PHI

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, 2004
Business Overview: PLDT is the leading national telecommunications service provider in the Philippines, operating through three primary segments: Wireless (cellular and satellite services via Smart and Piltel), Fixed Line (local exchange, long distance, and data services), and Information and Communications Technology (ICT) (internet, call centers, and IT services via ePLDT). The company holds a dominant market position, with approximately 62% of fixed lines and 44% of cellular subscribers in the country as of year-end 2004.

Key Financial Metrics (Year Ended Dec 31, 2004)

Note: US$ translations based on the exchange rate of Php 56.341 to US$1.00 as of December 31, 2004.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated operating revenues increased by 9% (Php 10,021 million) to Php 121,221 million, driven primarily by a 15% increase in wireless revenues due to a 48% growth in the cellular subscriber base (Smart and Piltel).
• Profitability Surge: Net income more than doubled, rising 154% to Php 28,101 million from Php 11,045 million in 2003. This was fueled by higher operating revenues, a 7% reduction in operating expenses, and a significant one-time gain of Php 2,620 million from a debt restructuring transaction involving Piltel.
• Debt Reduction: Total consolidated debt decreased by 14% to Php 159,455 million, reflecting a strategic focus on debt reduction. PLDT's non-consolidated debt fell by 19%, while Smart's debt increased by 114% due to the assumption of Piltel's restructured debt.
• Segment Performance: The Wireless segment contributed 98% of consolidated net income (Php 27,513 million), while the Fixed Line segment returned to profitability with a net income of Php 1,287 million, reversing a loss of Php 1,902 million in 2003.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items: The 2004 results include a non-recurring gain of Php 2,620 million from the debt exchange transaction where Smart acquired Piltel's restructured debt. Additionally, Smart's three-year income tax holiday expired in May 2004, leading to a higher effective tax rate for the year.
• Outlook: Management anticipates continued growth in wireless and data services. The 2005 budget for consolidated capital expenditures is approximately Php 17,758 million. The company expects higher effective tax rates going forward due to the expiration of Smart's tax holiday.
• Key Risks:
  • Foreign Exchange Exposure: Approximately 98% of consolidated debt is denominated in foreign currencies (primarily USD). Depreciation of the Philippine peso increases debt obligations and interest expenses in peso terms and negatively impacts financial covenants.
  • Debt Covenants: The company is subject to restrictive covenants regarding financial ratios (e.g., debt-to-equity, current ratio). Failure to comply could trigger defaults. Compliance is sensitive to peso depreciation and operating performance.
  • Regulatory and Taxation: Risks include potential changes in the currency exchange rate mechanism for local exchange rates, new taxes on cellular gross receipts, and disputes over local franchise taxes and NTC supervision fees.
  • Competition: Intense competition in the cellular market (Globe, Sun Cellular) and fixed-line substitution by mobile services pose threats to revenue growth.

Important Facts for Investor Verification

• Dividend Policy: PLDT resumed cash dividends to common shareholders in 2005 (Php 14 and Php 21 per share declared), the first since 2001. However, dividend payments are restricted by debt covenants and depend on cash flows from subsidiaries, particularly Smart.
• Smart's Dividend Dependency: PLDT relies heavily on dividends from its subsidiary Smart to service its own debt. Smart's ability to pay dividends is constrained by its own loan covenants, requiring lender waivers for distributions.
• Piltel Restructuring: Verify the status of Piltel's remaining unrestructured debt (Php 52 million) and the potential for future drawdowns under PLDT's Letter of Support (US$ 50 million remaining capacity).
• Legal Proceedings: Monitor ongoing disputes regarding NTC supervision fees, local franchise tax exemptions, and the outcome of the U.S. Department of Justice antitrust investigation (terminated in May 2005 with no enforcement action).
• Debt Maturities: Approximately Php 104 billion of long-term debt is scheduled to mature between 2005 and 2009, requiring significant refinancing or cash flow management.