PLDT - Q2 2022

Transcript

Melissa Vergel de Dios (First VP, Head of Investor Relations, and CSO)

Good afternoon, and thank you for joining us today to discuss the company's financial and operating results for the first half of 2022. A copy of today's presentation is posted on our website. For those who've not been able to join us, you may download the presentation from www.pldt.com under the Investor Relations section. Kindly note that this briefing is being recorded. A podcast of this event will be available on our website after the call. For today's presentation, we have with us Mr. Alfredo S. Panlilio, President and CEO of PLDT and Smart Communications, Ms. Anabelle Lim-Chua, Chief Finance Officer and Chief Risk Officer, Mr. Orlando B. Vea, Founder and CEO of PayMaya Philippines, as well as other members of the PLDT management team. Our chairman, Mr. Manuel V. Pangilinan, will join us later.

At this point, let me turn the floor over to Mr. Panlilio to begin the presentation.

Alfredo S. Panlilio (President and CEO)

Thank you. Thank you, Melissa. Good afternoon to all, and thank you for joining us today. Hopefully, after this, we can do face-to-face already, next time we do, this briefing. Again, good afternoon to all, and thank you for being here again. Happy to report our first half 2022 business performance and give you a glimpse of what is expected for the rest of 2022. For the first half, we closed Telco Core net income in the second quarter at PHP 8.8 billion, which is 14% versus the same period last year of PHP 7.7 billion. If you add up our Telco Core for the first half, it's PHP 17 billion, up 12% versus last year's 15.2. In terms of revenues, all-time high in terms of quarter.

Ended the second quarter of 2022 at PHP 47.9 billion. First half service revenues of PHP 94.3 billion, also an all-time high, which is 5% higher than last year's PHP 89.9 billion. Next page, please. Having grown by 5%, in terms of expenses, we're able to manage our expenses by only increasing it by 1% to PHP 43.8 billion due really to lower provisions. Again, just to plan maybe the second half, this is something that we have to continue to take a look at as headwinds can actually come up to the business because of the current economic conditions that we're experiencing, not only in the telco industry, but in fact, globally, this has affected other businesses.

Happy to report also that the first half EBITDA is at PHP 50.5 billion, which is also an all-time high, 8% higher than last year's PHP 46.6 billion. If you add up the last 4 quarters, I think PLDT has reached the PHP 100 billion EBITDA the past 4 quarters. The second half of last year and the first half of this year. I think this is a good milestone that the company's achieved. We are able to improve our EBITDA margin by 1%, so we ended the first half at 52% EBITDA margin. Next page. Just want to also highlight that we have fully transformed the business. Today, 79% of our business is really driven by data.

Wireless, in terms of revenue terms, the highest contributor at PHP 35.7 billion, a growth of 2%, or in peso terms, growth of PHP 700 million from last year. The fastest growing, of course, for us is home, which is now at PHP 24.6 billion, increase of 22% or PHP 4.4 billion in peso terms, compared to last year. Corporate ended at PHP 11.9 billion for 11% increase, a PHP 1.2 billion increase in terms of revenue terms. ICT has a healthy growth of 14% or PHP 300 million in peso terms. Again, focus on data revenues, and we will continue to support this in our CapEx investments.

Just talking about CapEx, we are, you know, proud to say that we're still the largest integrated telco, and we continue to expand our network. We have added 1.92 million ports compared to a year ago. We have at present 6.72 million ports available for service, which is compared to last year's only 4.8. We continue to roll out on our 5G base stations. We added 2,500 compared to last year, ending the year at about, I mean, year to date to 7,189 compared to 4,776 of last year. We continue to expand, aside from our fiber ports, our fiber optic backbone.

We are now at 837,000 kilometers of fiber, and we already have 16.2 million homes passed in terms of our coverage in network. Next page, please. In the data centers space, just to complete the picture on our local ecosystem in terms of network, we've also added 612 racks in our data centers. Presently, we have 6,133 racks available for service. 74% of that is already utilized. We will continue to expand even more racks into the system as we are making sure that we are ahead of the demand, not only from enterprises, but you know, especially from hyperscalers, a lot of the people that we talk to today.

Looking forward to really completion of the Santa Rosa Hyperscaler data center by year end this year. Everything is on track in terms of that project. Again, the first 1,050 racks will be available by fourth quarter next year. Next page. On top of the local backbone that I just talked about, expansion of the local backbone, we did announce last Friday the launch of Jupiter Cable System, which has tripled the international capacity of PLDT. From 20 Tb now to 60 Tb. From a total market share among all the telcos in the country, we have 65% market share in terms of international capacity that is flowing into the country. We will continue to invest.

We have two other submarine cable systems that we're investing in, ABC and 2Africa. That should be in service in the next year or so, expanding our capacity from international point of view. Next page, please. Happy to report also that we're jumpstarting our journey towards a greener fleet. What you see in the picture is the first EV vehicle that we will be using in service. We've ordered actually initially 10 of these. Today we have a fleet of 5,400 vehicles. Maybe it's an aspiration short-term for us to have at least 10% or 8% of our fleet that is EV, you know. This is in partnership with Isuzu of Japan. Lastly, next page, please.

Just wanted to report that we continue to transform the company. Three major driving force of this transformation are, number one, build a solid plan in terms of a solid plan behind 2022 and de-risking at 2022, especially with lot of uncontrollable factors that are hitting the business. Also, not only the business and not only the industry, but also the country. We also want to set up ourselves for a stronger 2023 and 2024 and moving forward. We've also. It is an ongoing journey enhancing the ways of working for PLDT.

Continue to break down silos, enabling teams to cross-post and strengthening our execution muscle to ensure that we're able to be more productive and more efficient in the way we work. Lastly, a discipline that we want to make sure that we get stronger in is really a deliberate and relentless execution and identifying the gaps needed to address to make sure that we're able to drive and fulfill our commitments, not only to our stakeholders, but also to the public. At this point, I'd like to pass it on to Annabelle for the more detailed financials for the first half. Annabelle? Thank you.

Anabelle Lim-Chua (Senior VP, CFO, and CRO)

Thank you. Thank you, Al. Let me show you our first half results today. As we have said in our announcement earlier today, despite very tough market conditions out there, PLDT is quite pleased that we are able to record a record high in terms of our service revenues of PHP 94.3 billion for the first six months of this year, up 5% versus a year ago. Home continues to lead the charge with a PHP 28.1 billion revenue achievement in the first half, growing 24% year-on-year. Within the home business, the fiber revenues now account for PHP 23.2 billion of the home revenues, and that is growing at a clip of 62% year-on-year.

Enterprise also has performed very well and has also achieved an all-time high at PHP 23.2 billion for the first semester, having garnered a 9% increase year-on-year. Individual, which remains to be our largest business, does face certain challenges and is down 6% year-on-year. I'll show you in more detail later how this is also tracking better. The international and carrier, which understandably continues to be under decline because of the lack of roaming and other international termination voice business. That's down 17% year-on-year. Moving on to the next chart. I show here the breakdown between the first quarter and the second quarter revenues. You see here that in the first quarter, we grew our revenues by 3%.

In the second quarter, we doubled that to a 6% increase. Peso amount, that was a PHP 1.5 billion increment in the first quarter, and it's almost double at PHP 2.9 billion, year-on-year increase for the second quarter. Breaking it down again by the major business segments. Home increased to PHP 14.5 billion in the second quarter, compared to PHP 13.6 billion in the first quarter. That's almost a billion higher in 2Q, and it's up PHP 2.7 billion in each of the quarters relative to last year. Enterprise has increased the growth momentum from 7% in the first quarter to 11% in the second quarter.

In the case of the individual mobile business, you'll see here that the second quarter results are better by about half a billion PHP over the first quarter, PHP 20.4 billion to PHP 20.9 billion. In terms of its comparison versus prior year, the decline is less at 4% compared to 8% that was happening in the first quarter. Moving on to the next chart. We just show here the same numbers over a longer trajectory of 10 quarters, and you see the PHP 47.9 billion record high after 5 quarters of sequential improvements. Next chart. This next chart breaks the same numbers into data versus non-data revenues. As indicated earlier, 79% of our revenues in the first half are from data.

In fact, it's already 80% in the second quarter, coming from about 70% at the start of 2020. Data having grown at 10% higher year-on-year compared to the overall growth of 5%. Next chart, please. Yeah. In terms of our subscriber base, we serve 77.3 million customers across our fixed mobile and broadband categories. With the focus on the broadband number, there are over 4 million broadband customers across our fixed and fixed wireless platforms. Fiber being the highest growth segment amongst all of this is at 2.8 million customers, having added 400,000 during the first six months of the year. In the next chart, I do show a more granular breakdown of how the 400,000 increase in fiber customers happened.

We were able to connect over 90,000 in each of the first two quarters in terms of new connections every month, which is trending better than what we were doing at the early part of last year, although not as high as the levels we achieved in the third and fourth quarters. We did have the benefit of the additional migrations from DSL to fiber in the second quarter of the year. All told, we added 550,000 new connects in the first half with another 117,000 of migrations. There was a bit of a higher churn, particularly in the second quarter as we run through the effect of the Typhoon Odette, which hit us in December 2021.

We did restore service in some areas until March, April. Then after that, when the services were normalized, we did see higher churn from some of these customers who had to opt out of the service already. Next chart, please. In terms of our P&L, full P&L, as indicated earlier, we were able to manage our increase in OpEx to 1%, helped by lower provisions. EBITDA increased by 8%, PHP 50.5 billion or 15% EBITDA margin. It's also an all-time high for us in terms of our EBITDA. EBIT of PHP 26.1 billion, 27% margin. That's up 15% year-on-year. Telco Core PHP 17 billion, which is 12% or PHP 1.8 billion better than the same period last year. Breaking this down further into the next charts.

The EBIT that improvement was on the back of higher revenues and lower provisions, and then offset by higher cash OpEx. Notice that within the higher cash OpEx is the impact of having to spend about PHP 1.1 billion more because of the requirements to restore service in the Odette impacted area. Had that not happened, our EBITDA would actually have been higher by 11% year-on-year to be about PHP 51.5 billion. Telco Core income was supported by the higher EBITDA offset by higher depreciation and higher financing costs on the back of the increased investments we've made in our fixed network assets. Next chart, please. This shows the EBITDA over a longer period.

As Al mentioned earlier, we've now surpassed the PHP 100 billion mark in terms of our EBITDA for the last 4 quarters. If you remember, that was our guidance for this year, is that we will be able to cross the PHP 100 billion EBITDA this year, and we've already achieved that, as of the end of June. Next chart. Telco Core income 8.2 in the first quarter, followed by 8.8 in the second quarter. When you look at the average, we've achieved of 8.5 billion. That's the highest quarter average since 2014. We are tracking well vis-à-vis our PHP 33 billion guidance for 2022 Telco Core income. Next chart, please.

Today the board did approve the declaration of interim cash dividends totaling PHP 75 per share. There are two parts to this. The regular 60% payout based on the Telco Core EPS in the first half, PHP 79, translates to a dividend of PHP 47 per share in terms of our regular payout. We did also declare a special dividend equivalent to PHP 28 per share. That represents part of the proceeds from the tower sale. As you may remember, we had said that when we do the tower sale, PHP 9 billion of the funds will be earmarked for a special dividend.

On the back of having closed about 2/3 of the tower sale, we've declared a dividend equivalent to PHP 6 billion, based on, together with the interim payout. The balance of PHP 3 billion will be paid at final closing together with the final regular dividend for the year. Next chart, please. In terms of our other items that affect our P&L, we did pick up our share in the Voyager Innovations losses equivalent to about PHP 1.6 billion, offset by some gains on dilution of PHP 0.5 billion. The other items, one-offs, including those we have in the first half, included one, the gain from the sale and leaseback of our towers, PHP 16.5 billion.

The income from the prescription of the preferred shares redemption liability of PHP 7.8 billion, which we already reported in the first quarter. Then against that, we have accelerated depreciation of PHP 16.5 billion. MRP costs of about PHP 4.8 billion for the manpower early retirement program we have, and then some ForEx losses as a result of the depreciation of the peso to 54.97 by the end of June. All told, our reported income is at PHP 16.7 billion. It's a good 30% up versus the PHP 12.9 billion in the prior year. Next chart, please. Just to recap on the tower sale and leaseback transaction.

I think most of you are aware that we did sign an agreement to sell 5,907 towers for PHP 77 billion. We managed already two closings. The first closing on the 1st of June, and then the second closing just Monday, 1st of August. PHP 39.2 billion for the first closing for 3,012 towers was received, and then PHP 13.2 billion for the second batch of 1,013 towers. We would hope to close out the remaining towers of a little less than 2,000 remaining over the next few months and finish that before the end of the year. In terms of the proceeds that we have received, PHP 7.1 billion is used to pre-pay debts.

Our intention is to pre-pay another PHP 9 billion of debts, and then a substantial portion is going towards the funding of our cash CapEx and other requirements. That effectively represents an avoidance of additional borrowings for this year. In an equivalent of about PHP 14.5 billion already, but will link up to about PHP 27.2 billion. The special dividends, as I indicated earlier, earmarked PHP 9 billion, of which PHP 6 billion is already declared to date.

In terms of the gains we had on the tower sale, the next chart will show you that we effectively have sold the assets at a significant premium over the book values and therefore a nominal gain of PHP 26.6 billion, of which a substantial portion equivalent to PHP 9.6 billion is being deferred as part of the leaseback arrangements under IFRS 16. The net gain on sale and leaseback is about PHP 16.5 billion pre-tax and then PHP 12.6 billion net of tax. Next chart. One of the things we did also as of the half year was to take stock of some of the assets we have in our books, and we've identified three sets of assets for early accelerated depreciation.

These are our 3G assets that we have. We have already shortened the life to 2024, but given that the remaining usage of 3G is down to 3%-4% of the market, we took the opportunity to just accelerate the whole 3G asset base of PHP 8.7 billion. In terms of the plan, we will work towards a shutdown and optimize the use of the spectrum from 3G to LTE and eventually 5G. We also, as you know, have been migrating our DSL copper customers to fiber, and that's practically finished. Now we are able to embark on the next round of upgrades from the VDSL network to fiber.

Again, about PHP 5.9 billion of accelerated depreciation as a result of this decision to migrate earlier the VDSL customers. There will be some additional add-on depreciation in the second half of this year, about PHP 1 billion and another PHP 1.2 billion next year to finish the full migration of the VDSL asset base. In terms of the third item, that's really relating to our plans to move out of our Makati headquarters. The assets and network equipment that were impacted by this decision, we've taken a PHP 1.8 billion accelerated depreciation. All of this is part of the reported income with respect to the one-offs that we had in the first half of the year. Moving on. Yeah.

From a balance sheet standpoint, please note that with the proceeds that we have received from first closing, we were able to bring down our net debt to below 4 billion now to about $3.9 billion, and a net debt to EBITDA ratio of 2.60x. Our maturities are pretty well spread out. In fact, when you look at the chart with respect to the 2022 and the 2023 debt obligations, most of that will be covered with the proceeds of our tower sale transaction. Overall, we still have a remaining life of about 7 years for our debt. Average interest cost of 4%. Some of our debts are US dollar denominated, 16%, but on an unhedged basis, amount to about 9% of our debt.

Next chart, please. CapEx, we spent about PHP 46 billion in terms of our CapEx in the first half of the year. 36 billion of that went towards our technology spend on our assets to support various of our business requirements, which I'll explain later. Then 6.3 billion are business CapEx relating to the last mile install costs at CPEs with respect to the new connects in our home broadband business. CapEx, as you know, is going towards supporting all our businesses for the growth of home broadband with the addition of more ports, 1.7 billion new fiber ports to be built out this year, of which we've already built 950,000 as of the end of June.

To support also the growth in mobile data traffic, which is increasing as well, and then the data center requirements. We have the expansion of our VITRO Makati fourth floor and fifth floor, as well as the start of the construction of our 11th data center in Santa Rosa, Laguna. As Al indicated, we also launched the Jupiter cable systems last week. Part of the CapEx went towards that as well as other cable systems like Apricot. In fact, we're proud to note that PLDT accounts for about 65% of the international cable capacity in this country. For the tower sale, I think a two-pronged effect.

One is, there are some accelerated CapEx booked spend to finish all the in-flight projects we have with respect to upgrading the power and other support facilities of the towers we sold. We hastened the pace of that so that we can turn over those towers immediately to the tower companies with all the in-flight projects accomplished. That adds a bit of CapEx to this year, which would have been next year. The offsetting impact of the tower transactions, of course, with respect to new towers, we will be able to take advantage of the build-to-suit commitments with the new tower companies that we have.

Both EdgePoint and edotco have undertook to build these new towers, as well as we're also free to transact with all the other tower companies in the market with respect to new tower requirements. Next, please. Some highlights in terms of our network. As I indicated earlier, we're expanding our ports to 6.7 million after having added 950,000. We now pass 16 million homes with our broadband network. Fiber footprint continues to be increased, and we are also growing our wireless network as well to support 97% coverage of the country through 2G, 4G, and 5G. Then at the bottom, you see here the distribution of the devices in use.

Predominantly really an LTE market at this point, with 3G declining and 2G actually higher than 3G, but also on the downtrend and then 5G emerging at 3%. Lastly, next chart will just show the growth in terms of the 5G device adoption, data traffic growth. Of course, proud to note that our network for 5G is ahead in terms of relative to competition. At this point, I'll turn you over to Doy for a discussion on the finances.

Orlando B. Vea (Founder and CEO)

Good afternoon. Let me start by saying that, at PayMaya Philippines and Maya Bank, we are committed to, delivering the most advanced financial services to Filipino consumers and enterprises. Consumers and businesses want the convenience of an all-in-one money app. Last April, PayMaya rebranded to Maya, a fintech super app with seamless e-wallet, crypto, savings, and credit services, and prospectively investment, insurance, and other financial services. Just the other week, we relaunched PayMaya Enterprise into Maya Business. Maya Business is, of course, the largest merchant payment processor in the country in number of transactions. The positive traction validates our all-in-one money app strategy. As of end June, Maya had 50 million registered users across its consumer platforms.

We saw more than 650,000 customers opening a Maya Save account in less than 3 months, making Maya Bank the fastest growing digital bank in the country. This is like fintech on steroids. We have done what others took more than 6 months or even years. On the enterprise side, we are, as mentioned, the largest fully integrated payment processor for businesses with over 760,000 registered merchant acceptance points. We also have over 65,000 agents, including Maya centers, which were previously Smart Padala touchpoints. Next slide, please. As we grow our trailblazing financial services ecosystem, we ensure a seamless, convenient, reliable experience for our customers. For Maya Business, we are leading the charge for QRPH, person-to-merchant payments. We have also started offering a business deposit service for our Maya business clients.

We are extending MSME credit to our Maya Center agents via the Negosyo app. Soon, we will be offering other credit products to enterprise partners and their customers. On the consumer side, Maya is the top-rated local finance app in the market, both in Android and iOS. We introduced seamless crypto in-app with 15 popular coins. On the other hand, the 6% interest rate for Maya Save and personal goals is one of the highest in the market today. We're also now offering Maya Credit to customers for up to PHP 15,000. Expect more exciting services as we enable Filipinos to make bolder choices through FinTech. Thank you.

Alfredo S. Panlilio (President and CEO)

Okay. Chairman should be joining us, but let me just give you the guidance for 2022. I guess from a service revenue growth, we are maintaining our mid-single-digit growth guidance. Home broadband will continue to lead the growth. Revenue momentum expected to even accelerate even more. Enterprise expected to register a stronger performance, underpinned by its ICT and data center revenues. Wireless, facing a challenging environment, should benefit from opening up of the economy. We do have new programs that have been launched a couple of weeks ago. We expect that the trend for improvement in the second half should follow. With Telco core income, we maintain the guidance of PHP 33 billion as we expect a robust increase in our EBITDA.

Possible reduction in our financing costs resulting from the sale of our towers. Also, balancing it out to the effects of prolonged pandemic and the challenging market environment that we see today that are really affecting the consumer wallet of our consumers, and increasing our operating costs and CapEx in terms of 45% of our CapEx is actually USD denominated, so we might see some increases in terms of CapEx. For CapEx guidance of PHP 285 billion, but as I mentioned, maybe weaker peso on FX rate will impact this amount near the year. I think Anabelle has indicated that maybe two to three billion that might is due to the FX.

As we continue to aspire for really delivering a positive Free Cash Flow, and aiming to deleverage back to 2x, and really improving our position on paying special dividends. That's the guidance that we want to share with you for today. Thank you.

Melissa Vergel de Dios (First VP, Head of Investor Relations, and CSO)

We're now ready to take your questions. You may type your questions in the Q&A box in the upper right side of the screen. You may also click the Raise Hand button and just wait for the moderator to call your name before you unmute your microphone. You may also send your questions via email to [email protected]. Please indicate your name and company name for identification. I'll read out the first questions that were sent via email by Steven Olivares of China Bank Securities. The first one is: Can you shed some light on how mobile top-ups fared during the second quarter, first semester, and whether there are any trends you've been seeing during the early third quarter? He has a second question, but we'll deal with that question first.

Alfredo S. Panlilio (President and CEO)

Francis Flores here, who heads our wireless business. Maybe Francis can answer the question. Francis.

Francis Flores (Senior VP and Head of Consumer Business Group – Individual)

Quarter two of this year versus quarter one, we experienced a top-up increase of around 2%. First half top-up versus first half of last year, we did experience a decline of around 3%. In the coming months, we expect our top-ups, especially in quarter three, to go higher, especially with the increased mobility. One factor would be the back to school weeks. Of course, also our plans for the balance of the year, we increase our top-ups to continue to grow until quarter four.

Melissa Vergel de Dios (First VP, Head of Investor Relations, and CSO)

The second question from Steven: How does the entry of Starlink in the country, how will it affect PLDT?

Alfredo S. Panlilio (President and CEO)

Maybe I can take that. Well, basically, I think it's complementary to the services that we offer today. I think it also depends on how much the services are. It's gonna be compared to fiber optic, our broadband service, our wireless service, and how much the satellite service would cost. Obviously, the areas where wireless and fixed are not there, then the option being only satellite. It is an option, but I guess it depends on the commerciality also of the offer in the market and how the market can absorb the cost of the service.

It is complementary, and I think we are also, Mario is here also, Mario heads our network, but we've also talked to entities like Starlink and others, in terms of how we can work together. I don't know, Mario, what do you want to add, a few more insights?

Mario Tamayo (Senior VP and Head of Technology Group)

Yeah. We're talking to several of them, three of which we already have an MOU with PLDT to a proof of concept. That's progressing.

Alfredo S. Panlilio (President and CEO)

It's also an opportunity for our enterprise business. Maybe Jojo can shed some view on that.

Jojo G. Gendrano (First VP and Head of Enterprise Business Group)

Sure. Good afternoon. Would just like to quickly share that we're also talking with Starlink and similar entities on enabling them to come into the Philippines. In a way, just adding to what Espie had mentioned, we view it as complementary, and we're open to providing services to them as well.

Operator (participant)

Sami from UBS, you may unmute your mic. You have a hand raised.

Sami Kassab (Equity Research Analyst)

Yeah, sure. Thanks, Melissa, and good afternoon, everyone. Couple of questions from me. First is, just want to understand your view on mobile side. So, means obviously the mobile growth has been relatively slower. Is it a factor of macroeconomy, or is it because of competition? Related question is, has the competition changed, in the third quarter related to the first and second quarter? That's question number one. Second question is again linked to macro factors, and it has been highlighted that remains a bit of a challenge. Just want to understand that which business segment is more exposed to macro challenges. And the third question is on the churn, fixed broadband churn levels, which has increased.

What percentage of it is linked to Odette, and what percentage it is linked to the general or the regular churn levels in the market? Finally, on the data center side, the third and fourth quarter of the VITRO Makati data center, how much capacity or percentage increase in capacity it will add to PLDT's data center? Thank you.

Alfredo S. Panlilio (President and CEO)

I guess before that, our chairman has joined us, so if there are questions for the chairman who's also here. Quick, let me try to answer the first two questions, and I'll leave number three. Just turn to Jeremiah in the data center group. I guess on the towers, and maybe Martin can answer this also. It is really a matter of nomination. We do go through a lot of analytics in terms of where we should put up towers and locations that we need to improve coverage. It is a nomination, plus of course assessing also where competition is. Making sure that we are able to address the market and continue to serve our market also.

It is a lot of detailed discussions between business and network on where to roll out and a lot of analytics behind that. Across the businesses, what is most affected, as a general answer to that, I think everybody's affected in terms of the share of wallet. As you know, macroeconomic issues and inflation will always play a big role in the wallets of our consumers. We are seeing some still some growth still in broadband. There's still a lot of demand coming in from broadband. As Franz indicated, we're seeing progress also in terms of mobile as also the lockdowns have really been, you know, have not only lightened. There are no more lockdowns. I think according to the president, he will not impose any lockdown moving forward.

That is positive to the wireless business. Maybe Jeremiah can answer the churn.

Jeremiah de la Cruz (Senior VP and Head of Consumer Business – Home)

Sure. The question I believe was, what percentage of the churn in fixed broadband can be directly attributed to Odette versus what you would normally see as churn in the marketplace? To answer this. Sorry, was that correct?

Sami Kassab (Equity Research Analyst)

Yeah. Yes. Yes, please.

Jeremiah de la Cruz (Senior VP and Head of Consumer Business – Home)

Okay. To answer this question, I'll speak specifically about Odette first, to give you a better understanding of the timelines. Odette actually struck December 16th. I was actually referencing a little bit of a different date earlier on, but it's December 16th. One of the things that we did in response to Odette, aside from springing into action to help our communities and families as well as homes, restore services, was we actually applied a different process for those customers and different treatment. We actually wanted to alleviate some of the concern and the pressure that they may have on their household. We actually put them under special treatment over that period.

What you'll see in quarter one, we actually saw lower churn in totality in quarter one because we're actually not treating customers in the Odette-stricken, Odette-struck areas, right? We saw a slight decline in churn in quarter one. If you normalize that and you have a look at churn as a percentage of our base for quarter one and quarter two, what you will see is churn directly attributable to Odette, specific Odette areas, was actually 50,000 customers, right? It's about 50,000 customers directly attributable to the Odette areas. Does that answer your question?

Sami Kassab (Equity Research Analyst)

Understood. Thanks. If we take net of the 50,000, then that suggests that the churn level is increasing in the market. Is that a right assessment?

Jeremiah de la Cruz (Senior VP and Head of Consumer Business – Home)

There's a slight uptick in quarter two, but if you actually flatten it out over quarter one, quarter two and look at the overall as a percentage, it's not a significant increase.

Sami Kassab (Equity Research Analyst)

Understood. Thank you very much.

Alfredo S. Panlilio (President and CEO)

Okay. Fourth question, maybe Anastacio Martirez.

Anastacio Martirez (COO)

Yeah. Hi, good afternoon. Thank you for the question on the VITRO Makati expansion. Happy to report we're on track. The expansion involves two floors. One is the fourth floor expansion, and the other one is the fifth floor. If you look at the fourth floor, that's going to add roughly 672 racks available for the fourth floor. If you look at the fifth floor, that's an additional 896 racks. So all told

Alfredo S. Panlilio (President and CEO)

With the full expansion of the fourth and fifth floor of VITRO Makati, we'll have 1,568 new racks by the end of the year. Thank you.

Sami Kassab (Equity Research Analyst)

Understood. Thank you very much. Just going back on the mobile question, I think that is not answered. Is that how you would characterize the mobile competition, or and how has it changed related to the first and second quarter going into the third quarter?

Alfredo S. Panlilio (President and CEO)

I can answer.

Sami Kassab (Equity Research Analyst)

You can answer it, yeah.

Alfredo S. Panlilio (President and CEO)

Yes. I think in terms of competition, our competition are actually going for more value for money. That's what we need to really consider as we move forward, and especially in the light of the recession. I think more consumers are even looking for more value for money. That's number one. Number two, I think our competition is really expanding the coverage and also trying to improve their network. I think that's something that we also have to consider moving forward.

Sami Kassab (Equity Research Analyst)

Understood. Thank you very much. This is very clear. Thanks, everyone.

Alfredo S. Panlilio (President and CEO)

Thank you.

Operator (participant)

Arthur of Citi, you may unmute your line, ask your question.

Arthur Pineda (Managing Director and Senior Equity Analyst)

Hi. Thanks for the opportunity. Several questions, please. You mentioned that there were headwinds mainly because of inflation issues. Are you already starting to see that in terms of monthly trends on consumption? I'm just wondering if you look at, let's say, April to July, has there been any notable changes? Second question I had is with regard to the digital bank. You've mentioned 650,000 users within three months, which is quite impressive. I'm just wondering, are you monetizing on these users? Like, are you already deploying the capital for items like credit? Has that already started? Third question I had is with regard to the data centers. Obviously, this is a big focus area for you.

Are there any moves actually taking any strategic investors, such as what your competitors locally and regionally have been doing? Maybe it's a housekeeping question on the accelerated depreciation. Can you talk about the impact of accelerated depreciation? What's the annual depreciation from bookings that you have on 3G, VDSL and HFC network so that we can actually model it into the following years? Thank you.

Alfredo S. Panlilio (President and CEO)

Thank you. Thank you, Arthur. Nice to hear from you. Well, first of all, on the impact on the business, I think, as I said earlier, I think all the businesses have been impacted. There is some softness on top-ups for July. Having said that, I think, as Francis indicated, the market is looking for value for money propositions, which actually Francis has just launched, 2 weeks ago. There are offers in the market that are basically answering the needs of the times, and these are the packages that are already out there in the market. We're seeing some traction in that, and hopefully we can continue to see progress in the next few months.

Yes, we are very wary of it, and it's also affecting some of the broadband customers. In terms of what Jeremiah indicated, that is some people churning out, really the ability for them to afford continuous service. We are looking at other solutions, basically just, you know, to address also the affordability issue. Really put, you know, looking at, for example, at fixed wireless as solution to certain segments of the demographics of the broadband market. On the second question, I think I'll give it to Doy, on the digital bank.

Orlando B. Vea (Founder and CEO)

Yeah. Yes, to your question, Arthur. Yes, we are already deploying the deposits that we're generating, particularly as you pointed out, for lending. Having said that, credit just started as a business for us, but we are tracking a faster trajectory than our peers, just like in savings. I think we can see a better view of that in the next three months as the traction increases for both sides, lending and savings.

Alfredo S. Panlilio (President and CEO)

On your third question, Arthur, on the data center. I think right now we are very busy on expanding our capacities. As you might know, we broke ground on our 11th data center, which is the biggest data center we have, a hyperscaler development that should be completed sometime late next year. We have not really gone forward with the view of bringing in a strategic partner this time. Maybe we will revisit that maybe sometime next year. Right now we just focus on, like, making sure that we're able to address the demands that are being asked of us. That's why we're expanding our data center capacity as we indicated earlier.

On the fourth question, I guess I give it to Anabelle for the accelerated depreciation.

Anabelle Lim-Chua (Senior VP, CFO, and CRO)

Yeah. Arthur, there are, as I indicated, three different asset categories with different remaining lives. Roughly, the impact of reduced depreciation for the half a year remaining, half of the year is pre-tax about PHP 2.3 billion, roughly. Yeah, PHP 2.2 billion, PHP 2.3 billion. You can annualize that. For next year, that'll be double that number on a pre-tax basis.

Arthur Pineda (Managing Director and Senior Equity Analyst)

Understood. Thank you. Sorry, if I could just sneak in one last question. Are you seeing any changes from the third operator? I mean, there's a lot of talk of them facing financial difficulties. Has that changed their investment intensity from what you've been seeing on the ground?

Anabelle Lim-Chua (Senior VP, CFO, and CRO)

I think they're still building out, right. I think they have announced that they have over 5,500 sites.

Arthur Pineda (Managing Director and Senior Equity Analyst)

Building out.

Orlando B. Vea (Founder and CEO)

I think they're continuing to roll out their base stations so far. As far as that's concerned, they're continuing to roll out.

Arthur Pineda (Managing Director and Senior Equity Analyst)

Got it. Thank you very much.

Orlando B. Vea (Founder and CEO)

Thank you.

Anabelle Lim-Chua (Senior VP, CFO, and CRO)

The next set of questions from Ranjan of J.P. Morgan. Ranjan, you can unmute your line now.

Ranjan Sharma (Equity Research Analyst)

Hello, good evening, and thank you for the presentation. Two questions from my side. Maybe we can take them one-by-one. Firstly, on this, accelerated depreciation, should we be penciling more to come in the coming quarters? I know Anabelle talked about like the savings that we'll see, but should we be expecting more, accelerated depreciation in the next, let's say in the next 2, 3 quarters?

Anabelle Lim-Chua (Senior VP, CFO, and CRO)

Ranjan, we'll take stock at year-end, so that's typically when we do a review, right, of the assets. You know, I guess if we have some one-off gains from the tower sales, it's always a good time to kinda look at some of these sort of cleanup that we can do at year-end as well.

Ranjan Sharma (Equity Research Analyst)

The second question is on the financial services side. What's driving your rapid growth in financial services? Are you offering incentives? Are you offering higher deposit rates? If you can just share, what's driving that growth.

Orlando B. Vea (Founder and CEO)

Well, first of all, it's a, as I mentioned, it's an all-in-one app. It's all-purpose. Within one app, you can do everything. Okay. Our customers are crossing from one service to another seamlessly. When they do that, they get attracted by offers as well on particular services. In the case of savings, we're offering 6% as an introductory rate up to August, September, as we announced, but we can extend that if we feel like, based on results. It's a mixture of both the attractiveness of the offers and the fact that they're already inside the app. Like, just like there are many savings customers that are coming in, same case with crypto. You know, they get all.

They get to move around the app very seamlessly to test the services.

Ranjan Sharma (Equity Research Analyst)

What are the lending products that you have grown so far on the app?

Orlando B. Vea (Founder and CEO)

It's a, like a personal credit line, PHP 15,000 for very small ticket items, 30 days tenor. In terms of personal goals, you can establish accounts where you want to save for a particular goal, and we encourage you to do that. As a result, we reward you for doing that.

Ranjan Sharma (Equity Research Analyst)

These are more consumer loans?

Orlando B. Vea (Founder and CEO)

Consumer, we're already starting to offer MSME loans as well. We just launched our Maya Business last week, and that's part of the suite of services.

Ranjan Sharma (Equity Research Analyst)

Can I just ask one last question? How will you do collections for these loans? I mean, the issue with giving out loans rapidly is that your credit quality can decline very swiftly, right?

Orlando B. Vea (Founder and CEO)

Yes.

Ranjan Sharma (Equity Research Analyst)

How does the credit collection work?

Orlando B. Vea (Founder and CEO)

Well, our collection experience is right now we're tracking 95% collection rate. It's not a bad number. Maybe the question is, are we taking enough risk? It's been a good performance on collections.

Ranjan Sharma (Equity Research Analyst)

Okay, thank you.

Anabelle Lim-Chua (Senior VP, CFO, and CRO)

Next in line, Rochelle of Maybank. You can unmute your line and ask your question.

Rochelle Cruz (Equity Research Analyst)

Hi, good afternoon. On the fixed line, can you share your take on competition on the fixed line, especially as you have been quite aggressive in raising speeds? I think it's now at 100 Mbps. Do you think this is also causing the churn, or are those using mobile data shifting to mobile data from broadband?

Jeremiah de la Cruz (Senior VP and Head of Consumer Business – Home)

Okay. Firstly, as I mentioned earlier on, the vast majority of the churn that actually we experienced in quarter two, the uplift in churn is predominantly and directly related to Odette. Right. When we saw that impact of Odette, these are customers actually in those areas, those barangays and those addresses that actually had a great impact. From a competitive pressure perspective, what we are seeing, what I can share with you is, we have seen still very, very strong demand from the market for PLDT services. In fact, if you look at the number of gross additions that PLDT Home had in H1 of 2022 versus H1 of 2021.

Both growth and migrations, we actually grew over the same period, right? It's about an 80,000 increase over that same period in terms of new customers being acquired to our fiber network. We have seen an increase in competition, right. I think that's natural, especially as you start to see that there is a quite a large available market. There's been a lot of talk about that. What we've been focused on is actually making sure that we deliver the best possible service we can for our customer. You're seeing that come through in terms of the awards that we've been able to secure as being the fastest broad fixed broadband network in the country. We're also seeing that in terms of the number of applications that we still see coming in.

Having said that, we'll always make sure that our customers receive value for money. We constantly scan the market to ensure that the plans that we do offer to our customers remain really good value for money, and that there is still plenty of reason to actually join PLDT Home.

Rochelle Cruz (Equity Research Analyst)

All right. Thank you for that. Two more questions for me. First is on the Starlink, I mean. Isn't it the same product being offered by your Telesat partnership? And second one is DITO a threat now that it has 11 million subscribers?

Jeremiah de la Cruz (Senior VP and Head of Consumer Business – Home)

I missed the first question. Starlink, I think.

Rochelle Cruz (Equity Research Analyst)

The one from Telesat.

Jeremiah de la Cruz (Senior VP and Head of Consumer Business – Home)

Yes.

Alfredo S. Panlilio (President and CEO)

I'll take that. I think from the Telesat partnership that we're looking at is more on B2B solutions on higher ARPU. It doesn't directly compete with the Starlink offering, though Telesat will not be available in country until about 2025 or 2026. Right. It is not impacting right now. On the question on DITO, I saw that announced at 11 million. At the end of the day, I think the question should be asking what kinds of revenues are they generating there in the million. Because there have been a lot of SIMs seem to have been given away at the start. I think maybe the question should not be asked of us, but what is the revenues that they're seeing in 11 million.

I don't know whether Francis Flores wants to add some flavor about what the competition is doing. Francis Flores did say earlier that the customers are looking for value for money propositions, and that's something that we're also addressing.

Jeremiah de la Cruz (Senior VP and Head of Consumer Business – Home)

Service-wise.

Rochelle Cruz (Equity Research Analyst)

Just at the press conference.

Alfredo S. Panlilio (President and CEO)

Just at the cost of PHP 11 million.

Rochelle Cruz (Equity Research Analyst)

All right. Thank you.

Operator (participant)

The next question is from Miguel Ong. Miguel, unmute your line and ask your question.

Miguel Ong (Equity Research Analyst)

For the presentation. My first question is, I understand that the home broadband business has been one of the key drivers for revenues for the past several quarters. This might be most likely due to the under-penetrated nature of the market. I guess my question is, does the company have an internal expectation as to how long the robust growth will last? Considering that people are moving back to the offices and mobility is increasing as well.

Alfredo S. Panlilio (President and CEO)

Yeah. As Jeremiah indicated early on, I think the demand remains to be strong. I think that's how we see home broadband to be at this point. I think next year there will still be some demand, maybe not at the same level that we're experiencing this year, which is 23%. Maybe we're looking at higher teens next year, but I think we still see some growth in this market. I think just to put some context, I think in other countries, maybe Thailand and Vietnam, maybe even other countries, their penetration for the broadband is at the 40 or 50% level. We're only at the 20-25% level in terms of fixed broadband penetration. There's still a lot of opportunities to grow in this space.

Miguel Ong (Equity Research Analyst)

Thank you for that. Just another one. On the postpaid mobile ARPUs, could you give more color as to why it's trending a bit lower sequentially?

Alfredo S. Panlilio (President and CEO)

Do you have that, Franz?

Francis Bautista (VP)

I can.

Alfredo S. Panlilio (President and CEO)

Yes.

Francis Bautista (VP)

I think one challenge we're seeing on postpaid, again, part of the recession. I think we're seeing also a decline in ARPU for our postpaid. Especially what we all see is the prepaid offers are also becoming more value for money, not just across all the different brands. I think that really poses the challenge really for postpaid. So those are the two factors. One, again, related to the economic factors and also because the prepaid offers have also become more attractive to the postpaid consumer.

Alfredo S. Panlilio (President and CEO)

Miguel, are you okay?

Miguel Ong (Equity Research Analyst)

Hi. Yeah, thanks for those. That's it for me.

Operator (participant)

All right. Arthur, you have your hand raised. Do you have a follow-up before we go to the chat? Arthur.

Arthur Pineda (Managing Director and Senior Equity Analyst)

Can you hear me?

Operator (participant)

Yes, we can hear you, Arthur.

Arthur Pineda (Managing Director and Senior Equity Analyst)

Yeah, yeah, sorry. Just had a follow-up. Just to better understand the guidance. So you kept it at PHP 33 billion for the year, for core cap profit. You had PHP 17 billion in the first half. Basically for the second half you mentioned that you'll see D&A savings of around PHP 2.3 billion because of this accelerated depreciation. Why keep PHP 33 billion? Shouldn't this be stronger?

Anabelle Lim-Chua (Senior VP, CFO, and CRO)

Before MVP answers that question, just to clarify, it's PHP 2 billion for six months.

Manuel V. Pangilinan (Chairman)

Absolutely.

Anabelle Lim-Chua (Senior VP, CFO, and CRO)

You answered that question for us.

Manuel V. Pangilinan (Chairman)

Well, I think really we anticipate a stronger full year number that was higher than PHP 33 billion. What we're concerned about really is what Al indicated to you, and I'm sure the rest of the team here, is that the corrosive effect of inflation on consumer spending. Particularly the most vulnerable portion would be the wireless bit, because that's where the individual pockets are affected. I think the strongest segment of PLDT would be enterprise because they've got the resources to be able to weather better inflationary pressures. Plus, I think the effect on efficiency and savings on enterprises are getting to be more realized by corporates in terms of the deployment of technology in that sense.

The middle case is really the home business which I think Jeremiah has told you. To some extent they're insulated by the fact that there's a hybrid environment. They're not totally mobile yet. Of course, there's still a big market out there in terms of the demand for home fiber. I think the total fiber subscribers might only be about 5-6 million. We think that the addressable market is at least anywhere between 10-12 million households. At least there's still some ways to go in terms of affordability and the number of households that are able to afford the price points of fixed broadband. Wireless is what causes a bit of concern.

You know, yes, I think we will indeed support most likely a higher number than the PHP 33 billion. Got it. Thank you very much.

Melissa Vergel de Dios (First VP, Head of Investor Relations, and CSO)

All right, now questions from the chat box. After the sale transaction of 5,907 towers, how many towers will PLDT will remain? And of the 5,907 towers being sold, how many will be leased back by Smart, and how many will be leased back by Digitel? Are these towers originally booked under Smart and Digitel?

Anabelle Lim-Chua (Senior VP, CFO, and CRO)

All the leased back will be by Smart. Overall, we have 11,000 towers, but those are of different types of towers. That includes the macro, the micro, et cetera. I guess, yeah, we potentially could still have another tower sale transaction after this 5,907, but it will be of a slightly smaller magnitude. If we look at it, probably more likely next year than this year.

Melissa Vergel de Dios (First VP, Head of Investor Relations, and CSO)

There's another question. Any color on the recent earthquake? Did it result to any damages to your infrastructure equipment, and will it have any material effect, repairs, and rebates on financials?

Alfredo S. Panlilio (President and CEO)

There were very little. No impact on our network. There were just some outages when we lost power in certain areas. Really no major damage in our infrastructure because of the earthquake.

Melissa Vergel de Dios (First VP, Head of Investor Relations, and CSO)

Any impact on financials, rebates, and?

Alfredo S. Panlilio (President and CEO)

No, no. Very minimal. Very minimal. Zero. Nothing.

Melissa Vergel de Dios (First VP, Head of Investor Relations, and CSO)

Since the chairman's here, might as well ask the question of a Bloomberg headline that just came out. Sir, you might as well clarify. The Bloomberg headline reads that the Philippine ABS-CBN and TV5 are near an investment deal. How many answers?

Manuel V. Pangilinan (Chairman)

Well, you know, we've been in discussion with ABS-CBN for quite a number of months, in fact, more than a year. It's fair to characterize we're in the final stages of completing the agreement in respect of the commercial terms of an agreement with them. It is not. We are not acquiring any shares, or we're not making an investment in ABS-CBN itself. Rather ABS-CBN will make an investment in TV5. The basic model we agreed with them is that the principal free to air platform that both PLDT and MediaQuest and ABS-CBN would be TV5. That's the basic agreement. They will acquire a minority voting interest in TV5.

I think I described it as around 35%. Control will rest with MediaQuest. Of course, there are many more items in that agreement, but that's the basic terms. Those are the basic terms.

Melissa Vergel de Dios (First VP, Head of Investor Relations, and CSO)

We have Sami from UBS.

Sami Kassab (Equity Research Analyst)

Hi. Just a one housekeeping question that it was in the earlier presentation mentioned that PHP 1.6 billion was booked as an operating expense linked to audit. Just want to check how much of it was booked in first quarter and how much of it is in second quarter. Is that considered as one-off or as a part of your regular OpEx?

Anabelle Lim-Chua (Senior VP, CFO, and CRO)

Yeah. For Odette, we booked about PHP 600 million of OpEx, principally repairs and maintenance in the first quarter, and then close to PHP 500 million in the second quarter, so about PHP 1.1 billion combined. We didn't classify them as one-off, so they effectively are embedded inside the core numbers. That's why it's indicated that our EBITDA of PHP 50.5 billion would actually have been PHP 1.1 billion higher had there been no Odette related costs. This is just the repair cost. This doesn't include, you know, the impact effectively on the, you know, the business side for particularly home.

Sami Kassab (Equity Research Analyst)

Understood. Thank you. Thanks a lot. Thanks so much. Thanks.

Melissa Vergel de Dios (First VP, Head of Investor Relations, and CSO)

Any last questions? Final call. If there are none, we now turn the floor over back to Mr. Pangilinan for his closing remarks.

Manuel V. Pangilinan (Chairman)

Hi, DB. Thank you all for joining us today in this conversation with you, and we look forward to seeing you again sometime early November when we announce our third quarter results and perhaps give you an idea what 2023 would look like to our benefits after.

Alfredo S. Panlilio (President and CEO)

Understood

Manuel V. Pangilinan (Chairman)

Answer this question. The full impact, I forgot to add to it, the full impact of the gains on the tower sale will actually be felt starting next year. Sometime next year. Thank you.

Melissa Vergel de Dios (First VP, Head of Investor Relations, and CSO)

On that note, we're concluding today's briefing. As always, should you have any further questions or clarifications, please feel free to reach out to PLDT Investor Relations. Thank you for your participation. Stay safe.

Alfredo S. Panlilio (President and CEO)

Thank you.

Anabelle Lim-Chua (Senior VP, CFO, and CRO)

Bye.

Orlando B. Vea (Founder and CEO)

Thank you.

Anabelle Lim-Chua (Senior VP, CFO, and CRO)

Bye.