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Edited Transcript of GLO.PS earnings conference call or presentation 6-May-19 1:30am GMT

Q1 2019 Globe Telecom Inc Earnings Call

Taguig May 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Globe Telecom Inc earnings conference call or presentation Monday, May 6, 2019 at 1:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alberto M. de Larrazabal

Globe Telecom, Inc. - Chief Commercial Officer

* Ernest Lawrence L. Cu

Globe Telecom, Inc. - President, CEO & Executive Director

* Gil B. Genio

Globe Telecom, Inc. - Chief Technology & Information Officer and Chief Strategy Officer

* Jose Mari Fajardo

Globe Telecom, Inc. - Director of Investors Relations

* Rosemarie Maniego-Eala

Globe Telecom, Inc. - CFO, Treasurer & Chief Risk Officer

* Vicente Froilan M. Castelo

Globe Telecom, Inc. - General Counsel and Head of the Corporate & Legal Services Group

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Conference Call Participants

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* Arthur Pineda

Citigroup Inc, Research Division - Director and Head of Pan-Asian Telecommunications Research

* Giovanni Dela-Rosa

Deutsche Bank AG, Research Division - Research Analyst

* Luis A. Hilado

Maybank Kim Eng Holdings Limited, Research Division - Senior Research Analyst

* Ramakrishna Maruvada

Daiwa Securities Co. Ltd., Research Division - Head of Singapore Research

* Varun Ahuja

Crédit Suisse AG, Research Division - Associate

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Presentation

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Operator [1]

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Over to you.

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Jose Mari Fajardo, Globe Telecom, Inc. - Director of Investors Relations [2]

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Thank you. Good morning, and welcome to the First Quarter 2019 Analyst Briefing of Globe Telecom. Allow me to introduce our management panel for today's briefing. We have Mr. Ernest Cu, President and Chief Executive Officer; Mr. Alberto de Larrazabal, Chief Commercial Officer; Mr. Gil Genio, Chief Technology and Information Officer; Rizza Maniego-Eala, Chief Finance Officer; Attorney Froilan Castelo, General Counsel.

Mr. Cu will present the highlights of the company's performance of the first quarter 2019, then Ms. Maniego-Eala will present the financial results. Afterwards, we will open the floor for the Q&A portion beginning with our conference call participants and then our audience.

May we now request Mr. Cu for his presentation.

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Ernest Lawrence L. Cu, Globe Telecom, Inc. - President, CEO & Executive Director [3]

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Thanks, JoMari, and welcome, everyone. Welcome to those on the call. Good morning. Please allow me now to go through our performance for the first 3 months of 2019 and then as Jose Mari mentioned Rizza will take over and give you more particulars.

The year 2019 is off to a wonderful start with record-breaking performance across revenue, EBITDA and net income. First quarter service revenues are at the record high of PHP 36 billion up 13% 13% from the previous year. This revenue performance allowed EBITDA to improve 24% to PHP 19.9 billion, bringing EBITDA margins to 55%. This is primarily also due to, I believe, a good performance in helping maintain costs through 3% rise. That way a lot of the revenue gains were translated into profitability. Similarly, net income showed tremendous improvement growing 44% year on year to PHP 6.7 billion. Core net income, likewise, improved by 40% versus the same period last year.

We are also pleased to announce that our Board of Directors recently approved the secondary -- second quarterly dividend distribution of PHP 22.75 per share. The details of which will be discussed by Rizza after my portion of the presentation.

Breaking down our service revenues, we continue to see data as a main driver of growth. The mobile business grew 7% year-on-year, bolstered by a 44% increase in mobile data revenues. With a pervasive reach of data and the Internet of Things, we see its effects not just in the rapid acceleration of mobile data revenues, but also in the lower mobile voice and SMS services, both posting double-digit declines of 15% and 22% respectively.

Mobile subscribers, as of the end of March 2019, stood at 83.5 million. This figure remains elevated following the change in regulation on prepaid load expiry, which began -- which we began reporting in the fourth quarter of 2018.

The Fixed Line and Home Broadband business has revenue increase 17% year-on-year, boosted by the double-digit growth in the Home Broadband and Corporate Data businesses. Voice performance accounted for the 8% decline in fixed line voice. Home Broadband grew 21% year-on-year to PHP 5.2 billion, driven by a 22% increase in broadband subscribers, coming mostly from the Fixed Wireless business. To-date, 63% of broadband subscribers coming mostly from the Fixed Wireless business.

To-date, 63% of our Home Broadband subscriber base is on the fixed wireless technology. Corporate Data revenues are also up by 16% to PHP 3.1 billion, driven by a sustained demand for connectivity, business application, cloud solutions and cybersecurity services.

As of the end of March 2019, data revenues now account for 69% of our total service revenues with the largest contributor being Mobile Data at 46%, followed by Home Broadband at 14% and finally Corporate Data at 9%. As of the end of March, our Mobile Data user base is up 7% year-on-year from PHP 34.8 million to PHP 37.1 million. Mobile data traffic for the first 3 months of 2019 -- for the first 3 months in '19 stood at 370 petabytes. Twice as high as 180 petabytes recorded a year ago, and 17% higher than the 315 petabytes reported in the fourth quarter of 2018.

Mobile ARPU, which is the number of gigabytes used per subscriber among data active users is on a similar trend, up from 1.8 gigabytes per month in 2018 to 3.5 gigabytes per month in the first quarter of 2019. A growth rate of 91% was that the previous quarter. Mobile Data ARPU 15%.

Allow me now to go through some of the updates on Globe's initiatives to develop the digital ecosystem and support our customers' digital lifestyle. First of all, I'm happy to report that we are on track to launch the new 5G technology for Home Broadband this year, as we announced this week.

This new technology can potentially change the way we live, enabling smart cities and smart homes and bringing with it a whole new ecosystem of devices, experiences and innovation. To push the adoption of Internet of things just seem to become a physical engine for future growth of telcos services.

Next, payment through GCash continues to make strides in the mobile payments business, fostering financial inclusion in the Philippines. GCash is currently ranked #1 in the Philippines and #5 in the ASEAN in monthly active users, among mobile wallet apps in 2018 based on the year-end report of App Annie. To-date, GCash has around 24 million registered users and 64,000 QR merchants.

Not just limited to the mobile wallet, GCash now has the portfolio of products and expanding through savings and investment products, loans, credit scoring and just recently insurance. Currently, GCash Insure is being rolled out to select customers and offers a comprehensive insurance like Life, Personal, Accident and Daily Hospital Income.

Kickstart Globe's venture capital subsidiary was also recently appointed to manage Ayala Corporation's new venture capital fund called the ACTIVE Fund. The fund intends to support startups and early growth stage companies that offer technological solutions across 4 key investment themes. Number 1, integration of digital and traditional channels; 2, enhancement of the interaction between man and machine; 3, the innovation of property and real estate management and 4, the reframing of abundant and scarce resources like energy, water, food and waste through emerging technologies. The ACTIVE Fund is the largest effort of its kind in the Philippines and the first conglomerate wide strategic venture capital fund in the country, positioning the Ayala Group to lead the digital wave and support the Filipinos drive to adopt ever more connected, interactive and digital lifestyles.

The products and services side, GoWiFi, our fast and secure public WiFi service now covers over 2,000 sites nationwide, ranging from malls, airports and MRT and LRT stations. This translates to over 20,000 access points have been deployed over and enhanced experienced around 18 million sessions per month as of -- at the [instance]. GoWiFi is expected to expand its coverage throughout the year to include hospitals, universities, supermarkets, convenience stores and various other locations where people converge.

We also recently partnered with short-form video service TikTok to provide exclusive affordable data promos to our mobile subscribers. Creators and users can access TikTok for as low as PHP 15 a day with a 100-megabyte allocation. Along with the data promos, Globe launched at the #CreateWithLove Challenge with prizes up for grabs with the Top 5 most viewed videos.

Finally, in the Esports field, Globe unveiled the Philippines' first Esports Center last March. The ESC located at Play Nation in UP Town Center in Quezon City is an experience hub for Filipino gamers and gaming enthusiasts in participate in competitions, creating live streaming content and interact with other members of different Esports communities.

That is my portion, and I'll turn it over now to Rizza for just more details.

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Rosemarie Maniego-Eala, Globe Telecom, Inc. - CFO, Treasurer & Chief Risk Officer [4]

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Thank you, Ernest, and good morning, everyone. Let me go through the details of our financial results for the first quarter of this year. If you recall, last year, we adopted new accounting standards related to PFRS 16 and 9 and reported estimates related to these changes for the first few quarters of 2018.

After finalizing our system reports, all adjustments were made in fourth quarter of 2018 and this skewed our Q-on-Q performance. As such, we are restating our 2018 quarterly figures to present actual performance both for PFRS 16 and PFRS 9.

Gross service revenue for the first 3 months of 2019, registered a PHP 36 billion, up 13% from last year's restated figure of PHP 31.9 billion. Operating expenses and subsidy also grew slightly by 1%.

Owing to a strong revenue performance, EBITDA rose 24% to PHP 19.9 billion, translating to an EBITDA margin of 55%. Net income likewise grew to PHP 6.7 billion, a 44% increase from last year's PHP 4.7 billion.

This year we are adopting another new accounting standard PFRS 16 related to leases. Under this standard, lessee accounting of operating leases at the inception of the lease will be recognized on the balance sheet as right-of-use assets and lease liabilities. These are to be recognized at the present value of future non-cancellable lease payments and subsequent inception, right-of-use assets will be depreciated over straight line through the lease period, and lease liabilities will be amortized using the effective interest method.

Globe is using the modified retrospective approach and we are reporting as PHP 336 million upside adjustment to the opening balance of retained earnings for 2019. The impact of this on our P&L is minimal, and as of 1Q '19 amounted to a PHP 267 million upside EBITDA from lower expenses. We estimate the full year impact of this to be around PHP 1.2 billion to PHP 1.5 billion.

PFRS 16 will also result in higher depreciation and interest expense due to the recognition of right-of-use assets and lease liabilities. The impact to NIAT will be a downside in the initial years of the lease. As of this reporting period, we expect on NIAT the impact to be around PHP 30 million to PHP 50 million downside per quarter.

Let me now go through our expenses in more detail. Interconnect charges saw a decline year-on-year mainly due to lower internetwork traffic usage for mobile -- for mobile voice, SMS and roaming, and also due to the change in interconnect rates for both SMS and voice.

Staff costs posted PHP 191 million increase year-on-year from increased headcount to support the growing business. Subsidy and marketing expenses grew from increased expenses on advertising and promotion, as well as higher commissions from broadband acquisitions.

Network costs, on the other hand, posted a slight decline of PHP 48 million, partly due to lower lease expenses from the adoption of PFRS 16. This reduction amounted to PHP 267 million for the first quarter of 2019, as I mentioned earlier. Other components of network costs like supplies, utilities, and repairs and maintenance posted an increase year-on-year due to the additional network facility.

Provisions for the period also rose year-on-year, mostly from additional provisions for international traffic. Services and other expenses likewise grew due to an increase in managed and cloud services. Coupled with a PHP 4.1 billion increase in revenue, EBITDA for the first 3 months of 2019 settled at PHP 19.9 billion, a 24% improvement from last year's figure of PHP 16.1 billion. Subsequently, the first quarter EBITDA grew 26% from last quarter's PHP 15.8 billion.

Below EBITDA, we are also seeing increases across depreciation and non-operating expense, partly due to the adoption of PFRS 16 where then we recognized additional expenses for the right-of-use assets and additional interest expense for lease liability. Apart from those, depreciation expenses also rose in line with the growing business as we continue expanding our network.

For non-operating charges, we are also seeing increases in our shares in FX losses as Mynt continues to expand aggressively. Despite these rising charges, the EBITDA gain still allowed room for net income to grow 44% to PHP 6 billion from last year's PHP 4.7 billion.

Moving onto CapEx. Capex cash flow for the first quarter of 2019 totaled PHP 8.8 billion or a $167 million, up 33% from the PHP 6.6 billion reported last year, and translating to a CapEx-to-revenue ratio of 24%. At 68%, majority of our CapEx continues to be spent on data related requirements to support our growing mobile and broadband networks.

Gross debt as of the end of March is at $138.4 billion, 7% lower than end 2018 level due to loan repayments. The lower level of debt improved our debt ratios with gross debt-to-equity registering at 1.8x, versus end 2018 levels of 2x, while gross debt-to-EBITDA registered a 2.06x versus 2.33x. Debt service coverage ratio for the period is at 3.66x, lower than the end 2018 level, but well over the minimum requirement of 1.3x stated in our covenants.

As Ernest earlier mentioned, our Board of Directors recently approved the second quarterly cash dividend of PHP 22.75 per share, payable on May 31 to stockholders on record as of May 20. In aggregate, this quarterly declaration comes out of payout of about PHP 3 billion.

Further toward guidance discussion, in our last quarter's briefing, we are now ready to provide the market with service revenues and EBITDA margin guidance for the year. For overall service revenues, we are guiding high single-digit growth. We believe that our overall business momentum will continue for the rest of the year on the back of increased consumer spending, supported by our continued expansion to capture latent demand.

While for EBITDA, we expect to see this settle at around the low 50s level for full year. Despite the growth of lower margin data-related products, we believe that our leadership in mobile, our efforts to scale our Home Broadband and Corporate Data businesses, and our focus on cost transformation across the board would aid in achieving this EBITDA margin guidance. In terms of CapEx, we have the same guidance of PHP 1.2 billion or roughly about PHP 63 billion for the year.

This concludes my report, and we now open the floor for questions. As we did in the past, we shall take questions from the conference facility first, followed by those who are here today. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question, we have Luis Hilado from Maybank.

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Luis A. Hilado, Maybank Kim Eng Holdings Limited, Research Division - Senior Research Analyst [2]

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I have 3 questions, the first 2 on revenues and the 3rd on expenses. The first one is -- could give us some color in terms of what's driving your wireless data growth? Is it primarily video streaming? Any color on the biggest component and what's the fastest growing component?

Second question is. You've had very good progress in terms of fixed wireless broadband revenue growth. Have you seen PLDT react to your traction you see in the market whether in terms of pricing or subsidies? And any color on your 5G launch in terms of target number of households reached and such?

Last question is on D&A expenses, they were down Q-on-Q despite CapEx and the switch to the lease accounting treatment. Just wondering if there's any color on that and what's driving that? Any full year guidance for D&A?

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Ernest Lawrence L. Cu, Globe Telecom, Inc. - President, CEO & Executive Director [3]

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Hey, Luis. Let me take a stab at the first 3 questions, maybe I will let Gil or Alberto to chime in. The growth in mobile data volume and the resulting revenue increase was, you're right, due to video streaming. Well, we don't give data on the specific traffic per service. All I can tell is, obviously, given where the market is at, it's the 3 type of services that the consumers tend to use. This would be in the area of user-generated content or ad supported services that are in the market today.

You know there are lot of streaming providers to our benefit have switched from a peer subscription-based model to one of AVOD or advertising-video-on-demand and that really served well in terms of giving customers access to content basically for free in exchange for viewing advertising.

For fixed wireless, we have not seen much by way of competitive pressure. This is a divergent in strategy and belief. We believe that the market is substantial prepaid and thus wireless is the best way to deliver on the prepaid product. What we see is that competition continues to roll out fiber in various parts of the country. Just note that while we have a very strong focus on the fixed wireless, we have not completely abandoned fiber or FTTH as we call it. We continue to deploy very selectively, ensuring that the areas we deploy in -- will have great take up, will have good utilization so that we have a lot of CapEx efficiency and manage them from that strategy.

On the 5G launch, we are not yet disclosing the extent because it is still a sort of a commercial pilot launch, but we're definite that in June, around the third week or so, you will see the first commercial customers being hooked up to the 5G wireless service. Maybe on the G&A or maybe Alberto will like add to anything?

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Alberto M. de Larrazabal, Globe Telecom, Inc. - Chief Commercial Officer [4]

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Yes, just on the wireless data growth, we've -- obviously, video continues to be a significant driver of the usage. What we've seen in the driving the aggregates are really in part greater adoption, so there's more people now starting to use the service. 2, that they're using the service for a longer period of time. So both of that are starting to show that the viewing habits and more broadly the data habits of the consumers continue to evolve positively for us.

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Rosemarie Maniego-Eala, Globe Telecom, Inc. - CFO, Treasurer & Chief Risk Officer [5]

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Hi, Luis. This is in response to your D&A question. We did have end-of-life assets during the quarter. So that results to or that is the -- one of the reasons why we had decline in depreciation Q-on-Q. While we don't give guidance on depreciation, if you look at our first quarter, year-on-year growth in depreciation was 10% and if you look at the growth in depreciation for full year 2018 versus full year 2017 that was a growth of 11%. So maybe you can use those as data points together with the CapEx guidance and basically work your model towards those data points.

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Operator [6]

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Our next, we've Arthur from Citigroup.

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Arthur Pineda, Citigroup Inc, Research Division - Director and Head of Pan-Asian Telecommunications Research [7]

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Just 2 questions for me, please. Firstly on the 5G launch, I'm just wondering if you can give any indications in terms of your trials. How did the speeds compare sustainably versus fixed and wireless? What are the CPE price differentials? And if you're able to provide guidance on margin differentials as well between fixed and wireless broadband?

Second question I had is with regard to the guidance itself. It seems to be conservative versus what you've been seeing in the first quarter trends is there anything to suggest increased competition to change the 1Q momentum or is this really being a bit more prudent in terms of the guidance?

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Ernest Lawrence L. Cu, Globe Telecom, Inc. - President, CEO & Executive Director [8]

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On 5G I think we -- what I can say to you again -- we're not really seeing as much details yet, but we have seen some really good speeds approaching 1 gigabit per second type of performance. Now that serves to be seen in real application in terms of installing in home.

As you know, wireless has a lot of limitations as well and we need to learn more. Remember, we're also deploying at the higher frequency a 3.5 gigahertz. So it's a little bit more -- you would say, a little bit weaker when it comes to wall penetration and so and so forth. So we'll have to see what the actual results are. But what we see in trials is very encouraging. It does approach fiber speeds. But again, it's part of a learning process.

In terms of CPE, again, we don't release particulars on CPE because these are all negotiated prices. But as with any electronic device that's on the leading edge, we expect the prices to drop significantly over the next 12 months, very similar to what you're going to see on handsets. They predict $300 handsets will be in place by the end of the year in terms of the 5G chips because of chip pricing predominantly. Chips are no longer the, you would say, monopoly of QUALCOMM these days. There are companies that produce them at Huawei, MediaTek. And so we expect that as chip prices continue to go down and the CPE, whether it's on modem or on handsets, will continue to drop and drop rapidly.

With regard to the guidance, Globe has always been conservative in terms of its guidance. And I think it's up to you guys to model and see what our past performances and correlate what our -- what we're guiding and what we actually deliver. I think you can sense from the first quarter momentum that there is indeed momentum in the revenue stream and good cost management in terms of operations management. So I leave it to you to decide how conservative or how aggressive this particular guidance is.

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Operator [9]

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We have another question from Credit Suisse, Varun, over to you.

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Varun Ahuja, Crédit Suisse AG, Research Division - Associate [10]

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Firstly on the margin side, if you look at your mobile margins, it's now -- this first quarter is exceeding above 60%, so how sustainability do you think these are or the momentum can improve -- continue to improve? Because from 2018 we're seeing trend of improvement in margins, so I just wanted to understand how does the management view mobile margins specifically and can we can continue to see the improvement of momentum on that? So that's number 1.

Number 2, just wanted to understand on the ground has there been change in terms of regulatory procedures to get the number of sites is still the same? Are you facing the same problems regulatory side because there have been lot of things have been sent from the government side to improve that? And how is the progress happening on the tower company that has been talked about?

Thirdly, on the fixed wireless, currently I understand most of your fixed wireless rollout is happening on 4.5G or whatever you call it as LTE. How do you see it different from 5G, right? Is it, obviously, in the next near term that CPE devices may be expensive. So is your strategy towards have do more on the 5G side or you're still happy with the LTE? My understanding is with current technology also you can have decent rollout on speed performance on LTE. But it's just that you may need that spectrum for your current mobile services. So will you try to push for more 5G fixed wire customer to you because of the spectrum constraint that you may have, but the devices may be expensive? So just wanted to understand the strategy, how do you want to push towards the fixed wireless?

And lastly a housekeeping question on San Miguel joint venture. Can you give how much the losses are coming in now? How much have they reduced in the other income and expenses?

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Ernest Lawrence L. Cu, Globe Telecom, Inc. - President, CEO & Executive Director [11]

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Okay. On mobile margins, they're -- as you said, they are now at almost their peak for some time. I mean all I can say is that, if condition remained the same, which means pretty relatively quiet competitive landscape, I believe competition is also now trying to monetize data as they've now been able to increase their traffic on a quarter-on-quarter basis. I think margin should continue to stay. Expansion beyond what they are at will be a bit difficult. Of course, management will keep trying to do something -- to do ways to manage its cost and delivery of the per gig cost to manage them lower. But I don't think we can say that we can continue to expand this forever. They should level off at some point. I don't know where you got the number 60%. But if that's indeed true, then that's a great. Anybody with a 60% margin on a product -- that is your main product with 70% of your revenue stream, I think it's very blessed.

On the regulatory front, I'll turn that over to Froi, we'll go back together, myself on the 5G and Rizza on the San Miguel question. So Froi, change in regulatory terms of site acquisition permits?

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Vicente Froilan M. Castelo, Globe Telecom, Inc. - General Counsel and Head of the Corporate & Legal Services Group [12]

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Yes, on the ground there's not much a change in the -- or improvement in terms of bureaucracy. It's still -- we're still tightly having some problems with the permit as well. But there's some hope. There is a huge or improved public awareness already and we are actually aspiring the public itself would help us gain more sites through pressure on their respective local government units. Back to you Ernest.

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Ernest Lawrence L. Cu, Globe Telecom, Inc. - President, CEO & Executive Director [13]

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Okay.

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Rosemarie Maniego-Eala, Globe Telecom, Inc. - CFO, Treasurer & Chief Risk Officer [14]

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On the JV.

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Ernest Lawrence L. Cu, Globe Telecom, Inc. - President, CEO & Executive Director [15]

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On this is the fixed wireless. Maybe Gil can give us a flavor for the difference between the current deployment of LTE with a Massive MIMO and the 5G.

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Gil B. Genio, Globe Telecom, Inc. - Chief Technology & Information Officer and Chief Strategy Officer [16]

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Your question is centered on a 4.5G and 5G differences. Unfortunately, 4.5G, which is of course beyond 4G is an agglomeration of certain technological advancements, some of them have to do with radio, some of them to do with the Massive MIMO.

In the case of Globe, we actually have, in selected sites, a Massive MIMO deployment. This is a relatively new antenna technology that allows greater throughput to individual devices within the -- I guess a coverage of a particular site. 4.5G, as I said, however, encompasses quite a number of other technologies. It has become controversial obviously because no one really knows exactly what 4.5G is.

In our case, we have transitioned to -- and we will be doing 5G, as you already know. And 5G with respect to all of the technologies assumes all of the technological developments in 4.5G plus other things. And so inherently 5G will always have a speed superiority, all things being equal, to 4.5G. And as I said, it's worth repeating. There is globally accepted way of calling or whatnot to call 4.5G. And so in some markets like the U.S., the term has become controversial. But there's no controversy about what 5G really means.

You also mentioned something about the spectrum. From our perspective, the spectrum that we had originally gotten from that San Miguel acquisition, which is principally the 2600 is now being extensively used for our 4G wireless product, whether it's for mobile or for whom. And 5G is with our historical 3.5G as [current frequency]. So going forward, we don't really have or we don't expect any major contention between mobile and fixed wireless. Considering that our LTE frequency is on mobile, tends to be on the lower side of the band. As you may be aware, we have 1800. We also got a 2300 and a bit for 2600 for mobile. And principally home use are some slices of 2600 and of course principally going forward 5G will be on the 3.5 gig.

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Rosemarie Maniego-Eala, Globe Telecom, Inc. - CFO, Treasurer & Chief Risk Officer [17]

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On your JV query. This contributes positive to bottom line. It has been contributing positively to net income since last year. It's not a lot, but at least there is no negative carry.

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Ernest Lawrence L. Cu, Globe Telecom, Inc. - President, CEO & Executive Director [18]

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Maybe at this stage, I would also would like to add to what the Attorney Froilan Castelo mentioned with respect to towers. Yes, we do not see improvements. There's always some hopeful commentary from our regulators. But for those of you who appreciate what the tower difficulties in the Philippines are, it really dates back to the 1980s when the national government devolved relatively large chunks of permitting power to local governments, that's enshrined in the local government code.

It is a really sensitive topic, but no one really wants to touch or even approach the idea of amending the local government code. Unlike, in other countries, for example, in many jurisdictions internationally, the national government has the power to preempt local government codes, for national interest in the case of power grids, distribution and utilities, et cetera, and even for that matter, towers. Not so in the Philippines. We don't, unfortunately, have preemptive national government rules or laws that will allow companies like ourselves or actually many other utilities are affected by the same thing to be able to put towers based on the national authorization.

Ultimately, putting up towers is always a local authorization. And unfortunately, down to the Homeowners Association of Condominium or a Homeowners Association of every last village or everybody, every Barangay, which is the smallest local government unit. So yes, there are hopeful signs. Yes, the government regulators speak about some possible support. But the nitty-gritty at the ground level, it is increasingly hard to put towers.

Tower density is an important topic for the Philippines. In fact, we've been on record saying that if the government really wants to improve Internet experience in the Philippines, the single biggest change that they can make in this country is to increase our site density in one way or another. We badly lack towers. And even I personally have publicly said, I'll erect a statue for someone who can solve this problem. Let alone all of the ambitions of a third player, I really don't understand how they'll be able to do that. If they do, if they are able to share, fine. But the local government code basically puts so much power in the hands of local governments. So it's hard to put towers.

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Varun Ahuja, Crédit Suisse AG, Research Division - Associate [19]

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Just one more if I can ask. Have you been approached by the third player, Mislatel for any nice roaming arrangement, the sharing of network, any update on what you're seeing on the ground from the third operator?

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Ernest Lawrence L. Cu, Globe Telecom, Inc. - President, CEO & Executive Director [20]

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Maybe Froilan can...

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Vicente Froilan M. Castelo, Globe Telecom, Inc. - General Counsel and Head of the Corporate & Legal Services Group [21]

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Yes, we had about 2 or 3 meetings already with Mislatel but on the philosophical side. So I may speak, there's not much detail. We have only agreed to agree on certain aspects of interconnect, especially the domestic area. So that's about it. It's just a philosophical discussion of how and how to interconnect and how to coordinate.

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Operator [22]

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On the call, we have another question, Rama from Daiwa.

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Ramakrishna Maruvada, Daiwa Securities Co. Ltd., Research Division - Head of Singapore Research [23]

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I have 3 questions, please. Firstly, with regards to the Fixed Wireless division, could you give some indication of what you think would be the subscriber targets maybe by end of this year or next year? And along with it, in terms of pricing, how you expect the pricing trends to evolve?

The second one is with regards to your network capacity. Would you be able to share among the sites where you used both fixed wireless as well as a wireless product? What is the network capacity like and what is the proportion of sites where you have this joint product being rolled out at the moment?

Finally, with regards to the expenses side, would you be able to talk about your -- whether or not you will have any catch-up expenses given the strong rollout that you have particularly on network facilities, utilities? So my question is whether what we are seeing in the first quarter is it a sustainable trend or is there a big catch up that lies ahead in the next 1 or 2 quarters?

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Ernest Lawrence L. Cu, Globe Telecom, Inc. - President, CEO & Executive Director [24]

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Hey, Albert, you want to...

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Alberto M. de Larrazabal, Globe Telecom, Inc. - Chief Commercial Officer [25]

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Yes. Rama, hi, let me respond to your first question. While we don't give out targets on the fiber count and alike, I think if you look at the trends and how roaming, suffice it to say that we continue to provide investments in CapEx to be able to support that growth. So I'll leave it to that. As far as the pricing trends are concerned, a lot of the wireless subscribers are prepaid in nature. And so why the SKUs continued to be what they are. What we have seen is that as the wireless subscribers come in and start to use the service, they have been laddering up to the higher value SKUs that provides both a larger unit of data as well as longer tenures, very early days to ascribe a fundamental trend. But generally, they are upscaling both in usage and spend. Second question was?

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Ernest Lawrence L. Cu, Globe Telecom, Inc. - President, CEO & Executive Director [26]

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Network capacity.

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Vicente Froilan M. Castelo, Globe Telecom, Inc. - General Counsel and Head of the Corporate & Legal Services Group [27]

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Yes, let me tackle the network capacity with respect to your question between mobile and fixed. I've articulated from a frequency perspective our approach. We tend to support mobile data, typically on frequency bands 1800, 2300 and 2600. We have a large slice of 2600, so a segment of that we also use for our fixed wireless. And of course, our 5G would be 3.5 gig. So currently we have a national footprint across 1800, 2300 and 2600.

We have a smaller footprint on Massive MIMO where the sites have the most intense data use. But generally for our fixed wireless, locations where we would have 2600 is where basically they use it. And today when you think about our sites, given the limited number of towers we actually all the frequencies typically in all of our sites. So we load every tower with 1800, 2300, 2600 and of course in the future 3500 as well. So we're able to support both mobile as well as fixed wireless pretty much on the same footprint with a spectrum use somewhat segmented.

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Rosemarie Maniego-Eala, Globe Telecom, Inc. - CFO, Treasurer & Chief Risk Officer [28]

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Hi, Rama, on your expense question, our first quarter EBITDA margin was at 55%. And as we mentioned, we are guiding towards low 50s for the full year. Our expenses are always increasing towards the last 2 quarters as new expenses during the beginning of the year are incurred and we feel the full year impact of that towards the backend of the year. And that is why from a 55% EBITDA margin the guidance is low 50s.

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Ramakrishna Maruvada, Daiwa Securities Co. Ltd., Research Division - Head of Singapore Research [29]

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Maybe if I could just clarify on the network capacity one. Would you be able to give some indication of what proportional of your site that you own at the moment are fixed wireless ready? Is it like 10%-ish or are you talking about a much higher number?

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Vicente Froilan M. Castelo, Globe Telecom, Inc. - General Counsel and Head of the Corporate & Legal Services Group [30]

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Our actually our sites, as I mentioned, typically already have 1800 -- we would put all of the frequency layers on our sites. And in the more intense fixed wireless use, for example, if we see a lot of 2600 use, we actually upgrade the antenna to Massive MIMO to support even more wireless broadband -- for sorry, fixed wireless broadband. So that's what we do.

All the sites, pretty much, can use fixed wireless. But as the intensity rises, we change the underlying antenna technology. So we have a subset that's on Massive MIMO despite of 4.5G.

The 2600 sites are way beyond the present spectrum. I would say that -- of 80% of sites have 2600 band. I'm not sure how many of them actually have the Massive MIMO antennas that increase the 2600 capacity by between 4x and 6x depending on location.

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Operator [31]

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Our next follow up question is from Luis from Maybank.

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Luis A. Hilado, Maybank Kim Eng Holdings Limited, Research Division - Senior Research Analyst [32]

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Just 2 housekeeping questions from me. For the quarter-on-quarter sub growth, particularly prepaid, how much of that is still the after effects of the new SIM policy versus actual growth? And second question is during presentation, Ernest mentioned the usage per subscribers is 2.5 gig up from 1.8 gig year-on-year. But I didn't hear the Q-on-Q growth number.

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Ernest Lawrence L. Cu, Globe Telecom, Inc. - President, CEO & Executive Director [33]

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Alberto, if you -- Rizza, maybe you can talk about the...

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Rosemarie Maniego-Eala, Globe Telecom, Inc. - CFO, Treasurer & Chief Risk Officer [34]

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So Luis, we are -- on your query with regards to the prepaid sub numbers, the new expiration happened in the third quarter of last year, so it's the first few quarters of the impact of that change. So we need to wait until the end of the third quarter to see some stabilization with respect to the trend of the subscriber number that we report.

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Alberto M. de Larrazabal, Globe Telecom, Inc. - Chief Commercial Officer [35]

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I think the quarter-on-quarter growth is 15%. I think it's in our chart.

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Operator [36]

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There are no more further questions on the call, so back to speakers for floor questions.

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Ernest Lawrence L. Cu, Globe Telecom, Inc. - President, CEO & Executive Director [37]

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Thanks. Maybe we can open it to the in-house audience. Are there any questions? Please introduce yourself first as you ask the question or are you also done?

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Rosemarie Maniego-Eala, Globe Telecom, Inc. - CFO, Treasurer & Chief Risk Officer [38]

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There are some.

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Unidentified Analyst, [39]

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First question for Mr. Vicente, would you comment on the issue regarding the Huawei. Give us some color on the situation and why we shouldn't be worried about anything? And then the next question is for Ms. Rizza. On the segment revenues, just [segmented], was there any pre-allocation on the segments that would have made the decline on the SMS and the call side to be faster?

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Vicente Froilan M. Castelo, Globe Telecom, Inc. - General Counsel and Head of the Corporate & Legal Services Group [40]

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So let me tackle the first question. So there are pretty basis principles with respect to this topic. The first one is that the operator can ever abdicate responsibility for security -- with just inherently security for our customers to other people. So it is always the operator who is responsible for putting in the necessary protections to protect the confidentiality of information in the company and of course customers' privacy.

And so therefore, what we end up doing, which is really the second principle, is that the way we would approach things is to make sure that: a, the equipment are properly vetted obviously; and 2, we regularly audit. And so we have to do those things.

And I think if you think about what has happened now in various countries, including in Europe, that's what rationally has happened when people say we do not necessarily want to block certain vendors. If the focus today is Huawei what about the other vendors? Do they naturally, therefore, pass just because they start with a different letter or they come from a different geography, right? But whether it's "Vendor A" or "Vendor B", ultimately, the responsibility still rests with the government operator. And so we also try vet, we also try to audit regularly.

Thirdly, a lot of the topics have to do with a lot more -- I mean you have to read through some of the articles despite the headlines, to understand what actually is going on. There are software coding practices that are fixed. Every vendor -- every network vendor always has vulnerabilities. The question is, when do they recognize it and how well do they patch regularly? Some of you may be aware, a couple of days ago, a major vendor basically had to do another patch-up -- patches that they've historically been around. So that regularly happens and it's also responsibility of an operator, if we are conscious about our security to make sure that our vendors also perform those patches.

And then finally, the advice we give to enterprise customers, typically in organizations is they also put their own layers. Obviously, individuals don't have that capability. I mean other than some malware and antivirus protection in your mobile phones, obviously you don't just click on any link -- particularly, if you are on Android device. But for enterprises that require even more layers for protection, they also insert their own layer of protection.

So I think that the whole discussion is being muddled by who is ultimately responsible. And the party who is responsible, what do they do in order to put certain layers in. It can't be just based in the headline or some accusation. It has to be somewhat based on some facts, and we take to heart. And our approach is very similar to some other jurisdictions to take a little bit more rational view, who also vet properly and make sure that both the software as well as the underlying security layers are properly done.

There is no guarantee by the way. Just because you don't do "Vendor A", doesn't mean that -- because you're always doing with "Vendor B", doesn't mean you're immune. This used to be over the past 5 to 7 years suggests otherwise. And so maybe there's a little bit of disservice in this -- all of this public pronouncements and headlines by focusing on one vendor. When in reality, you cannot rely on a statement of, "I just don't want "Vendor A", I always want "Vendor B"". Because at the end of the day, its operator who is responsible, and you might just switch off from your responsibility if you do that.

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Rosemarie Maniego-Eala, Globe Telecom, Inc. - CFO, Treasurer & Chief Risk Officer [41]

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Hi, thanks for your question. We have not made any revenue re-allocation.

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Giovanni Dela-Rosa, Deutsche Bank AG, Research Division - Research Analyst [42]

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This is Gio from Deutsche. I'm just wondering is data traffic moving -- of course rising faster than we expected. I'm asking this question in the context of your CapEx requirements. So does it mean, it's more likely than not, that you will move to spend more CapEx to increase -- accommodating incremental traffic?

The other question is on the recent passage of the mobile number portability. Can you give us an indication of when do you expect it to actually be implemented? And I also understand that embedded in the law is something more interconnection bids, how do you expect this to impact your position?

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Ernest Lawrence L. Cu, Globe Telecom, Inc. - President, CEO & Executive Director [43]

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On the data, one thing that we've experienced over the past few years is that whatever we predicted is wrong. Whatever data -- so whether that are reports, forecast that we make we've always [delayed]. And so this was not going to be I think something different, although we do up and get aggressive on the forecast, users seem to consume more and more of this data for video as it progresses. So it is likely that we will need to continue the CapEx churn we have if not increase. I think going down, it will be less of a possibility than the increase in CapEx. For number portability let's turn over to Froilan.

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Vicente Froilan M. Castelo, Globe Telecom, Inc. - General Counsel and Head of the Corporate & Legal Services Group [44]

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Yes. For the MNP, the NPC is still hearing, conducting consultations. What they're proposing is that there will be a third party that will be the aggregator of the number -- the user to do the MNP for all the telcos and that is being vetted and that is being consulted. And also with interconnection, the zero interconnect is still being -- going to be heard by the NPC, so we're waiting for the outcome of that.

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Giovanni Dela-Rosa, Deutsche Bank AG, Research Division - Research Analyst [45]

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Do you expect it to -- like say 3 months...

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Vicente Froilan M. Castelo, Globe Telecom, Inc. - General Counsel and Head of the Corporate & Legal Services Group [46]

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Can happen -- the law only requires one public consultation so after this Friday, which is of course, the date of the hearing NPC may release the circular already.

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Ernest Lawrence L. Cu, Globe Telecom, Inc. - President, CEO & Executive Director [47]

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But implementation of number portability is not 3 month. As you need to find someone who will be acceptable to all parties, so third party mediator is porting the number from one operator to another -- the standard practice...

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Vicente Froilan M. Castelo, Globe Telecom, Inc. - General Counsel and Head of the Corporate & Legal Services Group [48]

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Yes. So draft contains also that within 90 days that telcos will appoint these third party designates that's the standard there. That's the challenge after -- is there anyone which is -- has the experience or capable of doing that here locally so.

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Ernest Lawrence L. Cu, Globe Telecom, Inc. - President, CEO & Executive Director [49]

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Any more questions? Any more questions from the calling audience?

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Operator [50]

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None from the audience side.

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Ernest Lawrence L. Cu, Globe Telecom, Inc. - President, CEO & Executive Director [51]

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Okay. If there aren't any -- no more questions, we would like to thank everyone. We hope to see you at the next quarter's briefing. Thank you very much.

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Vicente Froilan M. Castelo, Globe Telecom, Inc. - General Counsel and Head of the Corporate & Legal Services Group [52]

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Thank you.

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Rosemarie Maniego-Eala, Globe Telecom, Inc. - CFO, Treasurer & Chief Risk Officer [53]

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Thank you.

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Operator [54]

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Ladies and gentlemen, this conclude today's conference call. You may now disconnect.