60,640 | 80,154 | -24% |
| Net Debt to Equity Ratio | 27% | 54% | Improved |
| Dividends Declared (Common) | 28,299 | 14,459 | +96% |
Note: Exchange rate used for USD translation: Php41.411 to US$1.00 (Dec 31, 2007).
Material Changes vs. Prior Period
- Revenue Growth: Driven primarily by a 12% increase in Wireless revenues (due to subscriber growth and data services) and a 56% increase in ICT revenues (due to full-year consolidation of SPi Group). Fixed Line revenues declined 2% due to peso appreciation and declining long-distance traffic.
- Profitability: Net income rose 21% despite a 232% increase in income tax provision. This was offset by an 8% decrease in total expenses, largely due to lower financing costs, reduced depreciation (slower NGN rollout pace), and significantly lower losses on derivative transactions.
- Debt Reduction: Total debt decreased by approximately Php19.5 billion (25%) due to aggressive debt amortization, prepayments, and the revaluation of foreign currency debt due to peso appreciation.
- Foreign Exchange: Recognized foreign exchange gains of Php7.99 billion in 2007 (vs. Php4.82 billion in 2006) due to the appreciation of the Philippine peso against the U.S. dollar.
Guidance, Outlook, and Risks
Management Commentary & Outlook
- Capital Expenditures: 2008 budget is approximately Php25 billion (Php15 billion for Smart, Php9 billion for PLDT) focused on network expansion, 3G rollout, and broadband upgrades.
- Dividend Policy: Management aims to pay out 70% of core earnings. In 2007, the payout ratio effectively reached nearly 100% of earnings per share when including special dividends.
- Share Buyback: Board approved a buyback program of up to 2 million shares (approx. 1.1% of outstanding shares) in January 2008.
Key Risks
- Currency Risk: Approximately 88% of consolidated debt is denominated in foreign currencies (mostly USD). While the peso appreciated in 2007, future depreciation would increase debt obligations and operating expenses in peso terms.
- Competition: Intense competition in the cellular market (Globe, Digitel) and fixed-line market (fixed wireless entrants) pressures pricing and ARPU. "Multiple SIM card ownership" impacts subscriber growth metrics.
- Regulatory/Legal: Risk of franchise revocation for subsidiary Smart if it fails to conduct a public offering of shares as required by R.A. 7925. Ongoing disputes regarding local franchise taxes and NTC supervision fees.
- Technology: Rapid technological changes require significant capital investment to maintain competitiveness (e.g., 3G, NGN, VoIP).
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with financial ratios (e.g., debt-to-equity, interest coverage) given the high level of foreign currency debt.
- Smart Franchise Status: Monitor the status of the public offering requirement for Smart Communications to assess franchise revocation risk.
- Foreign Exchange Sensitivity: Assess the impact of potential peso depreciation on future debt service costs and revenue translation.
- ICT Integration: Evaluate the performance and integration of the SPi Group (acquired in 2006) as a key driver of ICT revenue growth.
- Dividend Sustainability: Confirm that high dividend payouts (approaching 100% of EPS in 2007) are sustainable given the heavy capital expenditure requirements for 2008.