Dear Shareholders,

I am pleased to report that 2004 was a stellar year for our company. PLDT posted historic highs across nearly all operating metrics – revenues, subscriber base, free cash flow and net income. Debt reduction was well ahead of targets. In addition, the Company’s Board of Directors fulfilled a commitment to restore dividends to common shareholders by approving a dividend of Php14 per share.

OPERATING GAINS

WIRELESS

Our cellular subsidiaries, Smart and Piltel, sustained their strong performances, contributing considerably to the sizeable rise in PLDT’s consolidated net income of Php28 billion. Exclusive of the gain resulting from the debt exchange transaction completed in July 2004, consolidated net income grew to Php25 billion. This figure is more than twice the normalized and restated net income of Php7.5 billion reported in 2003. The 2004 financial results and comparative numbers reflect the impact of adjustments taken as a result of the adoption of all applicable International Accounting Standards (IAS). PLDT has thus accomplished the challenging and complex transition to the new accounting regime seamlessly.

Despite escalating competition, Smart and Piltel, together, added more than 6.2 million subscribers in 2004. This brought the PLDT Group’s total cellular subscribers to 19.2 million and maintained our market share at about 58%. Smart added over 4.5 million subscribers while Talk ‘N Text added another 1.7 million to end 2004 with 14.6 million and 4.6 million subscribers, respectively. In the fourth quarter alone, when a number of aggressive initiatives were launched by competition, Smart and Piltel added over 1.7 million subscribers. The cellular penetration rate continues to exceed expectations, reaching approximately 39% at the end of 2004. It should be noted though that the practice of some subscribers owning multiple SIMs has probably inflated this rate to a certain extent.

More importantly, Smart and Piltel have preserved their share of industry revenues at approximately 59%. Consolidated cellular revenues and net income continued to rise. Consolidated cellular service revenues increased to Php67 billion, 27% higher than the Php53 billion realized last year. Consolidated cellular EBITDA grew by 31% to Php42.5 billion from Php32.4 billion and our EBITDA margin correspondingly improved to 63% in 2004 from 61% the previous year. Normalized net income in 2004 nearly doubled to Php23.3 billion from Php12 billion in 2003 while free cash flow increased by 40% to Php17.6 billion.

In December 2004, Smart paid an additional cash dividend of Php4.8 billion to PLDT, bringing its 2004 total dividend payments to Php16.1 billion. Smart intends to raise its dividend payments to PLDT in 2005 to Php20 billion.

Smart continues to lead as well in terms of network coverage. Its cellular network consisting of 36 mobile switches and over 5,300 base stations makes our cellular service available to more than 97% of the country’s population.

In 2004, Smart also acquired Meridian Telekoms, Inc., a company primarily engaged in providing wireless broadband and data services to small and medium-scale enterprises. This acquisition will strengthen our position in the wireless data segment and is in line with our overall strategy of providing the widest range of innovative wireless services.

Fixed Line

The fixed line business remains focused on maintaining the stability of its revenues and containing its cash operating expenses while minimizing capital expenditures. Total revenues increased by 3%, from almost Php47 billion in 2003 to Php48.5 billion in 2004. This was mainly due to the positive impact of favorable rate and interconnection charges on NLD revenues and higher data service revenues. DSL subscribers numbered almost 50,000 at the end of 2004 from less than 25,000 a year ago and a number of complementary product offerings are in the pipeline.

Cash operating expenses were down 12% due to a higher level of compensation expenses in 2003 resulting from the manpower rightsizing program. Fixed line EBITDA improved by 19%, from Php22 billion in 2003 to Php26.3 billion in 2004. The EBITDA margin likewise increased to 54% this year from 47% last year.

As of the end of 2004, PLDT Fixed Line had 9,692 employees compared with 10,518 employees as of last year, reducing headcount by 826 during the year in line with its objective to right-size its organization.

ICT

ePLDT, the Group’s information and communications technology arm, reported a net loss of Php693 million for 2004 mainly as a result of a write-down on one of its investments. Without the write-down, ePLDT would have broken even, as the 42% increase in service revenues was offset by a 36% increase in cash operating expenses.

The call center business continues to flourish, with Vocativ and Parlance increasing their seats by 5% and 69%, respectively. The call centers generated revenues of Php1.2 billion, or 58% of our total ICT service revenues. ePLDT call centers’ capacity was approximately 2,600 seats at the end of 2004 and is expected to grow by another 775 seats by mid-2005. The Internet and gaming business increased its revenue contribution to Php569 million or 27%, while VitroTM data center contributed service revenues of Php243 million, an increase of 103% over last year’s revenues.

DEBT REDUCTION

The increase in consolidated free cash flow, which grew 65% from Php23 billion in 2003 to Php37 billion in 2004, enabled the Group to accelerate its deleveraging program. PLDT Fixed Line reduced its debt by US$500 million in 2004, surpassing its initial target of US$300 million set at the beginning of 2004 and subsequently raised to US$350 million later in the year. As of the end of 2004, PLDT Fixed Line’s debt balance stood at US$1.97 billion. PLDT Fixed Line expects to continue its aggressive deleveraging in 2005, thereby achieving savings in interest and financing costs and, at the same time, reducing its risk profile.

CORPORATE REORGANIZATION

In 2004, the PLDT Group completed the rationalization of its wireless business with:

• The completion by Smart of the conversion of its Piltel Series K preferred shares into common shares which raised its ownership in Piltel to 86.5%;
• The acquisition by Smart of the remaining 6.5% common shareholding of PLDT in Piltel, subsequently bringing Smart’s total ownership to 92.1%; and
• The execution of a new omnibus agreement between Smart and Piltel which superseded and replaced previous management agreements. The omnibus agreement covers the provision of all the services under the previous agreements, in consideration of a revenue sharing arrangement for Talk ‘N Text service of 80-20, in favor of Piltel. This ratio allows Smart to largely recover its costs while providing Smart and Piltel with a more equitable revenue sharing agreement in the context of the latter’s increased subscriber base and the resulting economies of scale. The new arrangement also takes into account declining network and operating costs per subscriber derived from improvements in productivity and technology as well as the tax loss position at Piltel.

RESTORATION OF DIVIDENDS

On March 1, 2005, the Board of Directors also approved the payment of dividends to common shareholders at the rate of Php14 per share. Payment is scheduled to be made on May 12, 2005, to shareholders of record as of March 31, 2005. This marks the resumption of dividend payments to common shareholders since April 2001 when the last dividend was paid.

DIRECTOR FOR 2005

With 2005 looking to be another challenging and highly competitive year, the PLDT Group has set for itself the following objectives:

• Continue the develeraging thrust and increase dividends to common shareholders;
• Reduce consolidated debt by US$500 million;
• Achieve a consolidated debt-to-EBITDA ratio below 1.5 times by 2006;
• Increase common dividend payout ratio in 2006 to a minimum 15% of 2005 EPS;
• Maintain market leadership by introducing more product and service innovations;
• Commence the upgrade to an IP-based network and boost broadband capabilities; and
• Develop bundled products and services across the PLDT Group’s various businesses.

REDEFINE, REVITALIZE, RENEW

Beyond these specific objectives, we need to look at how we can redefine our businesses. The telecommunications industry is a very dynamic one and the markets we serve demand that we keep up with technology to deliver innovative and cost-effective products and services. Our leading positions in the fixed line, wireless and ICT segments coupled with the strength and breadth of our network infrastructure put us in an enviable position to deliver an even broader range of products and services to our customers.

My assumption in early 2004 of the presidency at PLDT while concurrently retaining the same position at Smart signaled the beginning of a new mindset – one where we think “Group” first. By “Group” we mean harnessing the strengths of the individual businesses and transforming them into tangible synergies – bundled products and services, innovative solutions to market demands and an open attitude to the so-called “disruptive technologies.” Already we are looking beyond mobile growth and are now focusing on developing new products and services that capitalize on the Group’s collective assets and capabilities.

By the time you read this annual report, we would have already launched a number of new initiatives in the tradition of Smart Load and Smart Padala. We ROAM, developed by PLDT’s corporate business group but powered by Smart’s GPRS/EDGE and wireless broadband networks, is a bundled service that provides mobile workers and remote offices with wireless high speed data connectivity. We have also forayed into the fixed rate voice market with such promotions as Telebabad in the fixed line and Smart 258 in the mobile markets. In the meantime, Smart Padala, the first international and domestic cash remittance service via text, which Smart launched in August 2004, now services 14 countries, including the United Kingdom, the United States, Spain, Germany, Canada, Israel, Taiwan, Singapore, Greece, Hong Kong, Japan, Australia and Brunei. This breakthrough service allows overseas Filipino workers to remit their money to their relatives in a more efficient and economical manner.

You know the saying ”if it ain’t broke, don’t fix it.” Well, at PLDT we say “if it ain’t broke, make it better!” And that is our promise to you, our shareholders – we will always strive to “make it better,” to redefine our businesses continually, revitalize what is stale, to renew what is dated and always in a manner that is innovative and that builds value for all of our stakeholders.

Sincerely yours,

NAPOLEON L. NAZARENO
President and CEO