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, 2005
Business Overview: PLDT is the leading national 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 a dominant market position with approximately 62% of fixed lines and 45% of cellular subscribers in the country.
Key Financial Metrics (Year Ended Dec 31, 2005)
| Metric | 2005 (Php Million) | 2005 (US$ Million) | 2004 (Php Million) |
|---|---|---|---|
| Operating Revenues | 123,335 | 2,324 | 121,173 |
| Operating Income | 48,514 | 914 | 48,539 |
| Net Income | 40,603 | 765 | 28,101 |
| Earnings Per Share (Basic) | Php 217.84 | US$ 4.11 | Php 146.32 |
| Net Cash from Operating Activities | 64,969 | 1,224 | 62,860 |
| Total Debt | 112,313 | 2,117 | 159,455 |
| Cash and Cash Equivalents | 30,064 | 567 | 27,321 |
| Capital Expenditures | 15,864 | 299 | 19,268 |
Note: US$ conversions based on exchange rate of Php 53.062 to US$ 1.00 as of Dec 31, 2005.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated operating revenues increased by 2% (Php 2,162 million) driven primarily by the Wireless segment, which contributed 62% of total revenues. Wireless service revenues grew 8% due to subscriber base expansion.
- Profitability Surge: Net income increased significantly by 44% (Php 12,502 million) to Php 40,603 million. This was largely driven by a 69% decrease in consolidated financing costs (to Php 5,224 million) due to substantial foreign exchange gains resulting from the appreciation of the Philippine peso against the US dollar and Japanese yen.
- Debt Reduction: Total consolidated debt decreased by 30% (Php 47,142 million) to Php 112,313 million, reflecting a continued strategy of debt reduction using internally generated cash flows.
- Dividend Restoration: PLDT resumed cash dividend payments to common shareholders in 2005 for the first time since 2001, declaring a total of Php 9,624 million in dividends.
- Fixed Line Decline: Fixed line revenues remained relatively flat, with local exchange and national long-distance revenues declining due to cellular substitution and regulatory changes, partially offset by a 46% growth in data and network services.
Guidance, Outlook, and Risks
- Outlook: Management expects to utilize a greater proportion of free cash flow for common dividends in succeeding years while continuing to service maturing debt. The 2006 capital expenditure budget is approximately Php 19,759 million, focused on fixed line data upgrades and Smart's 3G network expansion.
- Strategic Initiatives: PLDT is rolling out 3G services (W-CDMA) and upgrading fixed line networks to Next Generation Network (NGN) technology. A potential acquisition of SPI Technologies (a BPO company) by ePLDT was announced in May 2006.
- Key Risks:
- Foreign Exchange: Approximately 98% of debt is denominated in foreign currencies (mostly USD). A depreciation of the peso would increase debt obligations and interest expenses, potentially impacting debt covenants.
- Competition: Intense competition in the cellular market (Globe, Sun Cellular) and fixed line market (Globe, Digitel) pressures pricing and market share. The introduction of 3G services by competitors may require increased marketing spend.
- Regulatory: Risks include potential changes to the currency exchange rate mechanism for local exchange rates, new taxes on cellular gross receipts, and franchise renewal uncertainties.
- Debt Covenants: Debt instruments contain restrictive covenants regarding leverage ratios and dividend payments. Compliance is sensitive to peso fluctuations and operating performance.
Investor Verification Checklist
- Debt Covenant Compliance: Verify current ratio and leverage ratios under Philippine GAAP to ensure no default risk, especially given the high exposure to foreign currency debt.
- Foreign Exchange Sensitivity: Assess the impact of potential peso depreciation on the consolidated debt load and interest expense, as 98% of debt is foreign-denominated.
- Dividend Sustainability: Confirm that future dividend payments to common shareholders do not violate debt covenants or impair capital expenditure budgets for 3G and NGN rollouts.
- Regulatory Tax Exposure: Monitor legislative developments regarding proposed taxes on cellular gross receipts and the potential cancellation of the currency exchange rate mechanism for local exchange services.
- Smart's Dividend Flow: Verify Smart's ability to continue paying dividends to PLDT, as PLDT's liquidity and debt service capacity rely heavily on cash flows from its wireless subsidiary.