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, 2006
Business Overview: PLDT is the leading telecommunications provider in the Philippines, operating through three primary segments: Wireless (led by Smart Communications), Fixed Line, and Information and Communications Technology (ICT). The company holds a dominant market position with approximately 63% of fixed-line subscribers and 41% of cellular subscribers (via Smart) as of year-end 2006.
Key Financial Metrics (Year Ended Dec 31, 2006)
| Metric | 2006 (Php Millions) | 2006 (US$ Millions) | 2005 (Php Millions) |
|---|---|---|---|
| Operating Revenues | 127,536 | 2,600 | 123,335 |
| Operating Income | 48,179 | 982 | 48,514 |
| Net Income | 33,598 | 685 | 40,603 |
| Net Cash from Operating Activities | 61,201 | 1,248 | 66,280 |
| Total Debt | 86,059 | 1,755 | 112,313 |
| Cash and Cash Equivalents | 16,870 | 344 | 30,059 |
| Stockholders' Equity | 106,173 | 2,165 | 79,595 |
Note: US$ translations based on year-end exchange rate of Php49.045 to US$1.00.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated operating revenues increased by 3% (Php4,201 million) to Php127.5 billion, driven primarily by a 108% surge in ICT revenues due to the mid-year acquisition of SPi Technologies and continued growth in wireless services.
- Profitability Decline: Net income decreased by 17% (Php7,005 million) to Php33.6 billion. This decline was primarily caused by a Php5.1 billion increase in losses on derivative transactions (due to peso appreciation affecting principal-only swaps) and higher operating expenses related to employee benefits and the consolidation of new acquisitions.
- Debt Reduction: Total consolidated debt decreased by 23% (Php26.3 billion) to Php86.1 billion, reflecting a continued strategy of debt reduction using internally generated cash flows.
- Segment Performance:
- Wireless: Subscriber base grew 18% to 24.2 million. Net income for the segment decreased 8% due to higher operating expenses and tax provisions.
- Fixed Line: Net income plummeted 80% to Php923 million, largely due to significant losses on derivative transactions and declining international long-distance revenues.
- ICT: Revenues more than doubled to Php6.9 billion, though the segment reported a net loss of Php243 million due to integration costs and asset impairments.
Guidance, Outlook, and Risks
- Capital Expenditures: The 2007 budget for consolidated capital expenditures is approximately Php21.4 billion, with significant allocations for PLDT's fixed-line data upgrades and Smart's 3G network expansion.
- Dividend Policy: PLDT declared a total of Php78.00 per common share in dividends for 2006. Management intends to gradually increase the dividend payout ratio in succeeding years as leverage ratios improve.
- Key Risks:
- Foreign Exchange: Approximately 96% of consolidated debt is denominated in foreign currencies (mostly USD). While the peso appreciated in 2006, future depreciation could significantly increase debt obligations and operating expenses in peso terms.
- Competition: Intense competition in the cellular market (Globe, Digitel) and international long-distance services continues to pressure rates and margins.
- Regulatory: Risks include potential changes in the currency exchange rate mechanism for local exchange services, franchise tax impositions, and the requirement for Smart to conduct a public offering of shares to maintain its franchise.
- Derivative Losses: The company recognized significant mark-to-market losses on derivative instruments in 2006 due to peso appreciation, which may recur depending on currency movements.
Investor Verification Checklist
- Derivative Exposure: Verify the specific terms and remaining notional amounts of principal-only swaps and currency options, as these drove a Php6.9 billion loss in 2006.
- Debt Covenants: Confirm continued compliance with financial ratios (debt-to-equity, debt service coverage) under loan agreements, particularly given the high percentage of foreign-denominated debt.
- Smart's Franchise Status: Monitor the status of the Public Telecommunications Policy Act requirement for Smart to conduct a public offering of shares to avoid potential franchise revocation.
- ICT Integration: Assess the full-year financial impact of the SPi acquisition (consolidated July 2006) on future revenue growth and profitability.
- Exchange Rate Sensitivity: Evaluate the impact of potential peso depreciation on the company's ability to service its USD-denominated debt and meet financial covenants.