My Fellow Shareholders,

I am pleased to report to you that PLDT is stronger today than at any time in its 76-year history. We closed 2004 with the largest profit ever reported by a Philippine corporation. More importantly, we have enhanced the internal cohesiveness of the PLDT Group and positioned it to take the lead in introducing next generation telecommunications and I.T. services.

We have thus placed PLDT ahead of the curve and made it far more capable of thriving during this period of disruptive changes in technologies and business models for the telecommunications industry here and abroad.

A BANNER YEAR

Since late 1998, your management team has sought to rebuild and recast PLDT from a pure landline telephony provider into a diversified telecommunications and technology conglomerate.

That task has been substantially accomplished. PLDT today offers the widest array of communications and IT solutions through the unmatched reach and capabilities of its landline, wireless, and Internet-based businesses.

Our 2004 year-end results bear out the soundness of that strategy. Riding on the continued strong growth of our wireless business and the stability of our landline business, profits for 2004 were unprecedented. Consolidated service revenues and net income grew to Php115.3 billion and Php28 billion, respectively, while normalized consolidated net income increased by 237% to Php25.2 billion over 2003’s Php7.5 billion restated income.

The surge in revenues and profits, combined with control over cash expenses and over our capital expenditures, boosted our free cash flow, or FCF. This grew to Php37.3 billion for the year, a substantial improvement of 65% over 2003’s FCF of Php22.6 billion, which thereby enabled the PLDT Group to accelerate its deleveraging program. By lowering interest charges, deleveraging enhances PLDT’s ability to raise cash flow levels and continue delivering robust returns in the years to come.

Our accomplishments last year have paved the way for the resumption of common dividend payments in 2005. Our shareholders have been patient and understanding these past four years. We are, in turn, mindful of our responsibility to bring value back to them. The Php14 per share dividend payment in May 2005, the first such dividend payment to common shareholders since April 2001, is just the initial step. It is fully our intention to raise dividend payments as soon as practicable.

BRIGHT PROSPECTS

We believe PLDT’s prospects in the coming years are promising despite the increasingly intense competition and the transformational changes in technologies and business models now taking place in the domestic and global telecommunications scene.

I have on various occasions called attention to the more modest growth projections for the mobile industry following several years of strong subscriber base increases. This is taking place just as competition intensifies with the introduction of “bucket” or “flat-rate” pricing schemes.

Meantime, disruptive Internet-based technologies are entering the mainstream and are undermining the business models that have so far built and sustained the fixed line and wireless businesses of telecoms companies throughout the world.

Anticipating these trends, we have primed the PLDT Group for this period of far-reaching changes in four ways.

First, we have strengthened PLDT’s financial position to ensure that the Group has the wherewithal to invest in the relevant infrastructure and in the marketing initiatives required by the changing marketplace. As our financial results for 2004 show, we are accomplishing that goal.

Second, the Group has fortified its market position in all key businesses –wireless, fixed line and ICT. It is worth noting that despite energetic efforts by competition, the Group has increased its market share through innovation in products and services, strengthening distribution channels, and cost-effective expenditures and investments.

Third, we have continued to undertake very well-considered preparations to shift our core network from circuit-switch to packet-switch technologies. This process will be accelerated beginning 2005. The move to IP-based systems will enable the Group to offer a wide array of innovative, new generation products and services at more reasonable costs.

Fourth, underpinning all these efforts, we have undertaken a comprehensive program to attain higher levels of coordination and cooperation amongst the three major businesses groups –wireless, fixed line and ICT. Since early 2004, we have quietly assembled teams of senior managers, engineers, product development and marketing experts from the different businesses and put them to work to achieve precisely the benefits of an integrated network and a convergent business model.

THE NEXT WAVE

The result has seen the birth and rebirth of new thinking, new ideas. We are determined on creating and delivering to consumers a host of new services and technologies that fulfill market needs and desires regardless of how these are delivered – on wired or wireless platforms.

This process moved forward without fanfare in 2004. We were largely focused on internal preparations and on putting in place the new technologies, networks and business models needed to support these new services. As a result, we are now firmly positioned for the future.

In 2005, the transformation of the PLDT Group shall become much more manifest as we roll out a new generation of converged services. These services will tap the different networks and systems of the Group in order to better address the specific requirements of various customers. And we are all excited about their prospects.

As next generation technologies come onstream, such services will grow in number and sophistication and provide PLDT’s customers unrivaled value. These new technologies will make possible the development of new revenue streams and entirely new businesses that will ensure the continued profitability – and future – of the Group.

Finally, I must express my pride and satisfaction in the fact that PLDT is the first and, thus far, the only Philippine corporation to comply in full with the new International Accounting Standards (IAS) – one year ahead of the required date. This is in line with our effort to attain higher levels of transparency and accountability in the conduct of our corporate affairs, and align PLDT with the highest and best standards of financial reporting internationally.

In furtherance of this, our Board of Directors approved the Code of Business Conduct and Ethics which defines the proper conduct of our business and our officers in matters ranging from competition and fair dealing to disclosure and relations with shareholders and investors.

It is also worth noting that that while Philippine law only requires the appointment of a minimum of two independent directors, our Board has exceeded that standard by appointing four independent directors out of the 13.

CONCLUSION

Let me close by saying to our shareholders that we pledge to continue delivering on our goals with regard our commercial success and financial performance, as well as in our adherence to the highest and best standards of accountability, integrity, fairness and transparency.

In the course of the past couple of years, PLDT has received numerous awards highlighting our increased profitability, our improved management systems and enhanced transparency. Now past the three-quarters’ century mark, PLDT is not about to settle down into middle-aged complacency.

I can assure all of you, on behalf of your Board of Directors and the 18,000 employees of the PLDT Group throughout the nation and elsewhere, that we regard ourselves at the start of a new and exciting era. From that perspective, the challenges and rewards of building value for our customers and the country, is just beginning.

Manuel V. Pangilinan
Chairman of the Board