________________________________________________

 

 

PHILIPPINE LONG DISTANCE

TELEPHONE COMPANY

________________________________________________

(Company’s Full Name)

 

 

Ramon Cojuangco Building

Makati Avenue, Makati City

_________________________________________________

(Company’s Address)

 

 

(632) 816-8556

______________________________________

(Telephone Number)

 

 

Not Applicable

______________________________________

(Fiscal Year Ending)

(month & day)

 

 

SEC Form 17-Q

______________________________________

Form Type

 

 

Not Applicable

______________________________________

Amendment Designation (if applicable)

 

 

December 31, 2008

______________________________________

Period Ended Date

 

 

Not Applicable

__________________________________________________

(Secondary License Type and File Number)

 

March 3, 2009

 

 

Securities & Exchange Commission

Money Market Operations Department

SEC Building, EDSA

Mandaluyong City

 

Attention: Director Justina Callangan

Corporations Finance Department

 

Gentlemen:

 

In accordance with Section 17.1(b) of the Securities Regulation Code, we submit herewith three (3) copies of SEC Form 17-Q with Management’s Discussion and Analysis and accompanying audited financial statements of the Company as at and for the year ended December 31, 2008.

 

 

 

 

COVER SHEET

 

 

 

(Company’s Full Name)

 

 

(Business Address: No. Street City/Town/Province)

 

 

 

 

 

----------------------------------------------------------------------------------------------------------------------------------

To be accomplished by SEC Personnel concerned

 

 

 

Remarks: Please use black ink for scanning purposes.

SECURITIES AND EXCHANGE COMMISSION

 

SEC FORM 17-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 17
OF THE SECURITIES REGULATION CODE (“SRC”) AND

SRC 17 (2) (b) THEREUNDER

 

 

 

1. For the quarterly period ended December 31, 2008

 

2. SEC Identification Number PW-55 3. BIR Tax Identification No. 000-488-793

 

4. Philippine Long Distance Telephone Company

Exact name of registrant as specified in its charter

 

5. Republic of the Philippines

Province, country or other jurisdiction of incorporation or organization

 

6. Industry Classification Code: (SEC Use Only)

 

7. Ramon Cojuangco Building, Makati Avenue, Makati City 0721

Address of registrant’s principal office Postal Code

 

8. (632) 816-8556

Registrant’s telephone number, including area code

 

9. Not Applicable

Former name, former address, and former fiscal year, if changed since last report

 

10. Securities registered pursuant to Sections 8 of the SRC

 

Title of Each Class Number of Shares of Common Stock Outstanding

 

Common Capital Stock, Php5 par value 187,483,837 shares as at December 31, 2008

 

11. Are any or all of these securities listed on the Philippine Stock Exchange?

 

Yes [ X ] No [ ]

 

12. Check whether the registrant

(a) has filed all reports required to be filed by Section 17 of the SRC during the preceding ten months (or for such shorter period that the registrant was required to file such reports):

Yes [ X ] No [ ]

 

(b) has been subject to such filing requirements for the past 90 days.

Yes [ X ] No [ ]

TABLE OF CONTENTS

 

Page

 

PART I - FINANCIAL INFORMATION 1

Item 1... Financial Statements 1

Item 2 Management’s Discussion and Analysis of Financial

Condition and Results of Operations 1

Financial Highlights and Key Performance Indicators 2

Overview 3

Results of Operations 4

Wireless 5

Total Revenues 5

Expenses 10

Other Income (Expenses) 12

Provision for Income Tax 13

Net Income 13

Fixed Line 13

Total Revenues 13

Expenses 16

Other Income (Expenses) 18

Provision for Income Tax 18

Net Income 19

Information and Communications Technology 19

Total Revenues 19

Expenses 20

Other Income (Expenses) 22

Benefit from Income Tax 22

Net Loss 22

Liquidity and Capital Resources 23

Operating Activities 23

Investing Activities 24

Financing Activities 25

Contractual Obligations and Commercial Commitments 29

Quantitative and Qualitative Disclosures about Market Risks 29

Impact of Inflation and Changing Prices 30

PART II – OTHER INFORMATION 30

Related Party Transactions 31

 

ANNEX – Aging of Accounts Receivable A-1

 

SIGNATURES S-1

PART I –– FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Our consolidated financial statements as at December 31, 2008 and December 31, 2007 and for the years ended December 31, 2008 and 2007 and related notes (pages F-1 to F-107) are filed as part of this report on Form 17-Q.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

In the following discussion and analysis of our financial condition and results of operations, unless the context indicates or otherwise requires, references to “we,” “us,” “our” or “PLDT Group” mean the Philippine Long Distance Telephone Company and its consolidated subsidiaries, and references to “PLDT” mean the Philippine Long Distance Telephone Company, not including its consolidated subsidiaries (please see Note 2 – Summary of Significant Accounting Policies and Practices to the accompanying audited consolidated financial statements for a list of these subsidiaries, including a description of their respective principal business activities).

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying audited consolidated financial statements and the related notes. Our audited consolidated financial statements, and the financial information discussed below, have been prepared in accordance with Philippine Financial Reporting Standards, or PFRS, which has certain differences from International Financial Reporting Standards as issued by the International Accounting Standards Board. PFRS differ in certain significant respects from generally accepted accounting principles in the U.S.

 

The financial information appearing in this report and in the accompanying audited consolidated financial statements is stated in Philippine pesos. All references to “pesos,” “Philippine pesos” or “Php” are to the lawful currency of the Philippines; all references to “U.S. dollars,” “US$” or “dollars” are to the lawful currency of the United States; all references to “Japanese yen,” “JP¥” or “¥” are to the lawful currency of Japan and all references to “Euro” or “€” are to the lawful currency of the European Union. Translations of Philippine peso amounts into U.S. dollars in this report and in the accompanying audited consolidated financial statements were made based on the exchange rate of Php47.647 to US$1.00, the volume weighted average exchange rate at December 31, 2008 quoted through the Philippine Dealing System.

 

Some information in this report may contain forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933 and Section 21E of the U.S. Securities Exchange Act of 1934. We have based these forward-looking statements on our current beliefs, expectations and intentions as to facts, actions and events that will or may occur in the future. Such statements generally are identified by forward-looking words such as “believe,” “plan,” “anticipate,” “continue,” “estimate,” “expect,” “may,” “will” or other similar words.

 

A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We have chosen these assumptions or bases in good faith, and we believe that they are reasonable in all material respects. However, we caution you that forward-looking statements and assumed facts or bases almost always vary from actual results, and the differences between the results implied by the forward-looking statements and assumed facts or bases and actual results can be material, depending on the circumstances. When considering forward-looking statements, you should keep in mind the description of risks and cautionary statements in this report. You should also keep in mind that any forward-looking statement made by us in this report or elsewhere speaks only as at the date on which we made it. New risks and uncertainties come up from time to time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the forward-looking statements in this report after the date hereof. In light of these risks and uncertainties, any forward-looking statement made in this report or elsewhere might not occur.

Financial Highlights and Key Performance Indicators

 

 

______________

 

(1)     Net debt is derived by deducting cash and cash equivalents and short-term investments from total debt (notes payable and long-term debt, including current portion).

 

Overview

 

We are the largest and most diversified telecommunications company in the Philippines. We have organized our business into three main segments:

 

•            Wireless — wireless telecommunications services provided by Smart Communications, Inc., or Smart, and Pilipino Telephone Corporation, or Piltel, and Connectivity Unlimited Resources Enterprises, or CURE, our cellular service providers; Smart Broadband, Inc., or SBI, and Airborne Access Corporation, or Airborne Access, our wireless broadband providers; Wolfpac Mobile, Inc., or Wolfpac, our wireless content operator; Mabuhay Satellite Corporation, or Mabuhay Satellite and ACeS Philippines Cellular Satellite Corporation, or ACeS Philippines, our satellite operator;

 

•            Fixed Line — fixed line telecommunications services primarily provided through PLDT. We also provide fixed line services through PLDT’s subsidiaries, namely, PLDT Clark Telecom, Inc., PLDT Subic Telecom, Inc., PLDT-Maratel, Inc., Piltel (on June 4, 2008, PLDT acquired the fixed line assets of Piltel), PLDT Global Corporation, or PLDT Global, Smart-NTT Multimedia, Inc., and Bonifacio Communications Corporation, which together account for approximately 2% of our consolidated fixed line subscribers; and

 

•            Information and Communications Technology, or ICT — information and communications infrastructure and services for internet applications, internet protocol, or IP-based solutions and multimedia content delivery provided by ePLDT, Inc., or ePLDT; knowledge processing solutions provided by SPi Technologies, Inc. and its subsidiaries, or SPi Group; customer interaction services provided under the umbrella brand name ePLDT Ventus, through ePLDT Ventus, Inc., or Ventus, Parlance Systems, Inc., or Parlance, and Vocativ Systems, Inc., or Vocativ; internet access and online gaming services provided by Infocom Technologies, Inc., or Infocom, Digital Paradise, Inc., or Digital Paradise, netGames, Inc., or netGames, and Level Up!, Inc., or Level Up!; and e-commerce, and IT-related services provided by other investees of ePLDT, as discussed in Note 9 – Investments in Associates and Joint Ventures to the accompanying consolidated financial statements.

 

We registered revenues of Php145,582 million in 2008, an increase of Php7,624 million, or 6%, as compared with Php137,958 million in 2007 primarily due to an increase in our service revenues by Php7,395 million resulting largely from an increase in the service revenues of our wireless business, which was primarily due to an increase in the number of our cellular and broadband subscribers.

 

Expenses increased by Php1,330 million, or 2%, to Php85,786 million in 2008 from Php84,456 million in 2007, largely resulting from increases in asset impairment, repairs and maintenance, rent and other operational-related expenses, which were partly offset by lower depreciation and amortization, and professional and other contracted services.

 

Other expenses increased by Php5,060 million to Php5,305 million in 2008 from Php245 million in 2007. The increase was primarily due to foreign exchange losses of Php6,170 million on account of a loss on revaluation of net foreign currency-denominated liabilities owing to the depreciation of the Philippine peso in 2008 compared with a net foreign exchange gain of Php2,976 million in 2007. This increase was partly offset by a gain on derivative transactions of Php3,812 million relating to the gain in the mark-to-market valuation of various financial instruments and the impact of the de-designation of foreign currency swaps and option contracts beginning January 1, 2008 compared to a loss on derivative transactions of Php1,044 million in 2007.

 

Net income attributable to equity holders of PLDT decreased by Php1,369 million, or 4%, to Php34,635 million in 2008 from Php36,004 million in 2007. The decrease is mainly attributable to increases in consolidated expenses by Php1,330 million, other expenses by Php5,060 million and provision for income tax by Php1,914 million due to higher taxable income in 2008, which were partially offset by the 6% increase in consolidated revenues by Php7,624 million. Likewise, our basic and diluted earnings per common share decreased to Php181.65 and Php181.64 in 2008 from Php188.42 and Php187.53 in 2007, respectively. At the end of 2008, as a result of the share buyback program implemented in 2008, there were 187.5 million PLDT common shares outstanding compared with 188.7 million at the end of 2007.

 

Results of Operations

 

The table below shows the contribution by each of our business segments to our revenues, expenses and net income (loss) for the years ended December 31, 2008 and 2007. Most of our revenues and other income are derived from our operations within the Philippines.

 

Wireless

 

Total Revenues

 

The following table summarizes total revenues from our wireless business for the years ended December 31, 2008 and 2007 by service segment:

 

 

Service Revenues

 

Our wireless service revenues increased by Php7,094 million, or 8%, to Php93,593 million in 2008 as compared with Php86,499 million in 2007, mainly as a result of the growth in the cellular and wireless broadband subscriber base. Short messaging service, or SMS, benefited from the larger subscriber base. Voice revenues also increased due to the growth in international inbound and outbound call volumes in 2008 compared with 2007. Such increases were partially offset by the unfavorable effect of the appreciation of the Philippine peso to the U.S. dollar exchange rate on our dollar-linked revenues. As a percentage of our total wireless revenues, service revenues contributed 98% in each of the years 2008 and 2007.

 

Cellular Service

 

Our cellular service revenues in 2008 amounted to Php87,518 million, an increase of Php5,184 million, or 6%, from Php82,334 million in 2007. Cellular service revenues accounted for 94% of our wireless service revenues in 2008 as compared with 95% in 2007.

 

The following tables show the breakdown in cellular service revenues and other key measures of our cellular business as at and for the years ended December 31, 2008 and 2007:

 

 

(1)      Refers to other non-subscriber-related revenues consisting primarily of inbound international roaming fees, revenues from Smart’s public calling offices and a small number of leased line contracts, revenues from Wolfpac and other Smart subsidiaries and revenue share in PLDT’s WeRoam and PLDT Landline Plus services.

 

 

Revenues attributable to our cellular prepaid service amounted to Php78,743 million in 2008, a 6% increase over the Php74,284 million earned in 2007. Prepaid service revenues in each of the years 2008 and 2007 accounted for 93% of voice and data revenues. Revenues attributable to Smart’s postpaid service amounted to Php6,336 million in 2008, a 7% increase over the Php5,913 million earned in 2007, and accounted for 7% of voice and data revenues in each of the years 2008 and 2007.

 

Voice Services

 

Cellular revenues from voice services, which include all voice traffic and voice value-added services such as voice mail and outbound international roaming, increased by Php1,182 million, or 3%, to Php37,287 million in 2008 from Php36,105 million in 2007 primarily due to increased domestic voice revenues brought about by bucket voice offers and the growth in international call volumes, partially offset by the unfavorable effect of a lower average Philippine peso to the U.S. dollar exchange rate on our dollar-linked revenues. Cellular voice services accounted for 43% of cellular service revenues in 2008 as compared with 44% in 2007.

 

Data Services

 

Cellular revenues from data services, which include all text messaging-related services as well as value-added services, increased by Php3,700 million, or 8%, to Php47,792 million in 2008 from Php44,092 million in 2007. Cellular data services accounted for 55% of cellular service revenues in 2008 as compared with 54% in 2007.

 

The following table shows the breakdown of our cellular data revenues for the years ended December 31, 2008 and 2007:

 

__________

(1)   Includes standard services such as info-on-demand, ringtone and logo download, etc.

(2)   Includes Multimedia Messaging System, internet browsing, General Packet Radio Service, or GPRS, etc.

 

Text messaging-related services contributed revenues of Php45,207 million in 2008, an increase of Php3,942 million, or 10%, compared with Php41,265 million in 2007, and accounted for 95% and 94% of the total cellular data revenues in 2008 and 2007, respectively. The increase in revenues from text messaging-related services resulted mainly from Smart’s various bucket-priced text promotional offerings which more than offset the decline in our standard texting services. Text messaging revenues from the various bucket plans totaled Php27,245 million in 2008, an increase of Php7,104 million, or 35%, compared with Php20,141 million in 2007. On the other hand, standard text messaging revenues declined by Php3,204 million, or 17%, to Php16,085 million in 2008 compared with Php19,289 million in 2007.

 

Standard text messages totaled 24,378 million in 2008, a decrease of 1,114 million, or 4%, from 25,492 million in 2007 mainly due to a shift to bucket-priced text services. Bucket-priced text messages in 2008 totaled 223,373 million, an increase of 24,047 million, or 12%, as compared with 199,326 million in 2007. The growth in bucket-priced text traffic together with revenue growth in bucket-priced text messaging is reflective of a shift from unlimited text packages to low-denominated text packages with a fixed number of SMS, resulting in improved yield per SMS and increased text revenues.

 

Value-added services, which contributed revenues of Php2,540 million in 2008, decreased by Php208 million, or 8%, from Php2,748 million in 2007 primarily due to lower usage of standard services and Pasa Load owing to the introduction of low-denomination top-ups, partially offset by higher usage of rich media services in 2008 as compared with 2007.

 

Subscriber Base, ARPU and Churn Rates

 

In 2008, Smart and Piltel cellular subscribers totaled 35,224,604, an increase of 5,183,574, or 17%, over their combined cellular subscriber base of 30,041,030 in 2007. Our cellular prepaid subscriber base grew by 17% to 34,826,468 in 2008 from 29,699,150 in 2007, while our postpaid subscriber base increased by 16% to 398,136 in 2008 from 341,880 in 2007. Prepaid and postpaid subscribers accounted for 99% and 1%, respectively, of our total subscriber base in 2008 and 2007. Prepaid and postpaid subscribers reflected net activations of 5,127,318 and 56,256, respectively, in 2008.

 

Our net subscriber activations for the years ended December 31, 2008 and 2007 were as follows:

 

 

The following table summarizes our cellular average monthly ARPUs for the years ended December 31, 2008 and 2007:

 

____________

* Net monthly ARPU is calculated based on revenues net of discounts and allocated content-provider costs and interconnection income net of interconnection expense.

 

Prepaid service revenues consist mainly of charges for subscribers’ actual usage of their loads. Prepaid blended gross average monthly ARPU in 2008 was Php254, a decrease of 11%, compared with Php285 in 2007. The decrease was primarily due to a decline in the average outbound domestic voice, text messaging, value-added services and inbound revenue per subscriber in 2008 compared with 2007. On a net basis, prepaid blended average monthly ARPU in 2008 was Php203, a decrease of 13%, compared with Php233 in 2007.

 

Gross average monthly ARPU for postpaid subscribers decreased by 1% to Php2,065 while net average monthly ARPU decreased to Php1,483 in 2008 as compared with Php2,091 and Php1,485 in 2007, respectively. Prepaid and postpaid gross average monthly blended ARPU was Php274 in 2008, a decrease of 11%, compared with Php307 in 2007. Net average monthly blended ARPU decreased by 13% to Php217 in 2008 as compared with Php248 in 2007.

 

Our average quarterly prepaid and postpaid ARPUs for the years ended December 31, 2008 and 2007 were as follows:

 

 

For Smart prepaid, the average monthly churn rate for 2008 and 2007 were 4.7% and 3.5%, respectively, while the average monthly churn rate for Piltel subscribers in 2008 and 2007 were 4.8% and 3.5%, respectively.

 

The average monthly churn rate for Smart's postpaid subscribers was 1.2% for 2008 and 1.3% in 2007. Smart's policy is to redirect outgoing calls to an interactive voice response system if the postpaid subscriber's account is either 45 days overdue or the subscriber has exceeded the prescribed credit limit. If the subscriber does not make a payment within 44 days of redirection, the account is disconnected. Within this 44-day period, a series of collection activities are implemented, involving the sending of a collection letter, call-out reminders and collection messages via text messaging.

 

Wireless Broadband, Satellite and Other Services

 

Our revenues from wireless broadband, satellite and other services consist mainly of wireless broadband service revenues from SBI, rentals received for the lease of Mabuhay Satellite’s transponders, charges for ACeS Philippines’ satellite information and messaging services and service revenues generated from PLDT Global’s subsidiaries. Gross revenues from these services in 2008 amounted to Php6,075 million, an increase of Php1,910 million, or 46%, from Php4,165 million in 2007 principally due to the growth in our wireless broadband business and the peso depreciation in 2008. This was partially offset by lower satellite transponder rental revenues owing to lower rental charges and a decrease in the number of transponders being leased out.

 

SBI offers a number of wireless broadband services and had 547,090 subscribers in 2008 as compared with 301,738 in 2007. SmartBro, SBI’s fixed wireless broadband service linked to Smart’s wireless broadband-enabled base stations, allows subscribers to connect to the internet using an outdoor aerial antenna installed in a subscriber’s home. Wireless broadband revenues contributed Php4,327 million to wireless service revenues in 2008, increasing by Php1,938 million, or 81%, from Php2,389 million in 2007.

 

On November 22, 2007, we introduced SmartBro Plug-It which offers instant internet access, through the use of a wireless modem, in places where there is Smart network coverage. Subscribers to this plan simply have to plug the data modem in order to access the internet with speeds ranging from 384 to 512 kbps. The monthly service fee of Php799 includes 40 hours per month of internet usage. A one-time charge for the modem costs Php1,200. On April 13, 2008, we launched the SmartBro Plug-It Prepaid which offers 30-minute internet access for every Php10 worth of load.

 

We also offer PLDT WeRoam, a wireless broadband service, running on the PLDT Group’s nationwide wireless network (using GPRS, EDGE and WiFi technologies). This service had 16,243 subscribers in 2008 compared with 13,066 subscribers in 2007 and contributed Php203 million to our data revenues in 2008, increasing by Php61 million, or 43%, from Php142 million in 2007.

 

Non-service Revenues

 

Our wireless non-service revenues consist of proceeds from sales of cellular handsets, cellular SIM-packs and broadband data modems. Our wireless non-service revenues decreased by Php50 million, or 2%, to Php2,004 million in 2008 as compared with Php2,054 million in 2007 primarily due to lower average retail price per SIM-pack and a lower quantity of phonekits sold, partly offset by a higher volume of SIM-packs and broadband data modems sold in 2008.

 

Expenses

 

Expenses associated with our wireless business in 2008 amounted to Php47,589 million, an increase of Php2,190 million, or 5%, from Php45,399 million in 2007. A significant portion of this increase was attributable to provisions, compensation and employee benefits, repairs and maintenance, taxes and licenses, rent and asset impairment, partially offset by lower expenses related to professional and other contracted services, depreciation and amortization, and cost of sales. As a percentage of our total wireless revenues, expenses associated with our wireless business accounted for 50% and 51% in 2008 and 2007, respectively.

 

Cellular business expenses accounted for 90% of our wireless business expenses, while wireless broadband, satellite and other business expenses accounted for the remaining 10% of our wireless business expenses in 2008 compared with 91% and 9%, respectively, in 2007.

 

The following table summarizes the breakdown of our total wireless-related expenses for the years ended December 31, 2008 and 2007 and the percentage of each expense item to the total:

 

__________

(1)     Includes salaries and employee benefits, long-term incentive plan, or LTIP, pension and manpower rightsizing program, or MRP, costs.

 

Depreciation and amortization charges decreased by Php227 million, or 2%, to Php11,975 million in 2008 principally due to a decrease in our depreciable asset base consisting mainly of 2G networks, partly offset by increased depreciation on the growing asset base of 3G and broadband networks, and broadband customer-deployed equipment.

 

Rent expenses increased by Php516 million, or 6%, to Php9,267 million on account of an increase in international and domestic circuits leased by Smart from PLDT, as well as higher site and office rental expenses. In 2008, we had 5,284 GSM cell sites and 8,477 base stations, compared with 5,001 GSM cell sites and 7,825 base stations in 2007.

 

Compensation and employee benefits expenses increased by Php825 million, or 18%, to Php5,433 million primarily due to a 3% growth in Smart’s headcount, merit-based increases and employee upgrades and promotions partly offset by lower LTIP costs. Smart and subsidiaries’ employee headcount increased by 185 to 5,548 in 2008 as compared with 5,363 in 2007. For further discussion on our LTIP, please see Note 23 – Share-based Payments and Employee Benefits to the accompanying consolidated financial statements.

 

Cost of sales decreased by Php210 million, or 5%, to Php4,236 million due to a lower average cost of cellular phonekits and SIM-packs, and a lower quantity of phonekits sold, partly offset by a higher quantity of SIM-packs and broadband data modems sold in 2008.

 

Repairs and maintenance expenses increased by Php596 million, or 16%, to Php4,230 million mainly due to an increase in network maintenance costs, as well as an increase in electricity consumption and fuel costs for power generation.

 

Selling and promotion expenses decreased by Php22 million, or 1%, to Php3,781 million due to decreases in advertising, promotion and public relations expenses and printing cost of prepaid cards with the dominance of our e-Loading service, partly offset by higher commission expense.

 

Professional and other contracted services decreased by Php709 million, or 22%, to Php2,529 million primarily due to lower technical service, consultancy and payment facility fees. In 2007, we changed the estimated useful life of a prepaid management fee to effectively end that year.

 

Taxes and licenses increased by Php524 million, or 39%, to Php1,872 million primarily due to network expansion, the imposition of new licenses and fees on telecommunications entities, and non-creditable input tax.

 

Communication, training and travel expenses increased by Php8 million, or 1%, to Php1,091 million primarily due to higher mailing, fuel and communication expenses incurred in 2008.

 

Asset impairment increased by Php443 million, or 79%, to Php1,006 million mainly due to the impairment of intangible assets relating to technology and license costs for development activities covering an internet protocol communications platform and GSM connectivity service for the commercial shipping sector, and impairment on investment in ACeS International Limited through ACeS Philippines. Such impairments were partially offset by lower provision for inventory obsolescence and doubtful accounts. For discussion on impairment on intangible assets, please see
Note 11 – Goodwill and Intangible Assets to the accompanying audited consolidated financial statements.

 

Provisions of Php897 million pertained to provisions for assessments. Please see Note 25 – Provisions and Contingencies to the accompanying audited consolidated financial statements for further details.

 

Insurance and security services decreased by Php61 million, or 8%, to Php722 million primarily due to lower insurance and bond premiums.

 

Amortization of intangible assets decreased by Php25 million, or 16%, to Php133 million mainly due to intangible assets relating to customer list arising from the acquisition of SBI which was fully amortized by August 2007.

 

Other expenses decreased by Php365 million, or 47%, to Php417 million primarily due to lower various business and operational-related expenses.

 

Other Income (Expenses)

 

The following table summarizes the breakdown of our total wireless-related other income (expenses) for the years ended December 31, 2008 and 2007:

 

 

Our wireless business segment generated other expenses of Php2,640 million in 2008, a change of Php5,217 million, or 202%, from other income of Php2,577 million in 2007 primarily due to the recognition in 2008 of net foreign exchange losses of Php1,771 million on account of a loss on revaluation of net foreign currency-denominated liabilities owing to the depreciation of the Philippine peso compared with a net foreign exchange gain of Php2,649 million in 2007 and a net loss on derivative transactions of Php241 million in 2008 relating to the loss in the mark-to-market valuation of forward contracts and embedded derivatives on service and purchase contracts in 2008 compared with a net gain on derivative transactions of Php278 million in 2007.

 

Provision for Income Tax

 

Provision for income tax increased by Php1,034 million, or 7%, to Php16,035 million in 2008 from Php15,001 million in 2007. In 2008, the effective tax rate for our wireless business was 35% as compared with 33% in 2007 mainly due to higher non-deductible expenses and derecognition of deferred income tax assets by ACeS Philippines in 2008.

 

Net Income

 

Our wireless business segment recorded a net income of Php29,333 million in 2008, a decrease of Php1,397 million, or 5%, from Php30,730 million recorded in 2007 on account of a 5% increase in wireless-related expenses and higher provision for income tax, partially offset by an 8% increase in wireless service revenues.

 

Fixed Line

 

Total Revenues

 

Revenues generated from our fixed line business in 2008 totaled Php49,686 million, an increase of Php854 million, or 2%, from Php48,832 million in 2007.

 

The following table summarizes the revenues of our fixed line business for the years ended December 31, 2008 and 2007 by service segment:

 

 

Service Revenues

 

Our fixed line business provides local exchange service, international and national long distance services, data and other network services, and miscellaneous services. Our fixed line service revenues increased by Php715 million, or 1%, to Php49,266 million in 2008 from Php48,551 million in 2007 primarily due to an increase in our data and other network service as a result of higher revenues contributed by our DSL and Diginet services, and miscellaneous services, partially offset by the decrease in our international long distance, local exchange and national long distance services.

 

Local Exchange Service

 

The following table summarizes the key measures of our local exchange service business as at and for the years ended December 31, 2008 and 2007:

 

 

Revenues from our local exchange service decreased by Php282 million, or 2%, to Php15,923 million in 2008 from Php16,205 million in 2007 primarily owing to a decrease in average revenue per user on account of lower fixed charges due to bundling of services, partially offset by an increase in the average number of postpaid billed lines as a result of the launching of PLDT Landline Plus, higher bundled voice and data services and higher service connection charges. The percentage contribution of local exchange revenues to our total fixed line service revenues decreased to 32% in 2008 as compared with 33% in 2007.

 

In March 2007, PLDT launched the PLDT Landline Plus, a postpaid fixed wireless service where subscribers to the service benefit from a text-capable home phone. The monthly service fee is at Php600 with 600 local minutes free and Php1,000 with 1,000 local minutes free for residential and business subscribers, respectively. In March 2008, we introduced the prepaid counterpart of the PLDT Landline Plus. As at December 31, 2008, there were a total of 125,621 active PLDT Landline Plus subscribers, of which 61,604 and 64,017 were postpaid and prepaid subscribers, respectively.

 

International Long Distance Service

 

The following table shows our fixed line international long distance revenues and call volumes for the years ended December 31, 2008 and 2007:

 

 

Our total international long distance service revenues decreased by Php1,611 million, or 19%, to Php7,063 million in 2008 from Php8,674 million in 2007 primarily due to the average appreciation of the Philippine peso, a decrease in average settlement rate per minute for inbound calls and a decrease in inbound and outbound call volumes. The percentage contribution of international long distance service revenues to our total fixed line service revenues decreased to 14% in 2008 from 18% in 2007.

 

Our revenues from inbound international long distance service decreased by Php1,460 million, or 20%, to Php5,667 million from Php7,127 million in 2007 due to a decline in inbound traffic volume by 221 million minutes to 1,786 million minutes in 2008, as well as the appreciation of the average Philippine peso to the U.S. dollar exchange rate coupled with a decrease in average settlement rate per minute due to the change in call mix with more traffic terminating to cellular operators where the net revenue retained by us is lower. The appreciation of the Philippine peso to the U.S. dollar average exchange rates of Php44.474 in 2008 and Php46.184 in 2007 also contributed to the decrease in our inbound international long distance revenues in peso terms, since settlement charges for inbound calls are primarily billed in U.S. dollars.

 

Our revenues from outbound international long distance service decreased by Php151 million, or 10%, to Php1,396 million in 2008 from Php1,547 million in 2007 primarily due to a decline in outbound international call volumes and the appreciation of the Philippine peso to the U.S. dollar resulting in a decrease in the average billing rates to Php43.95 in 2008 from Php46.79 in 2007 partially offset by an increase in average revenue per minute as a result of a higher average collection rate.

 

National Long Distance Service

 

The following table shows our national long distance service revenues and call volumes for the years ended December 31, 2008 and 2007:

 

 

Our national long distance service revenues decreased by Php131 million, or 2%, to Php6,207 million in 2008 from Php6,338 million in 2007 primarily due to a decrease in call volumes. The percentage contribution of national long distance revenues to our fixed line service revenues accounted for 13% in 2008 and 2007.

 

Data and Other Network Services

 

The following table shows information about our data and other network service revenues for the years ended December 31, 2008 and 2007:

 

 

In 2008, our data and other network services posted revenues of Php18,607 million, an increase of Php2,686 million, or 17%, from Php15,921 million in 2007 primarily due to increases in leased lines, IP-based and packet-based data services, particularly Diginet and DFON rental, and PLDT DSL, partially offset by a decrease in PLDT Vibe services. The percentage contribution of this service segment to our fixed line service revenues increased to 38% in 2008 from 33% in 2007.

 

IP-based products include PLDT DSL (myDSL and BizDSL), PLDT Vibe and I-Gate. PLDT DSL broadband internet service is targeted for heavy individual internet users as well as for small and medium enterprises, while PLDT Vibe, PLDT’s dial-up/narrowband internet service, is targeted for light to medium residential or individual internet users. I-Gate, our dedicated leased line internet access service, on the other hand, is targeted at enterprises and value-added service providers.

 

DSL contributed revenues of Php5,360 million in 2008, an increase of Php1,480 million, or 38%, from Php3,880 million in 2007 primarily due to an increase in the number of subscribers, which was partially offset by lower ARPU as a result of launching of lower-priced plans as part of promotions. DSL subscribers increased by 64% to 432,583 in 2008 compared with 264,291 subscribers in 2007.

 

PLDT Vibe revenues decreased by Php122 million, or 47%, to Php137 million in 2008 from Php259 million in 2007 primarily due to lower number of plan subscribers as well as the declining usage of our Vibe prepaid service. PLDT Vibe subscribers decreased by 56% to 101,411 in 2008 from 230,995 in 2007. The declining number of Vibe plans and regular monthly users for Vibe prepaid may be attributed to the migration from Vibe dial-up to DSL which is now priced more competitively.

 

The continued growth in data services revenues can be attributed to several product offerings. The steady demand for dedicated connectivity or private networking from the corporate market using PLDT’s traditional international and domestic data offerings – Fibernet, Arcstar, other Global Service Providers such as BT-infonet, Orange Business and Verizon; ISDN has been increasingly popular with corporate customers, especially the Primary Rate Interface type, I-Gate, Diginet, BRAINS, IP-VPN and Shops.work, among others – continue to provide us with a stable revenue source.

 

Diginet, our domestic private leased line service, has been providing Smart’s increasing fiber optic and leased line data requirements. Diginet revenues decreased by Php75 million, or 1%, to Php7,216 million in 2008 as compared with Php7,291 million in 2007 mainly due to a decrease in Smart’s DFON rental to Php5,444 million in 2008 from Php5,565 million in 2007.

 

Miscellaneous

 

Miscellaneous service revenues are derived mostly from directory advertising, facilities management and rental fees. In 2008, these revenues improved by Php53 million, or 4%, to Php1,466 million from Php1,413 million in 2007 mainly due to an increase in facilities management fees and rental income owing to higher co-location charges. The percentage contribution of miscellaneous service revenues to our total fixed line service revenues was 3% in each of the years 2008 and 2007.

 

Non-service Revenues

 

Non-service revenues increased by Php139 million, or 49%, to Php420 million in 2008 from Php281 million in 2007 primarily due to an increase in computer sales resulting from an increase in subscriptions for our DSL service that is bundled with computers.

 

Expenses

 

Expenses related to our fixed line business totaled Php35,733 million in 2008, a decrease of Php2,158 million, or 6%, as compared with Php37,891 million in 2007. The decrease was primarily due to lower depreciation and amortization, compensation and employee benefits and provisions partially offset by higher repairs and maintenance, asset impairment, rent, professional and other contracted services, and other expenses.

 

The following table shows the breakdown of our fixed line-related expenses for the years ended December 31, 2008 and 2007 and the percentage of each expense item to the total:

 

__________

 

(1) Includes salaries and employee benefits, LTIP, pension and MRP costs.

 

Depreciation and amortization charges decreased by Php3,576 million, or 23%, to Php11,901 million in 2008 due to a lower depreciable asset base in 2008 as compared with 2007.

 

Compensation and employee benefits expenses decreased by Php1,318 million, or 13%, to Php9,093 million primarily due to a decrease in pension benefits as a result of a lower salary increase assumption in the 2008 actuarial valuation of defined benefit pension plans and lower LTIP costs. For further discussion on our LTIP, please see Note 23 – Share-based Payments and Employee Benefits to the accompanying consolidated financial statements.

 

Repairs and maintenance expenses increased by Php862 million, or 23%, to Php4,634 million primarily due to higher maintenance costs of IT software and hardware and foreign cable and wire facilities as more operating and maintenance-related restorations were incurred in 2008 as compared with 2007.

 

Rent expenses increased by Php693 million, or 39%, to Php2,492 million due to the increase in international leased circuit charges and pole rental charges, partially offset by a decrease in transponder lease rentals.

 

Professional and other contracted services increased by Php416 million, or 24%, to Php2,143 million primarily due to higher contracted fees for technical and advisory services.

 

Selling and promotion expenses increased by Php163 million, or 11%, to Php1,715 million primarily due to higher marketing expenses as a result of major advertising campaigns launched on ask PLDT and PLDT Landline Plus in 2008 as well as an increase in commission expenses.

 

Asset impairment increased by Php845 million to Php888 million mainly due to higher provision for doubtful accounts and inventory obsolescence in 2008.

 

Taxes and licenses decreased by Php108 million, or 12%, to Php769 million as a result of higher business-related taxes paid in 2007.

 

Communication, training and travel expenses increased by Php142 million, or 30%, to Php608 million due to the increase in subscriber-related mailing, courier and delivery charges, and local travel, partially offset by a net decrease in foreign and local training expenses.

 

Insurance and security services increased by Php48 million, or 11%, to Php487 million primarily due to higher security expense, insurance and bond premiums.

 

Cost of sales increased by Php56 million, or 19%, to Php356 million due to higher computer-bundled sales in relation to our DSL promotion and WeRoam subscriptions.

 

Other expenses increased by Php284 million, or 78%, to Php646 million due to higher various business and operational-related expenses.

 

Other Income (Expenses)

 

The following table summarizes the breakdown of our total fixed line-related other income (expenses) for the years ended December 31, 2008 and 2007:

 

 

Our fixed line business segment generated other expenses of Php2,476 million in 2008, a decrease of Php797 million, or 24%, from Php3,273 million in 2007. The decrease was due to a gain on derivative transactions of Php4,141 million relating to the gain in the mark-to-market valuation of various financial instruments and the impact of the de-designation of foreign currency swaps and option contracts beginning January 1, 2008 compared to a loss on derivative transactions of Php1,530 million in 2007 and a decrease in financing costs due to a lower debt level of PLDT, partially offset by a net foreign exchange loss of Php4,513 million on account of a loss on revaluation of net foreign currency-denominated liabilities owing to the depreciation of the Philippine peso in 2008 compared to a net foreign exchange gain of Php465 million in 2007. The de-designation exposes our profit and loss accounts to the volatility of the financial instruments’ fair valuation at certain periods. Please see Note 26 – Financial Assets and Liabilities to the accompanying consolidated financial statements for further discussion.

 

Provision for Income Tax

 

Provision for income tax amounted to Php3,257 million in 2008 as compared with Php2,395 million in 2007 primarily due to higher taxable income.

 

Net Income

 

In 2008, our fixed line business segment contributed a net income of Php8,220 million, an increase of Php2,947 million, or 56%, as compared with Php5,273 million in 2007 mainly as a result of higher service revenues by Php715 million, lower fixed line-related expenses by Php2,158 million and a decrease in other expenses by Php797 million.

 

Information and Communications Technology

 

Total Revenues

 

Our ICT business provides knowledge processing solutions, customer interaction services, internet and online gaming, and data center services.

 

In 2008, our ICT business generated revenues of Php10,983 million, an increase of Php661 million, or 6%, from Php10,322 million in 2007. This increase was primarily due to the continued growth of our data center and customer interaction services, as well as the steady revenue contribution of our knowledge processing solutions and internet and online gaming businesses.

 

The following table summarizes the total revenues from our ICT business for the years ended December 31, 2008 and 2007 by service segment:

 

 

Service Revenues

 

Service revenues generated by our ICT business segment amounted to Php10,417 million in 2008, an increase of Php362 million, or 4%, as compared with Php10,055 million in 2007 primarily as a result of the continued growth of our knowledge processing solutions business and our customer interaction services business complemented by an increase in co-location revenues and disaster recovery revenues from our data center business. As a percentage of our total ICT revenues, service revenues decreased to 95% in 2008 from 98% in 2007.

 

Knowledge Processing Solutions

 

We provide our knowledge processing solutions primarily through the SPi Group. Knowledge processing solutions contributed revenues of Php5,272 million in 2008, an increase of Php11 million from Php5,261 million in 2007 primarily as a result of the revenues contributed by SPi’s litigation and healthcare services. Knowledge processing solutions accounted for 51% and 52% of total service revenues of our ICT business in 2008 and 2007, respectively.

 

Customer Interaction Services

 

We provide our customer interaction services primarily through ePLDT Ventus. Revenues relating to our customer interaction services business increased by Php140 million, or 4%, to Php3,402 million in 2008 from Php3,262 million in 2007 primarily due to the expansion of our customer interaction service facilities. In total, we own and operate approximately 6,580 seats with 5,800 customer service representatives, or CSRs, in 2008 compared with approximately 6,400 seats with 5,930 CSRs in 2007. In each of the years 2008 and 2007, we have seven customer interaction service sites. Customer interaction service revenues accounted for 33% of total service revenues of our ICT business in each of the years 2008 and 2007.

 

Internet and Online Gaming

 

Revenues from our internet and online gaming businesses increased by Php39 million, or 4%, to Php976 million in 2008 from Php937 million in 2007 primarily due to the increase in Infocom’s revenues from handling PLDT’s DSL-related nationwide technical helpdesk operations. Our internet and online gaming business revenues accounted for 9% of total service revenues of our ICT business in each of the years 2008 and 2007.

 

Data Center

 

ePLDT operates an internet data center under the brand name Vitroä which provides
co-location services, server hosting, hardware and software maintenance services, website development and maintenance services, webcasting and webhosting, shared applications, data disaster recovery and business continuity services, intrusion detection, and security services such as firewalls and managed firewalls.

 

In 2008, our data center contributed revenues of Php767 million, an increase of Php172 million, or 29%, from Php595 million in 2007 primarily due to an increase in co-location revenues and server hosting. Our data center revenues accounted for 7% and 6% of service revenues of our ICT business in 2008 and 2007, respectively.

 

Non-service Revenues

 

Non-service revenues consist of sales generated from reselling certain software licenses, server solutions, networking products, storage products and data security products. In 2008, non-service revenues generated by our ICT business increased by Php299 million, or 112%, to Php566 million as compared with Php267 million in 2007 primarily due to higher revenues from sales of software and hardware licenses.

 

Expenses

 

Expenses associated with our ICT business totaled Php13,267 million in 2008, an increase of Php2,262 million, or 21%, from Php11,005 million in 2007 primarily due to increases in asset impairment, compensation and employee benefits, cost of sales and repairs and maintenance, partially offset by lower professional and other contracted services, and depreciation and amortization. As a percentage of our ICT total revenues, expenses related to our ICT business were 121% and 107% in 2008 and 2007, respectively.

 

The following table shows the breakdown of our ICT-related expenses for years ended December 31, 2008 and 2007 and the percentage of each expense item to the total:

 

 

__________

(1) Includes salaries and employee benefits, incentive plan, pension and MRP costs.

 

Compensation and employee benefits increased by Php676 million, or 12%, to Php6,131 million mainly due to higher accrued bonuses and employees’ basic pay increase as a result of the expansion of our customer interaction services business. This increase was partially offset by a decrease of ePLDT and subsidiaries’ employee headcount by 271, or 2%, to 16,489 in 2008 as compared with 16,760 in 2007.

 

Asset impairment increased by Php1,575 million, or 222%, to Php2,286 million primarily due to ePLDT’s provision for impairment on goodwill and other intangibles on account of its investment in SPi and Level Up! Please see Note 11 – Goodwill and Intangible Assets to the accompanying consolidated financial statements for a detailed discussion.

 

Depreciation and amortization charges decreased by Php101 million, or 11%, to Php833 million primarily due to a decrease in the depreciable asset base of our customer interaction services business.

 

Professional and other contracted services decreased by Php382 million, or 34%, to Php747 million primarily due to lower consultancy fees and subcontracted services incurred by the SPi Group related to its knowledge processing solutions businesses.

 

Rent expenses increased by Php45 million, or 7%, to Php665 million primarily due to higher office space rentals and leased circuits incurred by our customer interaction services business.

 

Cost of sales increased by Php279 million, or 73%, to Php660 million primarily due to higher sales of software licenses and hardware products.

 

Repairs and maintenance expenses increased by Php69 million, or 14%, to Php573 million primarily due to higher maintenance costs for new customer interaction service facilities.

 

Communication, training and travel expenses increased by Php50 million, or 10%, to Php573 million primarily due to increased bandwidth and information system charges, combined with an increase in local and foreign travel costs incurred by our customer interaction service and knowledge processing solution businesses.

 

Amortization of intangible assets increased by Php12 million, or 5%, to Php244 million in relation to the acquisition of Springfield by SPi in April 2007. Please see Note 11 – Goodwill and Intangible Assets to the accompanying consolidated financial statements for further discussion.

 

Selling and promotion expenses increased by Php9 million, or 5%, to Php203 million mainly due to the SPi Group’s higher advertising and marketing expenses.

 

Taxes and licenses increased by Php4 million, or 4%, to Php98 million primarily due to higher business-related taxes.

 

Insurance and security services increased by Php12 million, or 24%, to Php61 million primarily due to higher premium costs and an increase in the value of assets insured.

 

Other expenses increased by Php14 million, or 8%, to Php193 million mainly due to higher business-related costs, such as office supplies.

 

Other Income (Expenses)

 

The following table summarizes the breakdown of our total ICT-related other income (expenses) for the years ended December 31, 2008 and 2007:

 

 

Our ICT business segment generated other expenses of Php1 million in 2008, compared with other income of Php472 million in 2007 primarily due to the recognition of cumulative dividends and interest on ePLDT’s investment on convertible securities of Stradcom International Holdings, Inc., or SIHI, in 2007 and a loss in the mark-to-market valuation recognized by our customer interaction service and knowledge processing solutions businesses on forward foreign exchange contracts partially offset by gain on revaluation of net foreign currency-denominated assets due to the depreciation of the Philippine peso in 2008.

 

Benefit from Income Tax

 

Benefit from income tax decreased by Php18 million, or 15%, to Php99 million in 2008 primarily due to the corresponding deferred tax effect of the amortization of intangible assets.

 

Net Loss

 

In 2008, our ICT business segment registered a net loss of Php2,186 million as compared with Php94 million in 2007 mainly as a result of the 21% increase in ICT-related expenses which more than offset the 6% increase in total revenues generated by our ICT business in 2008, and lower benefit from income tax in 2008 as compared with 2007.

 

Liquidity and Capital Resources

 

The following table shows our consolidated cash flows for the years ended December 31, 2008 and 2007 as well as our consolidated capitalization and other selected financial data as at December 31, 2008 and 2007:

 

 

As at December 31, 2008, our consolidated cash and cash equivalents and short-term investments totaled Php40,354 million. Principal sources of consolidated cash and cash equivalents in 2008 were cash flows from operating activities amounting to Php78,302 million and drawings from PLDT’s and Smart’s debt facilities aggregating Php17,912 million. These funds were used principally for dividend payments of Php37,124 million, capital outlays of Php25,203 million, total debt principal payments of Php14,053 million, share buyback of Php5,281 million and interest payments of Php5,167 million.

 

Operating Activities

 

Our consolidated net cash flows from operating activities increased by Php884 million, or 1%, to Php78,302 million in 2008 from Php77,418 million in 2007. A large portion of our consolidated cash flow is generated by our wireless service business, which accounted for 61% and 60% of our total service revenues in 2008 and 2007, respectively. Service revenues from our fixed line business and ICT business accounted for 32% and 7%, respectively, of our total service revenues in 2008, and 33% and 7%, respectively, in 2007.

 

Cash flows from operating activities of our wireless business amounted to Php42,780 million in 2008, a decrease of Php6,836 million, or 14%, compared with Php49,616 million in 2007. The decrease in our wireless business segment’s cash flows from operating activities was a result of higher prepayment of leased circuits and higher income tax paid partially offset by a lower settlement of various payables in 2008. Likewise, cash flows from operating activities of our ICT business decreased by Php777 million, or 31%, to Php1,752 million in 2008 compared with Php2,529 million in 2007 mainly due to higher settlement of various liabilities. Cash flows from operating activities of our fixed line business increased by Php8,520 million, or 34%, to Php33,794 million in 2008 compared with Php25,274 million in 2007. This increase was primarily due to lower settlement of various liabilities and increase in advance payments received from various leased circuit contracts in 2008. The overall increase in our cash flows from operating activities was primarily due to lower level of settlement of various current liabilities, partially offset by higher billings of accounts receivables and higher income taxes paid in 2008. We believe that our continuing increase in cash flows from operating activities on a consolidated basis will allow us to satisfy our current liabilities as our current ratio is less than 1:1 as at December 31, 2008.

 

Following the repayment by Smart by April 2006 of all its loan facilities that contained restrictive covenants, Smart is no longer required to seek consent from its lenders to pay dividends, redeem preferred shares, make distributions to PLDT or otherwise provide funds to PLDT or any associate. In 2008 and 2007, dividend payments received by PLDT from Smart amounted to Php24,200 million and Php26,927 million, respectively.

 

In 2007, Piltel paid cash dividends to various preferred shareholders in the aggregate amount of Php2,943 million, of which Php2,930 million was paid to PLDT. In 2008, Piltel paid cash dividends to common shareholders amounting to Php5,061 million, of which Php4,664 million was paid to Smart.

 

Investing Activities

 

Net cash used in investing activities amounted to Php17,014 million in 2008, a decrease of Php14,305 million, or 46%, from Php31,319 million in 2007 . The decrease resulted from a combination of: (1) higher proceeds from the maturity of short-term investments of Php12,898 million; (2) redemption of SIHI’s preferred shares of Php2,676 million in 2007; (3) lower payments for purchase of subsidiaries, including investments in associates by Php1,534 million; (4) higher investment in debt securities of Php3,193 million; (5) increase in capital expenditures of Php379 million in 2008; and
(6) higher proceeds from disposal of property, plant and equipment of Php62 million.

 

Our consolidated capital expenditures in 2008 totaled Php25,203 million, an increase of Php379 million, or 2%, from Php24,824 million in 2007 primarily due to an increase in Smart’s capital spending. Smart's capital spending of Php17,091 million in 2008 was used primarily to further upgrade its core, access and transmission network facilities and expand its wireless broadband facilities. PLDT's capital spending of Php7,209 million was principally used to finance the expansion and upgrade of its submarine cable facilities, fixed line data and IP-based network services. ePLDT and its subsidiaries’ capital spending of Php824 million was primarily used to fund the continued expansion of its customer interaction services facilities. The balance represented other subsidiaries’ capital spending.

 

As part of our growth strategy, we may from time to time, continue to make acquisitions and investments in companies or businesses.

 

Financing Activities

 

On a consolidated basis, we used net cash of Php45,464 million in 2008 for financing activities, net of loan drawings by Smart and PLDT, an increase of Php645 million compared with Php44,819 million in 2007. The net cash used in financing activities was mainly utilized for dividend payments distributed to PLDT common and preferred stockholders, buyback of PLDT’s common stock, debt repayments and interest payments.

 

Debt Financing

 

Additions to our consolidated debt in 2008 and 2007 totaled Php17,912 million and Php7,647 million, respectively, mainly from Smart's and PLDT’s drawings related to the financing of our network expansion projects and capital expenditure requirements, respectively. Payments in respect of principal and interest of our total debt amounted to Php14,053 million and Php5,167 million, respectively, in 2008 and Php18,258 million and Php5,891 million, respectively, in 2007.

 

Our long-term debt increased by Php13,211 million, or 22%, to Php73,358 million in 2008, largely due to drawings from our term loan facilities and the depreciation of the Philippine peso in 2008 as compared with the peso appreciation in 2007 resulting to higher peso equivalents of our foreign currency-denominated debts, partially offset by debt amortizations and prepayments. The debt levels of PLDT and Smart increased by 14% and 36% to Php38,823 million and Php33,898 million, respectively, while the debt level of Mabuhay decreased by 47% to Php610 million in 2008 as compared with the levels as at December 31, 2007.

 

On January 15, 2008, PLDT signed a US$100 million term loan facility agreement with Norddeutsche Landesbank Girozentrale Singapore Branch to be used for the capital expenditure requirements of PLDT. The facility was drawn on March 27 and April 10, 2008 for US$50 million each. The outstanding balance of this loan as at December 31, 2008 amounted to US$90 million, or Php4,288 million, which is payable over five years in 10 equal semi-annual installments with final repayment due on March 27, 2013.

 

On July 15, 2008, PLDT signed a loan agreement amounting to US$50 million with Bank of the Philippine Islands to refinance its loan obligations which were utilized for service improvements and expansion programs. The initial drawdown under this loan was made on July 21, 2008 in the amount of US$15 million and the balance of US$35 million was drawn on September 30, 2008. The outstanding balance of this loan as at December 31, 2008 amounted to US$50 million, or Php2,382 million, which is payable in 17 equal quarterly installments starting July 21, 2009 with final repayment due on July 22, 2013.

 

On October 21, 2008, Smart signed a Philippine Peso term loan facility with Metropolitan Bank and Trust Company for an amount of Php2,500 million to finance capital expenditures. The facility is a five-year term loan payable in 16 equal consecutive quarterly installments commencing on the fifth quarter from the date of the first drawdown, with final repayment on November 13, 2013. The facility was drawn on November 13, 2008 for the full amount of Php2,500 million. The outstanding balance of this loan as at December 31, 2008 amounted to Php2,500 million.

 

On November 21, 2008, PLDT signed a loan agreement with Land Bank of the Philippines amounting to Php2,400 million to finance capital expenditures and/or to refinance its loan obligations which were utilized for service improvements and expansion programs. The initial drawdown under this loan was made on December 12, 2008 in the amount of Php500 million, which remained outstanding as at December 31, 2008. The loan is payable over five years in ten equal semi-annual installments with final repayment due on December 12, 2013. As at December 31, 2008, the undrawn balance of the loan was Php1,900 million.

 

On November 25, 2008, Smart signed a US$22 million five-year term loan facility to finance the supply, installation, commissioning, and testing of Wireless Code Division Multiple Access/High Speed Packet Access project with Nordea Bank AB as Original Lender, Arranger and Facility Agent. On December 10, 2008, Nordea Bank AB assigned its rights and obligations to the Swedish Export Credit Corporation (AB Svensk Exportkredit) supported by EKN. The initial drawdown under this facility was made on December 15, 2008 in the amount of US$8 million. The facility is payable in ten equal semi-annual installments with final repayment due on December 10, 2013. Interest is payable at a fixed rate of 3.79% per annum. As at December 31, 2008, the undrawn balance of this facility was US$14 million.

 

On November 26, 2008, PLDT signed a loan agreement with Union Bank of the Philippines amounting to Php3,000 million to finance capital expenditures and/or to refinance its loan obligations which were utilized for service improvements and expansion programs. The initial drawdown under this loan was made on December 22, 2008 in the amount of Php500 million, which remained outstanding as at December 31, 2008. The loan is payable over five years in nine equal semi-annual installments with final repayment due on December 23, 2013. As at December 31, 2008, the undrawn balance of the loan was Php2,500 million.

 

On November 27, 2008, Smart signed a US$50 million five-year term loan facility to finance the Phase 10 GSM equipment and service contracts with Finnish Export Credit, Plc. The loan is payable in ten equal semi-annual installments with final repayment date on the fifth anniversary of the first drawdown. As at December 31, 2008, no amounts have been drawn under the facility.

 

On November 28, 2008, PLDT signed a loan agreement with Philippine National Bank amounting to Php2,000 million to be used for its capital expenditure requirements in connection with its service improvement and expansion programs. The initial drawdown under this loan was made on December 19, 2008 in the amount of Php500 million, which remained outstanding as at December 31, 2008. The loan is payable over five years in 17 equal quarterly amortizations with final repayment due on December 19, 2013. As at December 31, 2008, the undrawn balance of the loan was Php1,500 million. Two more drawdowns amounting to Php500 million each were made on January 30, 2009 and February 27, 2009.

 

On December 12, 2008, Smart issued Php5,000 million five-year fixed rate corporate notes with an interest rate of 8.4346%. Funds raised from the issuance of the notes will be used primarily for Smart’s capital expenditures for network upgrade and expansion. The amount of Php5,000 million remained outstanding as at December 31, 2008. The facility has annual amortizations equivalent to 1% of the principal amount with the balance of 96% payable on December 12, 2013.

 

On February 20, 2009, PLDT issued Php5,000 million Fixed Rate Notes under a Notes Facility Agreement dated February 18, 2009, comprising of Series A five-year notes amounting to Php2,400 million, Series B seven-year notes amounting to Php100 million, and Series C ten-year notes amounting to Php2,500 million. The interest rates on the Series A notes were fixed at 7.4269%, Series B notes at 8.3692%, and Series C notes at 9.1038%. Proceeds from the facility will be used to finance capital expenditures of PLDT.

 

Approximately Php41,991 million principal amount of our consolidated outstanding long-term debt as at December 31, 2008 is scheduled to mature over the period from 2009 to 2012. Of this amount, Php23,491 million is attributable to PLDT, Php17,863 million to Smart and the remainder to Mabuhay Satellite and ePLDT.

 

For a complete discussion of our long-term debt, see Note 18 – Interest-bearing Financial Liabilities – Long-term Debt to the accompanying consolidated financial statements.

 

Debt Covenants

 

Our debt instruments contain restrictive covenants, including covenants that require us to comply with specified financial ratios and other financial tests, calculated in conformity with PFRS, at relevant measurement dates, principally at the end of each quarterly period. We have complied with all of our maintenance financial ratios as required under our loan covenants and other debt instruments. Furthermore, certain of PLDT’s debt instruments contain provisions wherein PLDT may be required to repurchase or prepay certain indebtedness in case of a change in control of PLDT.

 

Please see Note 18 – Interest-bearing Financial Liabilities – Debt Covenants to the accompanying consolidated financial statements for a detailed discussion of our debt covenants.

 

Financing Requirements

 

We believe that our available cash, including cash flow from operations, will provide sufficient liquidity to fund our projected operating, investment, capital expenditures and debt service requirements for the next 12 months.

 

As a result of our strong cash flows and lower debt levels, we increased our regular dividend payout ratio to 70% of our earnings per share starting 2007 from 60% of 2006 earnings per share.

 

With respect to our 2007 earnings, in addition to the Php60 per share dividend declared on August 7, 2007, we declared on March 4, 2008 a regular cash dividend of Php68 per share and a special cash dividend of Php56 per share, in the aggregate representing close to a 100% payout of our 2007 earnings per share. On August 5, 2008, we declared a regular cash dividend of Php70 per share and on March 3, 2009, we also declared regular and special cash dividends of Php70 per share and Php60 per share, respectively, representing approximately 100% payout of our 2008 earnings per share on an adjusted basis (taking out asset impairment on non-current assets and gains/losses on foreign exchange revaluation and derivatives.)

 

Credit Ratings

 

None of our existing indebtedness contains provisions under which credit rating downgrades would trigger a default, changes in applicable interest rates or other similar terms and conditions.

 

PLDT’s current credit ratings are as follows:

 

 

On October 7, 2008, Fitch affirmed our long-term foreign and local currency issuer default ratings at “BB+” and “BBB”, respectively. Also, our national long-term rating has been affirmed at “AAA(ph1)”, as well as our global bonds and senior notes at “BB+”. The outlook is stable. The ratings reflect our preeminent position in the Philippine telecommunications industry, with diversified and integrated operations in fixed line, cellular, wired and wireless broadband services, internet services, as well as our notable presence in the call center and business process outsourcing industry. The stable outlook recognizes our ability to sustain our leading market position and maintain our strong financial profile, despite increasing shareholder distributions.

 

On March 19, 2008, Moody’s affirmed our local currency Ba2 rating and changed its outlook from stable to positive at the same time affirming our foreign currency bond Ba2 rating with a positive outlook. The rating action reflects our ability to achieve ongoing revenue growth and fund high levels of capital expenditures internally, as well as the ability to increase dividend payments to our shareholders. On January 28, 2008, Moody’s affirmed our foreign currency senior unsecured debt rating from stable to positive following the change in the outlook of the Philippines Ba3 country ceiling for foreign currency bonds to positive from stable.

 

Off-Balance Sheet Arrangement

 

There are no off-balance sheet arrangements that have or are reasonably likely to have any current or future effect on our financial position, results of operations, cash flows, changes in stockholders’ equity, liquidity, capital expenditures or capital resources that are material to investors.

 

Equity Financing

 

PLDT raised Php7 million and Php73 million from the exercise by certain officers and executives of stock options in 2008 and 2007, respectively. In addition, through our subscriber investment plan which provides postpaid fixed line subscribers the opportunity to buy shares of our 10% cumulative convertible preferred stock as part of the upfront payments collected from subscribers, PLDT was able to raise Php1 million and Php3 million in 2008 and 2007 from this source, respectively.

 

As part of our goal to maximize returns to our shareholders, in 2008, we obtained board of directors’ approval on a share buyback program of up to five million shares of PLDT’s common stock, representing approximately 3% of PLDT’s total outstanding shares of common stock. As at December 31, 2008, we acquired and paid a total of 1,972,290 shares of PLDT’s common stock at a weighted average price of Php2,521 per share for a total consideration of Php4,973 million in accordance with the share buyback program. The effect of the acquisition of shares of PLDT’s common stock pursuant to the share buyback program was considered in the computation of our basic and diluted earnings per common share for the year ended December 31, 2008. Please refer to Note 17 – Equity to the accompanying consolidated financial statements for further details.

 

Cash dividend payments in 2008 amounted to Php37,124 million compared with Php28,470 million paid to common and preferred shareholders in 2007.

 

Contractual Obligations and Commercial Commitments

 

Contractual Obligations

 

For a discussion of our contractual obligations, see Note 24 – Contractual Obligations and Commercial Commitments to the accompanying consolidated financial statements.

 

Commercial Commitments

 

As at December 31, 2008, our outstanding commercial commitments, in the form of letters of credit, amounted to Php1,634 million. These commitments will expire within one year.

 

Quantitative and Qualitative Disclosures about Market Risks

 

Our operations are exposed to various risks, including liquidity risk, foreign exchange risk, interest rate risk, credit risk and capital management risk. The importance of managing these risks has significantly increased in light of considerable change and continuing volatility in both the Philippine and international financial markets. With a view to managing these risks, we have incorporated financial risk management functions in our organization, particularly in our treasury operations, equity issues and sales of certain assets.

 

For further discussions of these risks, see Note 24 – Contractual Obligations and Commercial Commitments and Note 26 – Financial Assets and Liabilities to the accompanying consolidated financial statements.

 

The following table sets forth the fair values of our financial assets and liabilities recognized as at December 31, 2008 and September 30, 2008:

 

 

The following table sets forth the amount of gains (losses) recognized for the financial assets and liabilities for the year ended December 31, 2008 and for the nine months ended September 30, 2008:

 

 

Impact of Inflation and Changing Prices

 

Inflation can be a significant factor in the Philippine economy, and we are continually seeking ways to minimize its impact. In 2008, the inflation rate has increased and we expect this trend to have an impact on our operations moving forward. The average inflation rate in the Philippines in 2008 was 9.3% compared with 2.8% in 2007.

 

PART II – OTHER INFORMATION

 

Acquisition of Debt and Equity of Philcom Corporation, or Philcom

 

On January 2, 2009, PLDT signed a Debt Assignment Agreement with Premier Global Resources Corporation, or PGR, wherein PGR sold to PLDT, for a total consideration of Php340 million, all of the outstanding obligations of Philcom to suppliers, banks and other financial institutions, or the Philcom Lenders, which PGR had acquired from the Philcom Lenders.

 

On January 3, 2009, PLDT signed a Share Assignment Agreement with Philippine Global Communications, Inc., or PGCI, wherein the latter sold, transferred and conveyed in favor of PLDT its rights, title and interest in and to all of the outstanding shares of common stock in Philcom for a total consideration of Php75 million. The parties have filed the necessary application/petition for the approval of this transaction by the NTC.

 

The acquisition of Philcom will allow the PLDT Group to broaden its presence in Mindanao, where it already has operations carried out under Maratel and SBI. This expanded presence is expected to benefit not only the existing subscribers in the area, but will also provide the communities in the area with an opportunity to access improved telecommunications facilities.

 

PLDT, Mabuhay Satellite, ProtoStar Ltd., or ProtoStar, and ProtoStar III Ltd., or ProtoStar III, sign several cooperation agreements

 

On September 16, 2008, PLDT, its subsidiary Mabuhay Satellite, ProtoStar, a Bermuda-based company and its wholly-owned Bermuda subsidiary ProtoStar III, signed several agreements covering multiple areas of cooperation. 

 

Key aspects of the agreements include: (a) an exchange of certain Mabuhay Satellite assets for an equity position in ProtoStar; (b) expanded use of Mabuhay’s Subic Space Center for the operation and control of satellites; (c) an option for PLDT to make further investments in ProtoStar; and (d) an agreement for PLDT to lease C-band transponder capacity on the ProtoStar I satellite owned and operated by ProtoStar I Ltd., also a wholly-owned Bermuda subsidiary of ProtoStar. 

 

Mabuhay Satellite and ProtoStar III are continuing to work on closing the transaction and transfer of assets from Mabuhay Satellite to ProtoStar III may be completed within the first quarter of 2009.  In the meantime, ProtoStar has begun to expand the Subic Space Center for the operation and control of its satellites.

 

ProtoStar plans to launch several more satellites in the coming years, with a ProtoStar II satellite due to be launched in the spring of 2009.  It aims to operate high-power geostationary satellites optimized for direct-to-home satellite television, broadband internet and GSM backhaul services, wherein the availability of significant satellite capacity which will further add to the robustness of our network.

 

Related Party Transactions

 

For a detailed discussion of the related party transactions, see Note 22 –Related Party Transactions to the accompanying consolidated financial statements.