In 2016, we set off on a three-year journey to transform PLDT into the country’s leading integrated provider of digital services, solutions, and digital content. We were aware at the outset that this would be a difficult and complex process and that indeed has been the case, as shown by the Company’s financial results for the year. The ride this year has been rough at times with stops and starts, and we have had to make adjustments along the way. In any event, despite a tough start, your Company has clearly set the direction of its digital journey and steady progress has been made in the three key tasks that I listed in my message to you last year.
First, we are upgrading and expanding the reach of our fixed and mobile networks, enabling us to better meet the rising demand for data and digital services. Second, we are broadening the range of compelling digital services that we offer our consumer and enterprise customers. And third, we have pressed ahead in transforming the PLDT group of companies into an integrated, digitally-empowered and customer-centric organization.
These tasks have acquired even greater urgency as the world moves rapidly towards a global digital economy driven by quantum technologies, machine learning and artificial intelligence. Many of these changes are now upon us and the Philippines must accelerate its own efforts to go digital. PLDT shall play a leading role in the transformation of the country into a Smart Nation.
Our Key Results
Our financial and operating results for 2016 reflect not only the challenges and opportunities posed by digital transformation, but also the intense competition within the industry.
Consolidated service revenues, net of interconnection costs, totaled P147.6 billion, 3% less than the prior year. Excluding international and national long distance (ILD and NLD) revenues and interconnection costs, service revenues reached P133.5 billion, just 1% less than 2015.
Data, broadband and digital platforms powered the growth of our business, their aggregate revenues rising 18% to P60.2 billion, accounting for 41% of consolidated services revenues, up from 34% in the previous year. This class of revenues now make up 60% and 31% of fixed line and wireless service revenues, respectively. However, SMS and landline and mobile domestic voice revenues declined 14% and 12%, to P28.1 billion and P43 billion, respectively.
Consolidated core income amounted to P27.9 billion, in line with our guidance provided earlier in the year. This is about 21% less than the previous year, due to lower EBITDA and costs arising from higher capital expenditures for the roll-out of the fixed and mobile networks of PLDT and Smart Communications, respectively. Recurring core income reached P20.2 billion, net of asset sales, accelerated depreciation, one-time provisions and subsidies, as well as lower taxes from deferred tax assets recognized during 2016.
Consolidated core EBITDA declined 6% to P65.8 billion, largely due to lower wireless service revenues and higher provisions, moderated by lower cash operating expenses. Including one-time provisions and handset subsidies, the underlying EBITDA stood at P61.2 billion versus our guidance of P60 billion. Consolidated EBITDA margin was 39%, after margins improved in the 2nd half of the year.
In line with our dividend policy, dividends per share amounted to P77, equivalent to 60% of 2016 core earnings.
As of end-2016, PLDT’s net debt and net debt to EBITDA rose to US$2.9 billion and 2.36 times, respectively. This was due to added obligations stemming from our acquisition of half of the telecom business of San Miguel Corporation (SMC). Gross debt stood at US$3.7 billion, of which only 9% is unhedged. Refinancing facilities for 2017 maturities are in place, including a US$228 million bond which was repaid on 6th March 2017. As of end-December 2016, PLDT’s investment grade ratings remain unchanged.
What’s worth highlighting is the elevated contribution of PLDT Home and Enterprise to consolidated service revenues, growing by 10% to P29.3 million and 9% to P30.6 billion, respectively. These are traditional areas of strength for PLDT, and have now acquired greater value because industry revenue on fixed is forecasted to grow much faster than wireless revenue in the medium-term. Given the rising demand for digital services in the Home and Enterprise markets and our superior infrastructure and brand strength, PLDT Home and Enterprise will continue to set the pace for revenue growth and will likely account for more than half of total revenues by 2017 and onwards.
The Wireless Consumer Group – which handles mobile services for Smart, TNT, and Sun individual subscribers – posted revenues of P66.4 billion, 9% less than the prior year. But there were bright spots, such as the 20% growth in mobile data which accounted for 34% of wireless consumer revenues, edging out SMS and domestic voice for the first time, which had shares of about 33% each. The challenge for us is precisely the manner of accelerating the shift to mobile data and digital services, and to help our customers make that transition as quickly and efficiently as possible.
All these business initiatives hinge to a large degree on the success of our ongoing network modernization and expansion efforts.
Cutting-edge Digital Infrastructure
Our network strategy is straightforward: We are building the latest, fastest, most resilient and extensive fixed and mobile data networks in the country. To accomplish this, we are pouring substantial resources and effort into developing this digital infrastructure. Our capex budget for 2017 is P46 billion, inclusive of carryovers from 2016. In 2016, we spent P42.8 billion of the P48 billion programmed last year.
On the wireless front, Smart is rolling out two complementary technology platforms: LTE and WiFi.
Smart is undertaking a three-year program through to 2018 that will bring its LTE and 3G coverage to 95% of the country’s over 1,500 cities and municipalities. This roll-out, which started in the metropolitan centers of Davao, Cebu and Manila in 2016, is using a combinations of low- and high-band frequencies for LTE and 3G, including the 700 MHz and other frequencies obtained through the acquisition of the telecoms business of SMC.
Smart’s efforts are producing the desired results. In Metro Davao, for example, where the network roll out was completed in October 2016, internal tests show that our subscribers are benefiting from much improved LTE coverage, particularly indoors where people use data services the most. Internal tests show that average 3G data download speeds rose six times to 6 Mbps, while average LTE speeds jumped four times to 17 Mbps.
As I write this message, similar positive results are being achieved in Metro Manila and Metro Cebu where average LTE and 3G speeds of around 20 Mbps and 5 Mbps, respectively, are being posted in a growing number of areas, as the roll out proceeds in the first few months of 2017. Indeed, third-party studies are providing corroborating information that Smart’s LTE is the fastest in the country.
Moreover, Smart has also installed LTE-Advanced (LTE-A) equipment in a number of cell sites, enabling LTE-A capable handsets to post data speeds of up to 80 to 90 Mbps. This positions us to take our mobile internet service to the next level quickly. As more LTE-A capable handsets become available, it becomes relatively easy to boost wireless internet services to the next level by deploying LTE-A.
Complementing our LTE/3G mobile internet roll-out, Smart is also building an extensive network of carrier-grade WiFi hotspots, taking advantage of PLDT’s extensive fiber network in the country. Initially, Smart WiFi was installed in key transportation facilities like airports, seaports and the Light Rail Transit (LRT) System in Metro Manila. In 2017, this wireless service is being deployed in a growing number of public spaces, schools, malls, retail and entertainment areas. The combination of Smart’s LTE/3G mobile data and Smart WiFi network will provide subscribers the best possible wireless data experience.
For its part, PLDT is rolling out its Fibr City program to bring its ultra-fast fiber-to-the-home (FTTH) service to more areas all over the country. Working with the local governments of these cities, PLDT set up the first Fibr Cities in Toledo, Cebu and General Santos, South Cotabato where residents can now use FTTH to experience equal upload and download speeds of up to 1 Gbps. The target is to expand the footprint of PLDT’s FTTH network from 2.8 million homes passed as at end-2016 to 4.4 million homes by end-2017, and to 6 million by 2020.
At the same time, PLDT is deploying hybrid fiber technologies such as G.fast, which can deliver fiber-like data speeds through our copper wires in buildings and residences. We intend to equip 1.7 million of PLDT’s copper-line connections with G.fast. This will raise the quality of customer experience for those on copper, and enable PLDT to increaser its data subscribers. Eventually, all of PLDT’s data customers will be using either an FTTH or G.fast connection within two years.
Another key component of PLDT’s digital infrastructure is its network of Data Centers, the largest and most resilient in the country. Through its subsidiary ePLDT, PLDT operates nine data centers, including its newest in the Clark Freeport Zone in Pampanga. By end-2017, its 10th data center will go online in Cebu, raising the total capacity of our data center network to over 9,000 racks.
Bundled, Converged, Targeted services
As we expand and strengthen our fixed and mobile data infrastructure, PLDT is further able to enrich the portfolio of digital services and solutions we offer to consumer and enterprise customers.
PLDT Home, for example, is using its high-speed connectivity to enhance its suite of family-friendly services under its Smart Home program. Its entertainment package, for example, already provides Filipino families the broadest range of live TV and video-on-demand content with the help of its affiliate, Cignal TV, and its partnerships with leading global and local content providers and aggregators like iflix, Netflix, Roku and iWant TV. Smart Home also offers family security services such as Fam Cam, the CCTV service that lets parents monitor their homes while at work, and, Fam Zone, which enables parents to manage their children’s access to the Internet.
Faster data speeds enable PLDT and Smart to offer popular video content across their fixed and mobile networks. Smart’s popular prepaid load Giga Surf 50, for example, provides 1 GB of open access data allowance, bundled with 300 MB for access to iflix, the music service Spinnr and YouTube.
Increasingly, data is becoming the headline offer of our product bundles with communications services like voice calls and text included as sweeteners in the package. In Smart’s All Out Surf packages, for example, data is blended with Unli All-Net SMS and allocations for calls to Smart, TNT and Sun. Moreover, other bundles include calls to PLDT, such as Sun’s prepaid package TU200 which provides five hours of calls to Sun, Smart, TNT and PLDT landlines.
Converged offers are a competitive advantage of PLDT that we are increasingly utilizing. Leveraging its large overall subscriber base, PLDT offers the country’s first data sharing plan that lets its fixed line customers to share their data allocation with up to four Smart mobile phones bundled with the plan. PLDT Home also combines fixed line voice and data with CignalTV content under the offer “Cignal over Fibr”. More such initiatives are forthcoming.
Banking on its extensive ties in Government and the business community, PLDT Enterprise has been actively offering converged services for several years now. Increasingly, Enterprise is offering cloud-based services delivered through fixed and mobile platforms.
A recent example is the Smart SOS Dispatch, a cloud-based emergency communications system designed for local governments, communities and corporations. Such services take advantage of PLDT’s unmatched ability to support cloud-services through its extensive data center network.
The Enterprise Group is also offering the eCommerce and ePayment solutions developed by the Voyager Innovations Group, the digital arm of PLDT and Smart. Voyager solutions like TackThis! and Takatack, for example, now enable the online stores of companies Philippine Airlines, Uber, ShopTV and fashion brands like Giordano. Voyagers freenet enables companies to increase usage of their apps and websites by offering their customers free sponsored access. The PayMaya app continues to be the leading mobile payment application in the Philippines, its growth fueled by strong adoption among millennials. PayMaya Business remains the leading mobile payments acquirer in the Philippines and enables companies to accept card payments via their mobile app, website or point of sale terminals.
Moving forward, we are endeavoring to make our product and service offers more and more relevant to our customers. We are doing this for example by building an Enterprise team that better understands the changing needs of our corporate customers, and can act as their trusted adviser in acquiring the right solutions for their businesses. In the Consumer business, we are using more extensively big data analytics in combination with a more engaged marketing and sales organization in order to develop and deliver compelling products to customers in the right place at the right time and at the most affordable price.
Integrated and empowered organization
To serve our customers with converged digital services more effectively, the PLDT organization, including its wireless and digital subsidiaries, needs to become more integrated and collaborative than ever before.
That is why new senior executives were appointed in the areas of Human Resources, Customer Experience and Data Analytics, Platforms and Networks in the later part of 2016. The designation of Ernesto R Alberto as Chief Revenue Officer places all the major revenue-generating business units – PLDT Home, Enterprise and Wireless Consumer – under one head and opens the door to greater collaboration among them. Placing Corporate Services across PLDT and Smart under Ray C Espinosa as Chief Corporate Services Officer aims to strengthen support for the frontline business units.
We have also reinforced our Customer Experience and Data Analytics groups so that we can utilize the most advanced digital tools to understand better our customers’ changing needs and tastes. This is a fast-moving field, where global technology giants are rewriting the rules of the games. We intend to keep apace by strengthening our internal capabilities and partnering with global leaders in this field.
Corporate Action: Pursuing the Digital Shift
In step with our business, our corporate social action programs are pursuing an increasingly digital tack. In education, for example, teacher and student training remains a strong focus and is increasingly going online.
Gabay Guro (2G), the flagship program of the PLDT Smart Foundation (PSF) and the PLDT Managers’ Club, Inc. (MCI), the PLDT Infoteach Outreach Program and the Smart Wireless Engineering Education Program (SWEEP) provided various sorts of training for about 7,900 teachers and students of public schools all over the country in 2016. In the case of 2G, the stress is on raising the level of teacher competencies, while the Infoteach Outreach Program focused on Internet and computer literacy. For SWEEP, the objective is to help colleges and universities to produce more industry-ready graduates, an effort that won for Smart inclusion in the “Change the World” list of Fortune Magazine – a yearly recognition given to 50 companies from around the world for conducting programs with significant
Some of our programs have produced digital innovations. For example, PLDT launched a new disaster preparedness mobile app called Handa through which employees of PLDT and Smart and their subsidiaries can receive relevant safety information, real-time situation updates and send calls for help during emergencies. Smart launched SHINE OS+, the mobile app version of the Secured Health Information Network and Exchange – an open-source electronic medical record platform developed in partnership with the Ateneo Java Wireless Competency Center.
But we still have plenty of brick and mortar activities. 2G is still building and turning over public school classrooms – 43 as of end-2016. In disaster resilience, PLDT built and turned over 30 “butterfly houses” to families in Tacloban, Leyte which had been displaced by Typhoon Yolanda. This was part of a joint program of the US AID and the Philippine Disaster Resilience Foundation (PDRF).
PLDT also remains active in the fields of environmental protection, livelihood promotion and health care. We are also committed to developing Philippine sports. Working with the MVP Sports Foundation (MVPSF), PLDT continues to support collegiate and national programs in basketball, boxing, golf, cycling, badminton, football, taekwondo, amongst others. A relatively recent focus of interest is weight lifting, which has got a big boost following the Silver Medal win of Hidilyn Diaz in the 2016 Olympics.
Our dream of hosting the FIBA Basketball World Cup in 2023 through the Samahang Basketbol ng Pilipinas burns bright as ever. We may win, or we may not. Either way, the pursuit of this dream will help us raise our level of excellence in the sport.
In this era of alternative facts, fake news, and populist politics, there is growing unease about the widening circles of creative disruption being caused by digital technologies like artificial intelligence, machine learning and robotics. There are fears for example that AI-driven software will wipe out work in our business process outsourcing industry, just as workers in advanced countries are worried that increasingly more affordable robots will take over their manufacturing jobs. If our experience is any guide, embracing change is ultimately more beneficial than trying to hold it back. We have learned ourselves that resisting change is a futile exercise – it will come anyway whether one likes it or not. The painful lessons are simply these – embrace change, disrupt yourself, get ahead by pivoting digitally.
That is why in our current efforts, we are profoundly mindful not only of the urgent needs of today, but also the emerging challenges and opportunities of tomorrow. For example, even as we roll out our LTE network, we are designing this deployment so that this will help us prepare for the coming of 5G in just three years from now. This explains why Smart conducted 5G tests with our technical partner Nokia in December 2016 and why PLDT signed an agreement with Huawei Technologies in February 2017 to do research and development (R&D) work on 5G.
We are building the digital infrastructure of tomorrow – today. And we are working with the best partners here and abroad to develop the ecosystems of digital services that will transform business, government and improve the lives of our people.
To get from here to there requires us to disrupt the businesses we have – profitable as they were in the past. We have pressed the 2016 Start Button as a period for resetting. Profitability was adjusted to a lower but realistic level, taking into account how our business, customer base and organization are being reshaped by the forces of technology and market changes. Our new baseline is P21.5 billion in 2017 in underlying core income without exceptionals, compared with the 2016 core of P20.2 billion. Moving forward, we aim to progressively raise profitability, starting with this baseline of P21.5 billion in 2017. To get back on this path of sustained growth and profitability, all of us in the PLDT group of companies need to exert concerted, relentless efforts to serve our customers in the best possible way. Digitally. Like never before.
Let me close by thanking our shareholders for their unstinting support, our Board of Directors for their wise counsel, and our Management and Staff for their tenacity and creativity in overcoming obstacles to building a new future for our Company, our Customers and our Country.
Manuel V. Pangilinan
Chairman of the Board, President and Chief Executive Officer