Globe SEC 17Q June 2007

SEC Number File Number
1177 ____
GLOBE TELECOM, INC.

(Companys Full Name)
5th Floor Globe Telecom Plaza (Pioneer Highlands) Pioneer corner Madison Streets, 1552 Mandaluyong City
(Companys Address)
(632) 730-2000
(Telephone Numbers)
30 June 2007
(Quarter Ending)
SEC FORM 17-Q

(Form Type)
SEC Form 17Q - 2Q 2007
SECURITIES AND EXCHANGE COMMISSION SEC FORM 17-Q QUARTERLY REPORT PURSUANT TO SECTION 17 OF THE SECURITIES REGULATION CODE AND SRC RULE 17(2)(b) THEREUNDER 1. For the six months ended 30 June 2007 2. Commission identification number: 1177 3. BIR Tax Identification No. 000-768-480-000 4. Exact name of registrant as specified in its charter: GLOBE TELECOM, INC. 5. Province, country or other jurisdiction of incorporation or organization: PHILIPPINES 6. Industry Classification Code: (SEC Use Only)
7. Address of registrants principal office: 5th Floor, Globe Telecom Plaza (Pioneer Highlands) Pioneer corner Madison Streets 1552 Mandaluyong City 8. Registrants telephone number, including area code: (632) 730-2000 9. Former name, former address and former fiscal year, if changed since last report: Not Applicable 10. Securities registered pursuant to Sections in Securities Regulation Code Number of shares of stock outstanding 132,140,880 158,515,021
Title of each class Common Stock, P50.00 par value Preferred Stock, P5.00 par value
11. Are any or all of the Securities listed on the Philippine Stock Exchange? Yes 12. Indicate whether the registrant: a) Has filed all reports required to be filed by Section 17 of the Code and SRC Rule 17 thereunder or Sections 11 of the SRC and SRC Rule 11(a)-1 thereunder, and Sections 26 and 141 of the Corporation Code of the Philippines, during the preceding 12 months (or for such shorter period the registrant was required to file such reports). Yes b) Has been subject to such filing requirements for the past 90 days. Yes
GLOBE TELECOM, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
FOR THE SECOND QUARTER AND FIRST HALF ENDED 30 JUNE 2007
PART I
ITEM 1. FINANCIAL STATEMENTS
FINANCIAL INFORMATION
Our unaudited condensed consolidated financial statements include the accounts of Globe Telecom, Inc. and its wholly owned subsidiaries, Innove Communications, Inc.(Innove) and G-Xchange, Inc. (GXI), collectively referred to as the Globe Group in this report. The unaudited condensed consolidated financial statements for the first half ended 30 June 2007 have been prepared in accordance with Philippine Accounting Standard 34, Interim Financial Reporting. Accordingly, the unaudited condensed consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principles in the Philippines (Philippine GAAP) for complete financial statements as set forth in Philippine Financial Reporting Standards (PFRS) and are filed as Annex I of this report.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS (MD&A) OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion and analysis of Globe Groups financial performance for the first half ended 30 June 2007. The prime objective of this MD&A is to help the readers understand the dynamics of our Companys business and the key factors underlying our financial results. Hence, our MD&A is comprised of a discussion of our core business, and our analysis of the results of operations for each business segment. This section also focuses on key statistics from the unaudited condensed consolidated financial statements and pertains to known risks and uncertainties relating to the telecommunications industry in the Philippines where we operate up to the stated reporting period. However, our MD&A should not be considered all inclusive, as it excludes unknown risks, uncertainties and changes that may occur in the general economic, political and environmental condition after the stated reporting period. Our MD&A should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes. All financial information is reported in Philippine Pesos (Php) unless otherwise stated. Any references in this MD&A to we, us, our, Company means the Globe Group and references to Globe mean Globe Telecom, Inc., not including its wholly-owned subsidiaries. Additional information about the Company, including annual and quarterly reports, can be found on our corporate website www.globe.com.ph.
The following is a summary of the key sections of this MD&A:

OVERVIEW OF OUR BUSINESS.........................................................................................................................6 KEY PERFORMANCE INDICATORS ..............................................................................................................10 FINANCIAL AND OPERATIONAL RESULTS ................................................................................................12 GROUP FINANCIAL HIGHLIGHTS ...........................................................................................................................12 GROUP RESULTS OF OPERATIONS .......................................................................................................................13 GROUP OPERATING REVENUES ................................................................................................................13 WIRELESS BUSINESS ................................................................................................................................14 WIRELINE BUSINESS ................................................................................................................................22 GROUP OPERATING EXPENSES .................................................................................................................27 LIQUIDITY AND CAPITAL RESOURCES ......................................................................................................31 FOREIGN EXCHANGE AND INTEREST RATE EXPOSURE......................................................................34 RECENT DEVELOPMENTS ...............................................................................................................................36 MAJOR STOCKHOLDERS .................................................................................................................................37 BOARD OF DIRECTORS ....................................................................................................................................37
OVERVIEW OF OUR BUSINESS

Our Company is a leading telecommunications company in the Philippines. Our mission is to transform and enrich lives through communications by way of our vision of making great things possible. Through our renewed commitment of enriching lives through ease and relevance, our goal is to enrich everyday communications by simplifying and removing the obstacles in communication technology so that we bring our customers closer to what matters to them most. We strive to create and deliver products that are relevant to our customers needs and are easy to understand and use, and are delivered with warmth and knowledge. The Globe Group is comprised of the following companies: Globe provides our wireless telecommunications services; Innove, a wholly-owned subsidiary, provides our fixed line telecommunications services, information and communications infrastructure, and services for internal applications, internet protocol-based solutions and multimedia content delivery. Innove also currently offers cellular services under the TM prepaid brand which is supported by the integrated cellular networks of Globe and Innove; and As part of its wireless business, Globe also provides mobile commerce services through its whollyowned subsidiary, GXI.
Wireless Business: Products and Services Our Company offers its wireless services including local, national long distance, international long distance, international roaming and other value-added services through three brands: Globe Postpaid, Globe Prepaid and TM. Globe Postpaid is the postpaid brand of Globe. This includes all postpaid plans such as G-Plans and consumable G-Flex Plans, Platinum (for the high-end market), and GlobeSolutions (for corporate and business needs). Globe Prepaid and TM are the prepaid brands of the Globe Group. Each brand is positioned at different market segments. Globe Prepaid is focused on the mainstream, broad market while TM is focused on valueconscious, working class market. Additionally, Globe has customized services and benefits to address specific market segments, each with its own unique positioning and service offerings. Globe also provides our subscribers with mobile payment and remittance services under the GCash brand. Now on its third year, this service enables our subscribers to perform international and domestic remittance transactions, pay annual business registration fees, income taxes for professionals, utility bills, avail of microfinance transactions, donate to charitable institutions, and buy Globe prepaid reloads. To cater to a wide variety of our prepaid subscribers, we provide various top up facilities at each subscribers convenience. Our Globe Prepaid and TM subscribers can reload airtime value or credits using various reloading channels. Subscribers can purchase Globe Prepaid Call and Text cards in P100, P300 and P500 denominations while TM Call and Text cards are available in P50, P100, and P300 denominations. They can also utilize Globe AutoloadMAX, our over-the- air (OTA) reload channel, which offers the most affordable and flexible load credits in P1 increments from P10 to P150 for our TM subscribers, and P15 to P150 for our Globe Prepaid subscribers. Globe AutoLoadMAX currently has over 561 thousand transacting retailers nationwide.
Subscribers can also top up using bank channels like ATMs, credit cards, Internet banking and Bank of the Philippine Islands 24 Hour Call Center and Express Phone, as well as through E-POS (electronic point-ofsale) terminals located at retail outlets and our business centers. A consumer to consumer top up facility, Share A Load, is also available whereby our Globe Prepaid and TM subscribers can share prepaid load credits among themselves in denominations of P1 to P150 (in P1 increment). In addition, our Globe Postpaid subscribers can Share A Load to our prepaid subscribers in P1 to P150, P300 and P500 denominations. Another reloading channel available is GCash2Load, where Globe Postpaid, Globe Prepaid and TM subscribers can top up their own or somebody elses mobile phone by converting their GCash to prepaid load credits in increments of P1 from P10 to P24 and increments of P25 from P25 to P150. Denominations of P300, P500 and P1,000 are also available. Moreover, current GCash2Load promotions include a 10% GCash rebate on all GCash2Load transactions. Wireline Business: Products and Services Innove, a wholly-owned subsidiary, provides our wireline voice communications, private data networks and Internet services to individuals and enterprises in the Philippines under the Globelines and GlobeQuest brands. Under our Globelines brand, we provide state-of-the-art digital communications technologies to homes and small and medium-sized enterprises through the following products and services: Globelines is a wireline voice communications service offering that includes local, national long distance, international long distance and other value-added services, through its postpaid, prepaid and payphone lines. With the availability of postpaid or prepaid options, subscription to Globelines comes with standard features and value-added services such as IDD, NDD, Phone Lock, Caller ID, Call Waiting, Multi-Calling, Call Forwarding, Voice Mail, Duplex Number, Hotline and Special Numbers. Globelines Business Connections is a bundled telephone package to help our clients manage their operations and enjoy big business efficiency on a small business overhead. There are various Globelines Connections packages suitable for clients requiring single and/or multiple lines. Globelines subscribers with personal computers can also surf the Internet and have their own Web-based email by using our Globelines Dial-up Internet service. Users of this service pay only for the actual minutes used at a low flat rate of P0.33 per minute. Globelines Broadband is a high speed internet connection that keeps our subscribers online all the time, getting instant access to communication, knowledge and entertainment. Application-based packages such as Express Unlimited and Explore are designed to cater to various Internet needs. Globelines Broadband subscribers may also activate their VoIP account and use Globelines Broadband VoIP softphone service to call overseas for a special rate of US$0.05/minute. Globelines Worldpass Prepaid is the first prepaid internet card in the market that allows the user to access the internet with total mobility, flexibility and convenience. The user may choose his access point - via dial-up using any landline, mobile access via WiFi from any WiZ hotspots, or broadband connection via Globelines Broadband kiosks. It is a pay per use internet access which comes in denominations of P20, P50, and P100 which expires 15 days after first use. Worldpass Prepaid vouchers can be purchased at any Globelines Payments and Services (GPS) Centers, Globe business centers, and other retail outlets.
Globelines Worldpass Postpaid is also available for subscribers who wish to access the internet anytime and anywhere through Wi-Fi, Broadband or Dial-up using just one account. Subscribers can use a laptop, PC, PDA or mobile phone and surf wirelessly at any WiZ Hotspot, dial-up to the internet using any landline in the country or connect via Broadband using a Globelines Broadband account. Subscribers can even access their accounts when they travel to international destinations through connectivity with iPass. All these are possible with just one username and password. Postpaid plans are available with a consumable monthly service fee of P250 (VAT included). Globe1 is our one-card for all communications needs. This PIN-based prepaid card service allows our customers to make local, domestic and international calls using our Globelines landline (postpaid and prepaid), Globelines Payphone, Globe and TM. This versatile and convenient product is offered in denominations of P100 and P300 and is available in our GPS Centers, Globe business centers and prepaid card dealers. Under our GlobeQUEST brand, we offer end-to-end solutions for corporate clients based on value-priced, high-speed data services over a nationwide broadband network. This includes domestic and international data services, wholesale and corporate internet access data center services and segment-specific solutions customized to the needs of vertical industries. Some of the products and services we offer are as follows: GlobeQUEST Broadband Internet offers our clients a complete range of Internet services that operate at broadband speeds using our Internet backbone which, at more than 2 Gbps and growing, is one of the largest in the Philippines. Some of the services currently being offered are: Digital Subscriber Line (DSL) This service lets subscribers access the Web at ultra-high speed connection for both downloads and uploads using our DSL access network and growing Internet backbone. Various access packages are available to ensure the service is cost-efficient and fits different corporate needs and budgets. Internet Direct This offers guaranteed service levels delivered over leased line facilities and is especially offered to those corporate clients running mission-critical applications. Broadband Internet Zone (BIZ) This is GlobeQuests broadband-to-the-room Internet service which provides secure, reliable and convenient high-speed broadband Internet access to transient business travelers and/or tenants of high-density buildings such as hotels, condominiums and other multi-tenant establishments. This service also utilizes wireless Internet access in convenient public locations and hotspots to provide mobile workers with Internet connectivity outside their offices. GIX Burstable This bandwidth on-demand service offers wholesale Internet access with a payment scheme that is based on average use only. Customers are allowed to start with a minimum subscription of 5 Mbps burstable to 45 Mbps depending on the actual growth of their internet traffic. Primarily used by wholesale customers and large enterprises, this service provides the pricing flexibility that supports the ever-changing business requirements of these companies. Freeway IP This service is GlobeQuests managed international private leased circuit to the USA. To ensure cost-efficiency for businesses, our package allows customers to pay a fixed monthly charge regardless of actual usage and increase bandwidth when needed. Universal Access services These are subscription plans available for corporate users, which enables WiFi and dial up access through a single user account.
GlobeQuest WIZ (Wireless Internet Zone) is Innoves brand for its WiFi (Wireless Fidelity)-enabled network providing broadband access on 802.11b/g-enabled strategic locations called hotspots such as airports, hotels, coffee shops and business lounges. It covers more than 577 locations to date, including hotzones in major malls in Metro Manila, Cebu & Davao, the Mactan and Davao international airports and ship terminals in the Visayas. WIZ can also be accessed by customers and subscribers of Innoves WorldPass, Globe through Wiz On service, GlobeQUEST-owned Universal Access and DSL corporate customers, as well as subscribers on international roaming service through our partners, GoRemote, iPass, T-Systems among others. This service is available both on prepaid and postpaid plans to cater to our customers various needs and budgets. GlobeQUEST Private Networks offers a variety of dedicated communications services that allow customers to run various data applications, access LANs or corporate intranets and extranets with integrated voice services on high speed, efficient and reliable connections. These include domestic and international leased lines, frame relay, IPVPN, and remote access services. International data services are offered in partnership with global network service providers. GlobeQUEST DataCentres optimizes the security of mission-critical information and applications through secure data centers operated and supported by a team of IT experts. GlobeQUEST has six commercially available data centers, namely: MK1 (Valero Data Center), MK2 (Pasong Tamo), MD1 (Sheridan), MD2 (Pioneer), Cebu and Laguna DataCentres. These offer complementary services to GlobeQUEST network services, ensuring that corporate customers are given end-to-end capabilities and solutions. GlobeQUEST Corporate Voice provides a full suite of telephony services, from basic direct lines to ISDN services, 1-800 numbers, IDD and NDD access as well as managed voice solutions that enable companies to access advanced telecommunications technology, such as managed IP communications. With the advent of VOIP technology, GlobeQUEST is introducing new functionalities on their Corporate Voice portfolio which will drive the voice business. GlobeQUEST BroadBand Access is a network access solution that provides our customers ultra-high speed fiber optic network connectivity, over a fully redundant and diverse DWDM-based fiber backbone. This service is designed for wholesale and corporate customers with huge bandwidth requirements, missioncritical applications and rapidly growing needs, and who demand uninterrupted access for their business operations. This service offering ranges from high speed leased lines to Ethernet services and even Escon or fibre channel connections for disaster-recovery service connectivity. Today, these services are heavily used by service providers, call centers and BPO (Business Process Outsourcing) companies as well as banking and manufacturing institutions. GlobeQUEST offers our customers with superior dial-up services such as: Dedicated Dial-up (DDU) This service enables multiple users to connect to the internet using only one phone line, as well as maintain a static IP address for better accessibility. E-Business in a box This provides start up companies with a complete set of solutions to establish and maintain web presence for their businesses. Wholesale and Corporate Remote Access Servers (RAS) This provides companies the ability to give its mobile/remote workers, as well as customers, access to the Local Area Network (LAN) and Internet through a private and secure dial-up access without investing in and maintaining costly network infrastructure.
KEY PERFORMANCE INDICATORS

Our Company acknowledges the importance of our shareholders and is dedicated to optimize profitability and efficiently manage our use of capital resources with a view to increasing shareholder value. We constantly review and monitor our activities and key performance indicators to measure our success in implementing our operating and financial strategies, plans and programs. Some of our key performance indicators are set out below. Except for Net Income, these key performance indicators are not measurements in accordance with Philippine Financial Reporting Standards (PFRS) and should not be considered as an alternative to net income or any other measure of performance which are in accordance with PFRS. GROSS AVERAGE REVENUE PER UNIT (GROSS ARPU) Gross ARPU measures the average monthly gross revenue generated for each subscriber. This is computed by dividing recurring gross service revenues for a business segment for the period by the average number of the segments subscribers and then dividing the quotient by the number of months in the period. NET AVERAGE REVENUE PER UNIT (NET ARPU) Net ARPU measures the average monthly net revenue generated for each subscriber. This is computed by dividing recurring net service revenues of the segment for the period (net of discounts and interconnection charges to external carriers and content provider revenue share) by the average number of the segments subscribers and then dividing the quotient by the number of months in the period. SUBSCRIBER ACQUISITION COST (SAC) SAC is computed by totaling marketing costs (including commissions and handset/SIM subsidies1) related to the acquisition programs for the segment for the period divided by the gross incremental subscribers. AVERAGE MONTHLY CHURN RATE The average monthly churn rate is computed by dividing total disconnections (net of reconnections) for the segment by the average number of the segments subscribers, and then divided by the number of months in the period. This is a measure of the average number of customers who leave/switch/change to another type of service or to another service provider and is usually stated as a percentage. EBITDA EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) is calculated as net service revenues less subsidy1, operating expenses and other income and expenses2. This measure provides useful information regarding a companys ability to generate cash flows, incur and service debt, finance capital expenditures and working capital changes. As the Companys method of calculating EBITDA may differ from other companies, it may not be comparable to similarly titled measures presented by other companies.
1 2
Subsidy is the difference between non-service revenues and cost of sales. Operating expenses and other income and expenses do not include any property and equipment-related gains and losses and financing costs.
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EBITDA MARGIN EBITDA margin is calculated as EBITDA divided by total net service revenues. Total net service revenue is equal to total net operating revenue less non-service revenue. This is useful in measuring the extent to which subsidies, operating expenses (excluding property and equipment-related gains and losses and financing costs) and other income and expenses, use up revenue. EBIT EBIT is defined as earnings before interest, property and equipment-related gains and losses and income taxes. This measure is calculated by deducting depreciation and amortization from EBITDA. Globe Groups method of calculating EBIT may differ from other companies, hence, may not be comparable to similar measures presented by other companies. NET INCOME As presented in the unaudited condensed consolidated financial statements for the periods ended 30 June 2007 and 2006, net income provides an indication of how well our Company performed after all costs of the business have been factored in. For more details about the Companys performance, see Financial and Operational Results section below.
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FINANCIAL AND OPERATIONAL RESULTS GROUP FINANCIAL HIGHLIGHTS
For the First Half ended 30 June 2007

Our Company posted net income after tax of P6.4 billion for the first half, 12% higher year-on-year on the back of 11% growth in consolidated service revenues partly offset by increases in operating expenses and provisions for income tax. Taking out the impact of the bond redemption costs and forex/MTM gains or losses, core net earnings of P7.4 billion grew at a higher rate of 20% from last years P6.1 billion. Consolidated EBITDA and EBIT for the year increased by 11% and 15% year-on-year, closing at P20.9 billion and P12.6 billion, respectively. EBITDA margins stood at a healthy 66% of service revenues, while EBIT margins were at 40%. Marketing and subsidy, as a percentage of net service revenues remained at the 8% level due to calibrated spending on advertising, promotions and acquisition efforts. Wireless service revenues expanded by 12% year-on-year despite continued pressure on ARPUs. Overall wireless revenue grew mainly driven by the sustained popularity of unlimited SMS and bucket voice offers, as well as higher prepaid top-up levels with the introduction of lower AMAX denominations. The continued strong revenue performance of the data segment is largely attributable to the strong uptake of regular SMS and subscriptions to unlimited SMS offers. On the other hand, wireline service revenues continued to register modest growth of 3%, despite the adverse impact of the strong peso, boosted by higher broadband revenues following significant improvements in total broadband subscriber base. Total capital expenditures for the first half of 2007 amounted to P5.8 billion or 13% higher than last years P5.2 billion as Globe deepened its geographic coverage to 95.3% and increased its population reach to 98.5%. By the end of June 2007, 2G cell sites reached 6,046, a 10% increase from last years 5,500 cell sites. The Company generated free cash flow of P11.6 billion, despite higher capex spending, during the first half of 2007 compared to last years P12.7 billion.
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GROUP RESULTS OF OPERATIONS

The following table details the consolidated results of operations for the Globe Group for the first and second quarters of 2007 and for the first half of 2007 and 2006.
Globe Group For the Quarter Ended For the Six Months Ended Results of Operations (Php Mn) Profit & Loss Data Net Operating Revenues Service Revenues Non-Service Revenues1. Costs and Expenses Cost of Sales Operating Expenses EBITDA EBITDA Margin.. Depreciation and Amortization.. EBIT . Financing. Interest Income Others - net. Provision for Income Tax..... Net Income After Tax (NIAT). Core Net Income 2 Q2 2007 Q1 2007 QoQ Change (%) 2% 3% -18% 3% -28% 10% 1% 4% -1% -80% -20% -131% 46% 48% 1% 30 June 2007 30 June 2006 YoY Change (%) 10% 11% -10% 9% -14% 15% 11% 5% 15% 10% -28% -450% 26% 12% 20%
16,637 16,012 625 6,118 836 5,282 10,519 66% 4,269 6,250 (539) 140 (53) (1,960) 3,838 3,705
16,372 15,609 763 5,949 1,159 4,790 10,423 67% 4,116 6,307 (2,728) 175 172 (1,339) 2,587 3,673
33,009 31,621 1,388 12,067 1,995 10,072 20,942 66% 8,385 12,557 (3,267) 315 119 (3,299) 6,425 7,378
29,984 28,447 1,537 11,040 2,318 8,722 18,944 67% 8,001 10,943 (2,972) 435 (34) (2,613) 5,759 6,144
_________________________________
1
Non-service revenues are reported net of discounts on phonekits and SIM (Subscriber Identification Module) packs. The cost related to the sale of handsets and SIM packs are shown under cost of sales. The difference between non-service revenues and cost of sales is referred to as subsidy. Core net income is NIAT before Forex/MTM gain (loss) and charges related to the early redemption of the Groups 2012 Senior Notes recognized in the first quarter of 2007.
GROUP OPERATING REVENUES For the first half of 2007, Globe Groups total net operating revenues grew by 10% to P33,009 million from last years P29,984 million.
Globe Group For the Quarter Ended For the Six Months Ended Operating Revenues By Segments (PhP Mn) Q2 2007 Q1 2007 QoQ Change (%) 2% 3% -19% 2% 2% 200% 2% 30 June 2007 30 June 2006 YoY Change (%) 11% 12% -10% 3% 3% 60% 10%
Wireless Service Revenues. Non-Service Revenues Wireline Service Revenues. Non-Service Revenues Total Net Operating Revenues.
14,960 14,341 619 1,677 1,671 6 16,637
14,733 13,972 761 1,639 1,637 2 16,372
29,693 28,313 1,380 3,316 3,308 8 33,009
26,760 25,228 1,532 3,224 3,219 5 29,984
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Consolidated net service revenues grew by 11% to P31,621 million at the end of the first half compared to P28,447 million for the same period in 2006. Consolidated non-service revenues dropped by 10% to P1,388 million for the first half from last years P1,537 million. This is mainly due to lower handset, SIM pack and SIM card sales related to subscriber acquisitions following the Companys shift to more cost-effective acquisition from handset subsidies. WIRELESS BUSINESS
Globe For the Quarter Ended Wireless Revenues (PhP Mn) Service Voice1 . Data 2.. Wireless Net Service Revenues.....
_________________________________________________________________________ 1
For the Six Months Ended 30 June 2007 30 June 2006 YoY Change (%) 2% 27% 12%
Q2 2007
Q1 2007
QoQ Change (%) 2% 4% 3%
7,648 6,693 14,341
7,523 6,449 13,972
15,171 13,142 28,313
14,903 10,325 25,228
Wireless voice net service revenues include the following: a) Monthly service fees on postpaid plans; b) Charges for intra-network and outbound calls in excess of the consumable minutes for various Globe Postpaid plans, including currency exchange rate adjustments, or CERA net of loyalty discounts credited to subscriber billing c) Airtime fees from prepaid reload denominations (for Globe Prepaid and TM) for intra network and outbound calls recognized upon the earlier of actual usage of the airtime value or expiration of the unused value of the prepaid reload denomination which occurs between 1 and 60 days after activation depending on the prepaid value reloaded by the subscriber net of (i) bonus credits and (ii) prepaid reload discounts; and revenues generated from inbound international and national long distance calls and international roaming calls; Revenues from (b) and (c) are net of any interconnection or settlement payouts to international and local carriers and content providers.
Wireless data net service revenues consist of revenues from value-added services such as inbound and outbound SMS and MMS, content downloading and infotext, subscription fees on prepaid services net of any interconnection or settlement payouts to international and local carriers and content providers.
The wireless business accounted for 90% of the Globe Groups net service revenues in the first half of 2007, growing by 12% to P28,313 million from P25,228 million in 2006. The 2nd quarter and this 1st semester represents our wireless business strongest performance to date. Both voice and data segments posted growth, increasing 2% and 27% year-on-year, respectively.
Wireless Voice During the period, the wireless voice segment accounted for 54% of total wireless net service revenues. Its year-on-year growth of 2% to P15,171 million was due to a larger subscriber base and higher voice usage resulting from the strong uptake of bucket voice offers under Globes Super Sulit Offers and TMs Todo Tawag. The Super Sulit Offers include the P10 for a 3-minute call and the 10 centavos kada Segundo (persecond call charging) for Globe-to-Globe call rates while the Todo Tawag promotions consist of the Todo Tawag 15/15 for 15 minute TM-to-TM calls at only P15 and the 10 centavos kada Segundo TM-to-TM call rate.
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For heavy IDD users, Globe continues to provide competitive IDD call rates to our Bridge Mobile Alliance partners in Hong Kong, Malaysia, Singapore and Taiwan and other popular calling destinations such as the US, Canada, Hawaii, Saudi Arabia and Japan under our Tipid IDD kada-Segundo and Super Sulit Tipid IDD promotions. Recently, we introduced P7.50 per minute call rates to two additional Bridge Mobile Alliance partners, Optus (Australia) and SK Telecom (South Korea). Various IDD initiatives have brought about year-on-year growth of 6% and 18% in total outbound and inbound international traffic volumes, respectively. To further drive revenues in our voice segment, we launched another innovative service which enables Globe and TM subscribers to send voice messages. Under Globe Voice Message and TM Boses Text services, our subscribers can record a voice message with maximum duration of 30 seconds for only 10 centavos per second and send this as a voice text message.
Wireless Data Wireless data continue to register strong growth during the period mainly driven by higher subscriptions of our unlimited SMS offers and increased regular SMS usage from an expanded subscriber base. As a result, data revenues share to total wireless revenues significantly increased from 41% in 2006 to 46% for the first half of 2007. Similar to the first quarter of 2007, we continue to gain good traction on our improved unlimited text promotions which offer several variants of the intra-network unlimited SMS service. These variants are customized to suit different subscriber profiles and budgets: UNLITXT ALL DAY(all day unlimited texting at P20/day, P40/2days and P80/5days), UNLITXT DAYSHIFT (day shift unlimited texting from 8 AM to 4:59 PM at P15/day and P30/2days), UNLITXT NIGHTSHIFT (night-shift unlimited texting from 10 PM to 7:59 AM at P10/day and P20/2days), TXTPLUS (unlimited intra-network texting plus reduced-rate of P0.75 per SMS to other networks at P25/day and P50/2days), TXTPLUSCL (unlimited daytime texting plus free two 3minute intra-network voice calls at P20/day), SULITXT (100 Globe-to-Globe text for P15 and 75 TM-to-TM text for P10), and TM TXTAWAG (unlimited off-peak texting plus free one 5-minute TM-to-TM voice calls at P15/day and P30/2days). On the international SMS front, our promo with Singtel enables Globe and TM subscribers to send an international SMS message to Singtel subscribers for only P1, or equivalent to the cost of a local text message. Also, our bucket IDD offer of five international SMS messages for only P50 (compared to the regular rate of P15 per international SMS) has been extended due to good uptake for these services. To further boost revenues in the data segment, Globe introduced other innovative services such as Micro Asenso! text facility (in partnership with Microfinance Program Committee) which enables subscribers to access information, via SMS, on micro finance institutions in the Philippines via SMS for only P2.50 per message. Globe has also recently partnered with Yahoo! to provide easy and convenient access to various Yahoo! services, including Yahoo!s informative OneSearch engine and a suite of applications under Yahoo! Go 2.0. Globe subscribers can now download Yahoo! Go 2.0 free of charge from the myGlobe WAP site. In addition, Globe subscribers can now browse the internet at the current promotional rate of only P0.075/kb (compared to the regular rate of P0.15/kb) when they use the Yahoo! Go application. For further details on products and services introduced from the first half of 2007, refer to Wireless Promotions section on pages 19 and 20.
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The wireless business results were further driven by the following key drivers set out in the table below:
Globe For the Quarter Ended Key Drivers Cumulative Subscribers (or SIMs*) Net Postpaid . Prepaid . Globe Prepaid TM Average Revenue Per Subscriber (ARPU) Gross ARPU Postpaid . Prepaid1 Globe Prepaid TM Net ARPU Postpaid . Prepaid Globe Prepaid . TM Subscriber Acquisition Cost (SAC) Postpaid . Prepaid Globe Prepaid . TM Average Monthly Churn Rate (%) Postpaid . Prepaid Globe Prepaid . TM .... Q2 2007 18,126,493 683,348 17,443,145 11,227,472 6,215,673 QoQ Change (%) 16,922,859 7% 663,188 3% 16,259,671 10,709,993 5,549,678 7% 5% 12% Q1 2007 For the Six Months Ended 30 June 2007 18,126,493 683,348 17,443,145 11,227,472 6,215,673 30 June 2006 YoY Change (%) 13,894,155 30% 615,060 11% 31% 21% 56%
13,279,095 9,282,321 3,996,774
2,188
2,170
1%
2,178
2,326
-6%
343 217
353 214
-3% 1%
349 216
390 277
-11% -22%
1,598
1,654
-3%
1,625
1,680
-3%
252 160
262 162
-4% -1%
258 161
276 200
-7% -20%
5,136
5,390
-5%
5,281
8,110
-35%
57 74
52 58
10% 28%
55 67
89 76
-38% -12%
1.21%
2.01%
1.60%
1.40%
4.33% 5.66%
3.92% 4.71%
4.14% 5.21%
5.04% 5.03%
____________________________________________ *The word subscriber may be used interchangeably with the term SIM.
1 Revenue from a prepaid subscriber is realized upon actual usage of the airtime value (pre-loaded airtime value of SIM cards and subsequent top-ups) for voice, SMS, MMS, content downloading, infotext services and prepaid unlimitext subscriptions net of free SMS allocation, bonus credits or the expiration of the unused value, whichever comes earlier. Proceeds from the sale of prepaid cards, airtime value through electronic load services such as ATM and airtime value through over-the-air (OTA) reloading are treated as deferred or unearned revenues and shown under the liabilities section of the balance sheet since the service has not yet been rendered, reduced by actual amount of usage for the period.
Our subscriber base continued to post significant gains during the first half, growing 30% year-on-year to reach 18.1 million subscribers. Gross and net subscriber additions continue to be strong compared to last year. Total gross subscriber additions for the first half reached 6.9 million, up 30% year-on-year, while second quarter additions of 3.7 million was 12% higher than last quarters 3.3 million. Meanwhile, net subscriber additions remain strong at 2.5 million on the back of lower year-on-year churn rates. First semester net additions are already at 76% of full years level.
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The succeeding sections cover the key segments and brands of the wireless business Globe Postpaid, Globe Prepaid and TM. Globe Postpaid For the first half of the year, our postpaid segment comprised approximately 4% of our total subscriber base. Our cumulative postpaid subscribers expanded by 11% from last year and 3% from the previous quarter to close at 683,348 by the end of June 2007. Total postpaid gross additions increased by 44% and registered at 103,264 for the first half of 2007 compared to 71,647 the previous year while net additions grew by 89% to reach 39,447 from last years 20,918. On a year-on-year basis, postpaid churn increased slightly to 1.60% in 2007 from 1.40% the previous year due to higher terminations resulting from the implementation of a credit management system that automatically churns a postpaid subscriber based on predefined criteria. However, postpaid churn improved on a quarter-on-quarter basis due to higher take up of handset offers by subscribers as a result of an expanded loyalty campaign. The postpaid segment posted a gross ARPU of P2,178 in 2007, a 6% decline from last years average of P2,326. Year-on-year, net ARPU declined by 3% due to lower average revenues resulting from the current mix of subscribers and their respective postpaid plans, as well as the impact of appreciation of the peso on international inbound revenues. SAC continued to decrease from 2006 levels, settling at P5,281 for the first half of 2007 due to lower handset subsidies. Handset subsidies accounted for about 93% of total acquisition costs for 2007 compared to last years 97% due to managed acquisition spending. Prepaid For the first half of 2007, our prepaid segment, composed of our Globe Prepaid and TM brands, made up the remaining 96% of our total subscriber base. Our consolidated prepaid subscribers increased by 31% from 13.3 million during the first half of 2006 to 17.4 million in 2007 on the back of strong gross and net subscriber additions. A prepaid subscriber is recognized upon the activation and use of a new SIM card. The subscriber is provided with 60 days (first expiry) to utilize the preloaded airtime value. If the subscriber does not reload prepaid credits within the first expiry period, the subscriber retains the use of the wireless number and is only entitled to receive incoming voice calls and text messages for another 120 days (second expiry). However, if the subscriber does not reload prepaid credits within the second expiry period, the account is permanently disconnected and considered part of churn. The first expiry periods of reloads vary depending on the denominations, ranging from 1 day for P10 to 60 days for P300 to P500 reloads. The second expiry is 120 days from the date of the first expiry. The first expiry is reset based on the longest expiry period among current and previous reloads. Under this policy, subscribers are included in the subscriber count until churned.
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The succeeding sections discuss Globe Prepaid and TM in more detail. Globe Prepaid Globe Prepaid maintained strong subscriber growth, posting a 21% year-on-year and 5% quarter-on-quarter increase in its SIM base to reach 11.2 million subscribers by the end of June 2007. Gross additions were also 14% higher at 3.8 million compared to 3.3 million, while net additions almost doubled to 1.1 million from last years 583 thousand as a result of improved churn rates coupled with higher gross acquisitions on a yearon-year basis. Globe Prepaid subscribers currently account for 62% of total wireless subscribers. To further boost acquisition efforts in the coming quarters, Globe Prepaid reduced the price of its 64K SIM by 34% from P99 to P65 for the whole month of July 2007. In addition to the regular preloaded 50 free SMS to all networks, Globe Prepaid subscribers, signing up between 1 July and 30 September 2007, can avail of the free unlimited intra-network texting service for one day. Year-on-year, gross and net ARPUs for Globe Prepaid declined by 11% and 7%, respectively as usage has been impacted by the continued penetration of low-income markets and increasing multi-SIM usage coupled with continuous competitive intra-tariff offerings for both voice and data services. While overall ARPUs declined, Globe Prepaid subscribers registered higher data revenues due to improving regular SMS traffic and unlimited SMS traffic and higher international SMS traffic after the extension of ongoing promotions. SAC continued to decline on a year-on-year basis from P89 to P55 in the first half of 2007 due to targeted acquisitions and more focused spending on marketing costs and subsidies. However, on a quarter-on-quarter basis, SAC increased 10% from higher phonekit sales during election-related activities and successful acquisition campaigns during the second quarter. In 2007, subsidies comprised 13% of total SAC, advertising and promotions contributed 84%, while commissions made up the balance of 3%. For 2006, subsidies accounted for 61% while ads and promotions, and commissions comprised 34% and 5%, respectively. TM TM continues to be a key driver of Globes SIM growth, posting a 56% growth in its subscriber base to reach 6.2 million from 4.0 million the previous year. It now accounts for 34% of total wireless subscribers. Both gross and net subscriber additions remain at strong levels with gross additions of 3.1 million growing by 56% and net additions of 1.3 million increasing by 49% from last year. To strengthen its acquisition campaign in the coming quarters, TM further reduced the price of its 64K SIM by 49% from P59 to P30 starting 2 July 2007. In addition to the regular preloaded 25 free SMS to all networks, new TM subscribers who signed up from 15 June to 15 August 2007, can avail of the free unlimited intra-network texting service for one day. TMs churn rate for the first six months of 2007 registered slightly higher at 5.21% compared to 5.03% for the same period in 2006. On a quarter-on-quarter basis, TMs churn increased to 5.66% from 4.71% due mainly to higher terminations during the second quarter of 2007 arising from peak December 2006 acquisition campaigns. Excluding the terminations due to ISR (International Simple Resale) activities which are illegal in the Philippines, the average monthly churn rate for TM would be at 4.50% level for the first half of 2007 compared to the 4.20% registered during the comparable period last year. (See related discussion on ISR in the ILD section)
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TMs net ARPU declined by 20% from P200 in the first half of 2006 to P161 for the same period in 2007. Targeted for the lower income segments, TMs ARPU remains under pressure as it continues to penetrate the mass market. To stimulate usage, TM has introduced its own variations of the unlimited SMS offers while continuing with its popular bulk-voice promotion, the Todo Tawag 15/15. During the first half of 2007, TMs SAC decreased by 12% from P76 to P67. About 57% of SAC was composed of subsidies, 40% from advertising and promotions with commissions making up the balance of 3% while 2006 acquisition costs were mostly made up of advertising and promotions. Wireless Promotions Globe introduced the following promotions and services in the second quarter of 2007: On 18 May 2007, GCash announced its partnership with BPI Express Mobile to offer mobile commerce convenience with mobile banking. With a mobile phone, subscribers can transfer funds from their BPI accounts to another BPI account, from a BPI account to their GCash wallets and viceversa. These can then be used to send cash, settle bills or load prepaid credits to a mobile phone. On 30 May 2007, GCash, in cooperation with leading Malaysian telecommunications company, Maxis Communications, implemented the worlds first multi-lingual and multi-currency interexchange remittance hub. This cross border facility enables a fast, convenient and affordable remittance service that converts Malaysian ringgit to Philippine pesos upon receipt of transfer to a subscribers GCash wallet. On 15 June 2007, GCash, together with the Department of Trade and Industry (DTI), offered the Business Name Registration System (BNRS) online payment facility service. Business owners can now pay for fees just by logging on to the Internet and by paying via GCash from their Globe or TM SIMs, without the need to be present at DTI offices. On 23 and 24 June 2007, Globe and TM launched Globe Voice Message and TM Boses Text, respectively. This service enables subscribers to send a voice message to Globe and TM subscribers for only P0.10 per second for a maximum duration of 30 seconds. First retrieval of the voice message is free while succeeding retrievals are charged at P1.00 per replay. On 27 June 2007, Globe offered a P7.50 per minute rate for calls to subscribers of Bridge Mobile Alliance members Optus (Australia) and SK Telecom (South Korea). In June 2007, GCash offered its Advise and Pay service which allows for convenient money remittances even without a mobile phone. Non-Globe/TM subscribers can pick up the remittance from any accredited GCash outlet upon receipt of a call. Globe/TM subscribers will receive a message from 2887 informing them of the remittance details including the reference number. On 1 July 2007, Globe launched its I-Text Text Mo! Linggu-linggo may milyonaryo! promotion whereby subscribers earn raffle entries by downloading a featured picture message offered for the period which entitles them to win various prizes such as GCash, prepaid load credits, cash, a Honda CRV and a house and lot in the weekly raffle. This promotion is available to all Globe and TM subscribers and runs from 1 July to 30 September 2007. On 1 and 2 July 2007, Globe and TM offered SIMs at promotional rates of P65 (from P99) and P30 (from P59), respectively, for the whole month of July 2007.
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On 25 July 2007, Globe partnered with Yahoo! to provide subscribers easy access to online content and information through Yahoo! Go 2.0 which is available for free download through myGlobes WAP site. This Yahoo! application contains popular tools such as OneSearch, Flickr, local maps, and email. In addition, Globe is offering a 50% discount on its browsing rates which enables subscribers to browse for only P0.075/kb from 22 July until 20 September 2007. On 31 July 2007, GCash announced its partnership with Jetstar Asia of Singapore to offer the countrys first mobile phone-based airline ticket payment platform. This service allows Globe & TM subscribers to pay for their Jetstar Asia airfare after booking online or thru Jetstar Asias call center just by sending a text message to the GCash access number 2882. Confirmation is instantaneous and the e-ticket/itinerary will be emailed to the subscriber within 3 working days.
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GCash GCash continues to establish its presence in the mobile commerce industry. Now on its third year, GCashs initial thrust towards money-transfers, purchase of goods and services from retail outlets, and sending and receiving domestic and international remittances has spurred alliances in the field of mobile commerce. Today, GCash allows Globe and TM subscribers to pay or transact for the following using their mobile phone:
Domestic and international remittances

utility bills interest and amortization of loans insurance premiums donations to various institutions and organizations sales commissions and payroll disbursements school tuition fees micro tax payments and business registration electronic loads and pins online purchases ferry and airline tickets train tickets using the G-PASS chip
In addition to the above transactions, GCash is also used as a wholesale payment facility. As of 30 June 2007, GCash handled an average monthly transaction value of around P6.2 billion. Net registered GCash user base as of end-June totaled about 423,000.
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WIRELINE BUSINESS Globe and Innove have adopted a customer-centric approach to allow for the development of products better suited to the specific needs and business requirements of its customers. Dedicated business units have been created and organized within the Company to focus on the wireless and wireline needs of specific market segments and customers be they residential subscribers, wholesalers and other large corporate clients, or smaller scale industries. The Enterprise Business Group (EBG) is one such business unit, created in response to our corporate clients preferences for integrated mobile and wireline communications solutions. Complete with its own dedicated technical and customer relationship teams, EBG now offers a full suite of managed IP telephony services which include the provision of IP PBX, inbound and outbound trunks, direct lines, international toll free service and other ancillary equipment and applications.
Innove For the Quarter Ended Wireline Revenues (PhP Mn) Service Voice 1 . Data 2.. Wireline Net Service Revenues..... 1,146 525 1,671 1,111 526 1,637 3% 2% 2,257 1,051 3,308 2,172 1,047 3,219 4% 3% Q2 2007 Q1 2007 QoQ Change (%) For the Six Months Ended 30 June 2007 30 June 2006 YoY Change (%)
_______________________________________
1
Wireline voice net service revenues consist of the following: a) Monthly service fees including CERA; b) Revenues from local, international and national long distance calls made by postpaid, prepaid wireline subscribers and payphone customers, net of (i) prepaid and payphone call card discounts (ii) bonus credits and (iii) loyalty discounts credited to subscriber billings; c) Revenues from inbound local, international and national long distance calls from other carriers terminating on our network; and d) Installation charges and other one-time fees associated with the establishment of the service. e) Broadband service revenues. Revenues from (b) and (c) are net of any interconnection or settlement payments to domestic and international carriers.
Wireline data net service revenues consist of revenues from: a) Monthly service fees from International and domestic leased lines; b) Monthly service fees on Corporate Internet services and charges in excess of free allocation; c) One-time connection charges associated with the establishment of service. d) Other wholesale transport services and e) Revenues from value-added services. Revenues from (b) are net of any interconnection or settlement payments to other carriers.
Overall, the wireline business registered growth despite the continued appreciation of the peso on the back of continued growth of the broadband segment. For the first half of 2007, the business posted a 3% gain in net service revenues from last year, reporting revenues of P3,308 million compared to last years P3,219 million.
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Wireline Voice
Innove For the Quarter Ended Key Drivers Cumulative Voice Subscribers Net (End of period) 1....................... Average Revenue Per Subscriber (ARPU) Gross ARPU.. Net ARPU. Average Monthly Churn Rate .... Broadband Subscribers-Net (End of period)
_____________________________________________ 1 Excludes payphone and data lines.
For the Six Months Ended 30 June 2007 30 June 2006 YoY Change (%) 9% -5% -5% 195%
Q2 2007
Q1 2007
QoQ Change (%) 2% 1% 1% 29%
389,506 1,094 969 1.51% 89,299
380,573 1,088 960 1.60% 69,170
389,506 1,090 964 1.50% 89,299
356,441 1,149 1,014 2.09% 30,285
As of 30 June 2007, Innove increased its total wireline voice subscribers by 9% to 389,506 from 356,441 in 2006. The subscriber mix is 64% postpaid and 36% prepaid, with the business to residential mix at 19:81 in the first half of 2007. Our wireline voice service revenues increased by 4% from last years P2,172 million to P2,257 million due to an expanded subscriber base. Gross and net ARPUs continued to decline on a year-on-year basis, mainly resulting from lower voice maintenance revenues due to a shift in voice traffic to mobile, subscriber conversions to bundled broadband packages that include free voice services and decreased IDD revenues owing to the stronger peso. (See related discussion in the Foreign Exchange and Interest Rate Exposure section) Our broadband business continues to show robust growth, with our broadband subscriber base expanding by 195% year-on-year and 29% quarter-on-quarter to reach 89,299 by the end of the second quarter of 2007 as a result of aggressive acquisition promotions during the first half of the year. (See wireline promotions section on the following page for details)
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Wireline Data
Innove For the Quarter Ended Service Revenues (PhP Mn) Wireline Data International .. Domestic . Others 1 Total Wireline Data Service Revenues..
________________________________________________________________________
1
For the Six Months Ended 30 June 2006 YoY Change (%) -2% 6% -5% -
Q2 2007
Q1 2007
QoQ 30 June Change 2007 (%) 162 216 148 526 -2% 1% 320 435 296 1,051
158 219 148 525
326 410 311 1,047
Includes revenues from value-added services and corporate internet services.
Wireline data business registered service revenues of P1,051 million, in line with 2006 level as a result of lower monthly recurring revenues from its international lease lines and corporate internet services but offset by higher revenues from the domestic lease line segment on the back of an expanded domestic circuit base. Additionally, the appreciation of the peso during the current year accounted for lower revenues from foreigncurrency linked subscriber billings. Following the launch of GlobeQUEST ICON or IP-Converged Optical Network in 2006, Innoves new MPLS (Multi Protocol Label Switching) data network pioneered the first Virtual Private Line Service (VPLS) in the Philippines. The VPLS allows the service to be extended to other countries through our regional partnerships with Singapore Telecom and Hutchison Global Corporation and is now available to serve Hong Kong, Singapore, Vietnam, Korea, Taiwan and the USA among other destinations. VPLS is a multipoint transparent LAN service using familiar Ethernet interfaces to connect multiple office locations. This allows the experience of being in one local area network and differentiates Innoves network by expanding its capabilities resulting in large network deals with government agencies, BPO companies and multinational corporations. Additionally, GlobeQUESTs VPN Express offering has been expanded to include wireless access methods such as GPRS and EDGE, in addition to the fixed line version utilizing DSL technology. Enterprise customers with several branches, retail outlets or off-site operations or machines like ATMs, can use this service to connect to their headquarters using a secure broadband connection in a cost-effective way. This currently serves retail stores, banks and gas stations to name a few enterprise applications. During the first semester of the year, Innove completed the full service portfolio of its managed VPN Express service. The service uses both fixed DSL and wireless 2G/3G with HSDPA technologies to provide broadband connections for banks and companies with sizeable point-of-sale networks. Wireline Promotions During the second quarter of 2007, Innove introduced the Globelines Broadband Price-Off Promo that offers subscribers waived installation and monthly service fees for one or two months depending on the type of broadband service plan availed.
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OTHER GLOBE GROUP REVENUES

International Long Distance (ILD) Services
Globe Group For the Quarter Ended For the Six Months Ended ILD Revenues and Minutes Total ILD Revenues (PhP Mn) . Total ILD Revenues as a percentage of net service revenues Total ILD Minutes (Mn minutes) 1 Inbound Outbound. ILD Inbound / Outbound Ratio (x) .
_______________________________________________________________________________________ 1
Q2 2007 3,695 23% 557 491 66 7.44
Q1 2007
30 June 30 June QoQ YoY 2007 2006 Change Change (%) (%) 1% -1% 3,651 7,346 7,393 23% 528 462 66 7.00 5% 6% 23% 1,085 953 132 7.22 26% 936 811 125 6.51 16% 18% 6%
ILD minutes originating from and terminating to Globe and Innove networks.
On a consolidated basis, ILD revenues from the wireless and wireline services decreased by 1% to P7,346 = million during the first half of 2007 compared to last years =7,393 million due to lower payment rates on P inbound international calls coupled with the impact from the continued appreciation of the peso. However, total ILD minutes continued to trend upwards driven by an 18% growth in inbound minutes and a 6% improvement in outbound minutes on a year-on-year basis. Both Globe and Innove offer ILD services which cover international calls between the Philippines and over 200 countries. This service generates revenues from both inbound and outbound international call traffic with pricing based on agreed international termination rates for inbound traffic revenues and NTC-approved ILD rates for outbound traffic revenues. As part of our commitment to serve our overseas Filipino communities better and to address the needs of specific segments such as the heavy IDD users among our wireless subscribers, Globe launched various IDD promos since the second half of 2005. Following its IDD CelebRATE! series of offerings in 2005, Globe relaunched various promos in 2006 under the umbrella banner Globe Super Sulit Offers. We continue to provide a discounted IDD rate of P7.50 per minute (equivalent to that of a local rate) for calls to selected countries such as US and Canada (off-peak hours only), and other Bridge Mobile Alliance partners such as Taiwan Mobile, HK CSL, Singtel, and Maxis Malaysia. During the second quarter of 2007, we extended the P7.50 per minute discounted IDD rate for calls to subscribers of Optus (Australia) and SK Telekom (Korea). Globe likewise maintained its competitive IDD rates of US$0.30 per minute to countries with large OFW groups such as Japan and Saudi Arabia. To spur usage of its IDD services in the first quarter of the year, Globe offered a P24 rate for 3 minute calls to the US and Canada anytime of the day for its subscribers. Globe also improved on its prepaid G-ROAM service by lowering the roaming subscribers daily maintaining balance from P100 to P50. The P24 for 3 minute call rate promotion ended last 18 May 2007 while the G-ROAM P50 daily maintaining balance has been extended to 15 October 2007. Globes per second charging remains a unique offering to this date. We continue to offer the IDD per second charging, at Philippine peso rates, to selected countries such as US, Canada, China, Malaysia, Hong Kong,
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Singapore, Thailand, South Korea, Taiwan, Australia, United Kingdom, Kuwait and Equatorial Guinea, as well as the per-second rate of US$.0067 to other countries. Through our alliance with our Bridge Mobile partners, Globe was also able to launch co-branded SIMs with Singtel, Hong Kong CSL, Taiwan Mobile and Maxis Malaysia to provide our OFWs the opportunity to avail of discounted call and SMS rates when connecting with their families in the Philippines. Globe also launched variations of its Kababayan phone cards that offer discounted IDD call rates to OFWs in Japan and Hong Kong. On the wireline front, Globelines continues to offer its Lowest IDD rates promotion via its Globe1 card. Globe1 card users continue to enjoy P2.50 per minute (USA, Canada, Australia, Hong Kong and Singapore), P4.50 per minute (China, Malaysia, Taiwan, South Korea and Thailand) and US$0.40 to other destinations from Globelines postpaid, prepaid lines and payphones nationwide. To ensure that the Company fully benefits from the increased ILD volume, we continue to actively monitor International Simple Resale (ISR) operations passing through our networks. An ISR operation, a bypass and block service considered illegal in the Philippines, is a method of terminating inbound international calls without passing through the International Gateway Facility. If ISR operations are unchecked, Globe will not be able to realize the full inbound international revenue and instead earn only normal domestic termination charges for local or NDD calls or access charges from other carriers, which are lower than international termination rates. To reduce ISR activities, Globe initiated increased detection and blocking procedures including closer coordination of detected ISR lines with other industry players. The Company also implemented arrangements with international carriers to reduce arbitrage opportunities for ISR operators. The Company further tightened its fraud and risk evaluation process for corporate and individual accounts and is implementing legal, commercial and technical solutions to the ISR concern, such as the immediate termination of SIMs detected as being used for ISR operations and the suspension of AutoLoad Max retailers identified as having significant loading transactions to ISR SIMs. The Company also regularly coordinates with the NTC and other government agencies in addressing this concern.
Interconnection Domestically, the Globe Group pays interconnection charges to other carriers for calls originating from its network terminating to other carriers networks, and hauling charges for calls that pass through Globes network terminating in another network. Internationally, the Globe Group also incurs payouts for outbound international calls which are based on a negotiated price per minute. The interconnection expenses paid as a percentage of gross service revenues for the period registered at 14% for the first half of 2007 from 19% for the same period in 2006. The Globe Group also collects termination fees from local carriers whose calls terminate in Globe Groups network. Domestic calls terminating to wireless networks are charged a termination rate of P4.00 per minute while calls terminating to wireline voice networks are charged a termination rate of P3.00 per minute.
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GROUP OPERATING EXPENSES For the first half of 2007, the Globe Groups total subsidy, operating expenses and depreciation and amortization expenses increased by 9% to =19,064 million from =17,504 million for the same period in 2006, P P mainly driven by higher marketing and staff costs, provisions and charges for professional and contracted services.
Globe Group For the Quarter Ended For the Six Months Ended Costs and Expenses (PhP Mn) Cost of sales.. Less: Non-service revenues Subsidy Selling, Advertising and Promotions. Staff Costs Utilities, Supplies & Other Administrative Expenses Rent Repairs and Maintenance Provisions Services and Others Insurance and security. Professional and Other contracted services.. Taxes and Licenses.. Others.. Operating Expenses. Depreciation and Amortization . Total. Q2 2007 836 625 211 1,121 1,032 589 538 527 262 362 403 257 191 5,282 4,269 9,762 Q1 2007 QoQ 30 June 30 June YoY Change Change 2007 2006 (%) (%) 1,159 -28% 1,995 2,318 -14% 763 -18% 1,388 1,537 -10% 396 -47% 607 781 -22% 780 982 479 577 595 127 395 392 280 183 4,790 4,116 9,302 44% 23% -7% -11% 106% -8% 3% -8% 4% 10% 4% 5% 1,901 2,014 1,068 1,115 1,122 389 757 795 537 374 10,072 8,385 19,064 1,586 1,681 999 1,053 1,093 252 770 491 453 344 8,722 8,001 17,504 20% 20% 7% 6% 3% 54% -2% 62% 19% 9% 15% 5% 9%
Subsidy Total subsidy decreased by 22% to P607 million in 2007 from P781 million in 2006 as a result of lower handset, SIM and phonekit subsidies during the period. Our continued targeted acquisition campaigns in 2007 have resulted in higher wireless gross additions of 6.9 million compared to last years 5.3 million. Selling, Advertising and Promotions Total marketing expenses, which comprised 19% of total operating expenses, reached P1,901 million for the first half of 2007. The 20% increase from last years P1,586 million was due to higher advertising costs and the implementation of more loyalty and retention programs. In addition, increased spending for summer advertising and sponsorships of festivals during the second quarter have resulted in the 44% quarter-onquarter increase over the first quarter in marketing expenses. As a percentage of total service revenues, total marketing expenses and subsidy remained at the 8% level on a year on year basis.
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Staff Costs Staff costs, which accounted for 20% of the total operating expenses, increased by 20% or P333 million from P1,681 million in 2006 to P2,014 million in 2007 on account of higher base pay coupled with increases in variable and incentive pay, as well as pension. Total headcount also grew by 7% to 5,348 in the first half of 2007 from last years 4,984. Utilities, Supplies and Other Administrative Expenses Utilities, Supplies and Other Administrative expenses accounted for 11% of total operating expenses and registered a 7% year-on-year increase to P1,068 million from last years P999 million. This is mainly due to higher power and utilities charges incurred by equipment and support facilities for Globes 2G and 3G networks. Rent Expenses Rent expenses accounted for 11% of total operating expenses and increased by 6% year-on-year to P1,115 million from last years P1,053 million as a result of rental charges for Globes expanding 2G and 3G networks, increased leases on facilities and warehouses and logistical support requirements. Globe had 6,046 2G network sites at the end of June 2007. Repairs and Maintenance Expenses Repairs and Maintenance expenses accounted for 11% of total operating expenses and increased by 3% yearon-year due to additional technical support and maintenance costs incurred by the Globe Groups expanded network facilities and information systems infrastructure. Provisions The provisions account includes provisions related to trade, non-trade and traffic receivables, and inventory. Total provisions increased by 54% to P389 million during the first half of 2007 from P252 million in 2006 mainly due to higher provisions for inventory losses and traffic receivables. The increase of P190 million in provisions for inventory losses resulted from the implementation of more stringent recoverability assessment criteria, hence, faster obsolescence cycle for handsets in general. Similarly, provisions for traffic receivables increased by P43 million due to higher provisions related to certain carrier accounts resulting from the continued implementation of the more stringent traffic receivables policies which started in 2007. In addition, 2006 provisions included reversals of traffic provisions due to confirmation and settlement of various carrier accounts. On the other hand, provisions for trade receivables decreased by 20% to P219 million compared to P272 million in 2006 due to improved credit quality and recovery from delinquent subscriber accounts. Services and Others Services and Others accounted for 24% of total operating expenses which increased by 20% from P2,058 million in 2006 to P2,463 million for the first half of 2007. The year-on-year increase was brought about by higher spending for professional fees and contracted services to support various business initiatives. However, insurance and security charges were lower by 2% year-on-year due to lower insurance expenses from reduced premiums as a result of the Companys improved risk management structure, process,
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capabilities, and risk profile. Taxes and licenses likewise recorded higher charges from increased regulatory spectrum fees related to additional 2G and 3G sites installed during the period. Depreciation and Amortization Depreciation and amortization increased by 5% to =8,385 million for the period compared to =8,001 million P P in 2006. This increase reflected the additional depreciation charges related to various telecommunications equipment placed in service during the intervening period. Depreciation is computed using the straight-line method over the estimated useful life (EUL) of the assets, where the weighted EUL of all depreciable assets is 9.26 years. As part of Globes continuous assessment of the relevance of the assigned EUL for its network elements, the EUL of certain network components were changed to reflect the more appropriate useful life estimates for periods assigned to such assets. The net effect of the change in EUL resulted in higher depreciation of P47.85 million for the first half of 2007. Other Income Statement Items Other income statement items include net financing costs, interest income and net property and equipment related charges as shown below:
Globe Group For the Quarter Ended For the Six Months Ended Other Expenses (PhP Mn) Financing Costs net Interest Expense (Loss) on derivative instruments net Swap costs and other financing costs Foreign Exchange gain net Q2 2007 Q1 2007 QoQ Change (%) -27% -57% -101% 91% -80% -20% -131% -81% 30 June 2007 30 June 2006 YoY Change (%) -21% 40% 549% -2042% 10% -28% -450% 10%
(729) (222) 17 395 (539) 140 (53) (452)
(1,001) (521) (1,413) 207 (2,728) 175 172 (2,381)
(1,730) (743) (1,396) 602 (3,267) 315 119 (2,833)
(2,197) (529) (215) (31) (2,972) 435 (34) (2,571)
Interest Income Property and Equipment related charges - net . Total Other Expenses.
For the first half of 2007, the Globe Group registered a 10% year-on-year increase of P262 million in net = non-operating charges to close at P2,833 million. This is mainly attributable to the increase in net financing costs resulting from the early redemption of the US$294 million Senior Notes (due in 2012) which brought about non-recurring bond redemption charges (included under swap cost and other financing costs) of P1,302 million. This included P687 million in bond redemption costs and P615 million in non-cash expenses representing net reversal of MTM values related to the bond call option, net of accelerated amortization of the bond premium. Globe fully redeemed its 2012 Senior Notes on 16 April 2007. Consequently, the mark-tomarket losses of P264 million on Globe Telecoms cross currency swaps entered into to hedge the Senior Notes and deferred under Cumulative translation adjustment account was charged to profit and loss in April 2007. The Philippine peso continued to appreciate against the US$, ending the first half of 2007 at =46.246. The P Company registered a P602 million net foreign exchange gain for the period, compared to last years =31 = P million loss. (See related discussion on derivative instruments and swap costs in the Foreign Exchange and Interest Rate Exposure section)
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Interest expense posted a 21% decline of P467 million from P2,197 million to P1,730 million for the first half of 2007. The decrease is mainly due to repayment of loans to foreign and local banks during the period, coupled with decrease in peso interest rates. Swap costs incurred to manage Globe Groups interest rate and foreign exchange risk exposures in loans registered a 56% drop of P122 million due to a reduction in the amount of outstanding swaps. Interest income likewise decreased by 28% from P435 million in 2006 to P315 million in 2007 due to lower peso interest rates during the period. In the first half of 2007, the Globe Group reversed a portion of estimated provision for impairment losses amounting to P179 million on certain network asset component based on adjusted component values resulting from its continued implementation of comprehensive component accounting. Net reversal of impairment losses for the six months ended 30 June 2007 amounted to P105 million. The consolidated provision for current and deferred income tax for the Globe Group registered a 26% increase of P686 million from P2,613 million to P3,299 million in the first half of 2007. Consolidated effective income tax rate was at 34% for the first half of 2007 compared to 31% for the same period in 2006. The Globe Group registered net income after tax of =6,425 million for the first half of 2007 compared to last P years P5,759 million. Excluding bond redemption costs, foreign exchange and mark-to-market gains and = losses, core earnings would have been =7,378 million, a 20% improvement from last years P6,144 million. P = On a quarter-on-quarter basis, core earnings in the second quarter of 2007 were higher by P32 million or 1% as a result of sustained improvements in service revenues and lower financing costs. (See related discussion in the Operating Expenses section) Accordingly, consolidated basic earnings per common share were P48.44 and P43.40 and consolidated diluted earnings per common share were P48.20 and P43.29 for the first half of 2007 and 2006, respectively.
30
LIQUIDITY AND CAPITAL RESOURCES

Globe Group
As of and For the Six Months Ended

Balance Sheet Data (PhP Mn) Total Assets Total Debt . Total Stockholders Equity Financial Ratios (x) Total Debt to EBITDA .. Debt Service Coverage. Interest Cover (Gross) Debt to Equity (Gross) .. Debt to Equity (Net) 1. Total Debt to Total Capitalization (Book) . Total Debt to Total Capitalization (Market) ...
1
30 June 2007 121,300 33,179 59,284
30 June 2006 126,144 45,375 54,827
YoY change (%) -4% -27% 8%
0.79 1.45 11.79 0.56 0.34 0.36 0.16
1.20 2.35 8.51 0.83 0.53 0.45 0.27
Net debt is calculated by subtracting cash, cash equivalents and short term investments from total debt.
Globe Groups consolidated assets as of 30 June 2007 amounted to =121,300 million compared to =126,144 P P million for the same period in 2006. On 9 February 2007, Globe signed a US$50 million 5-year floating loan facility with Norddeutsche Landesbank Girozentrale, Singapore branch of which proceeds were used to refinance other debt. On 16 February 2007, Globe signed a P5 billion Fixed Rate Corporate Notes facility which were issued on 20 February 2007. Consolidated cash, cash equivalents and short term investments (including investments in assets available for sale and held to maturity) was at =13,249 million at the end of the period, 18% lower than last years P16,155 P million. Gross debt to equity ratio was at 0.56:1 on a consolidated basis and remains well within the 2:1 debt to equity limit dictated by certain debt covenants while net debt to equity ratio was at 0.34:1 as of 30 June 2007. The financial tests under Globes loan agreements include compliance with the following ratios:
1
Total debt to equity not exceeding 2:1; Total debt to EBITDA not exceeding 3:1; Debt service coverage 1 exceeding 1.3 times; Secured debt ratio 2 not exceeding 0.2 times.
Debt service coverage ratio is defined as the ratio of EBITDA to required debt service, where debt service includes subordinated debt but excludes shareholder loans.
Secured debt ratio is defined as the ratio of the total amount for the period of all present consolidated obligations for payment, whether actual or contingent which are secured by Permitted Security Interest as defined in the loan agreement to the total amount of consolidated debt. Globe has no secured debt as of 30 June 2007.
31
Consolidated Net Cash Flows
Globe Group For the Six Months Ended (PhP Mn) Net Cash Flows Provided by Operating Activities Net Cash Flows Used in Investing Activities Net Cash Flows Used in Financing Activities 30 June 30 June 2007 2006 15,465 16,246 3,361 6,316 10,076 6,982 YoY change (%) -5% -47% 44%
Consolidated net cash flow from operations amounted to =15,465 million for the first half ended 30 June P 2007, a 5% decrease from last years =16,246 million due mainly to higher actual taxes paid and increased P accounts receivable billings during the current period. Consolidated net cash used in investing activities amounted to =3,361 million for the first half of 2007, a P 47% decrease from the net cash used of =6,316 million in 2006 due to proceeds received from the P termination of money market placements during the current period. Consolidated net cash used in financing activities for the first half of 2007 amounted to P10,076 million, a = 44% increase compared to the P6,982 million cash used during 2006 due to the redemption of the 2012 = Senior Notes redeemed in April 2007. Consequently, consolidated total debt amounted decreased by 27% from =45,375 million to =33,179 million. Loan repayments of Globe for the first half of 2007 amounted to P P = P18,790 million which posted a 338% increase compared to the =4,293 million paid during the same period P in 2006 due to the redemption of Globes US$294 million 9.75% Senior Notes.
Globe Group For the Six Months Ended (PhP Mn) Capital Expenditures (Cash) .
Decrease in Liabilities related to Acquisition of Property and Equipment
30 June 30 June 2007 2006 6,775 5,396 (936) 5,839 18% (232) 5,164 18%
YoY change (%) 26% 303% 13%
Total Capital Expenditures1 Total Capital Expenditures / Service Revenues (%)

1
Consolidated capital expenditures include property and equipment and intangibles, acquired as of report date regardless of whether payment has been made or not.
Consolidated capital expenditures of =5,839 million in 2007 increased by 13% over the previous years level P of P5,164 million due to increased investments in our 2G and 3G network facilities. For 2007, Globe has allocated approximately US$350 million for capital expenditures to deepen coverage of its 2G wireless network, accelerate wireless and wired broadband network roll-out, and upgrade the necessary support facilities. The 2007 capital expenditure program will be funded through internally-generated cash and debt financing. Out of total debt of =33,179 million, 25% are denominated in US$ out of which 25% have been hedged to P pesos. As a result, the amount of US$ debt swapped into pesos and peso-denominated debt accounts for approximately 81% of consolidated loans as of 30 June 2007.
32
Below is the schedule of debt maturities for Globe for the years stated below based on total outstanding debt as of 30 June 2007:
Year Due Principal * (US$ Mn) 53 112 168 386 719
2007 . 2008.. 2009. 2010 through 2012 . Total

* Principal amount before debt issuance costs.
On 12 January 2007, the Company announced its plans to redeem its US$294 million 9.75% Senior Notes due 2012 in April 2007 after receiving the Bangko Sentral ng Pilipinas (BSP) approval. On 16 April 2007, Globe fully redeemed its US$294 million Senior Notes at 104.875% of its face value. Estimated after-tax interest expense savings of P2.3 billion are expected to be realized as a result of the redemption of the Notes from 2007 to 2012. (See related discussion on the impact of the bond redemption to the current period financial performance in the Other Income statement items section) Stockholders equity for the current period was P59,284 million as of 30 June 2007, an 8% increase from the P54,827 million of the previous year. As of 30 June 2007, Globes capital stock consists of: Preferred Shares Preferred stock Series A at a par value of P5 per share of which 158 million shares are outstanding out of a total authorized of 250 million shares. Preferred stock Series A has the following features: a. Convertible to one common share after 10 years from issue date at a price which shall not be less than the prevailing market price of the common stock less the par value of the preferred shares; b. Cumulative and non-participating; c. Floating rate dividend; d. Issued at par; e. Voting rights; f. Globe has the right to redeem the preferred shares at par plus accrued dividends at any time after 5 years from date of issuance in 2001; and g. Preferences as to dividend in the event of liquidation. The dividends for preferred shares are declared upon the sole discretion of the Globe Telecom BOD. On 11 December 2006, the BOD approved the declaration of cash dividends to preferred shareholders Series A as of record date 31 December 2006 amounting to P64.67 million. Common Shares Common shares at par value of P50 per share of which 132 million are issued and outstanding out of a total authorized of 180 million shares.
33
Cash Dividends On 7 February 2006, the BOD approved the declaration of first semi-annual cash dividends in 2006 of P20 per share to common stockholders of record as of 21 February 2006 and paid last 15 March 2006. On 31 July 2006, the BOD approved an amendment of its dividend policy and increased its payout from 50% to 75% of prior years net income. The approved dividends were paid on 12 September 2006 to all stockholders of record on 17 August 2006. On 5 February 2007, the BOD declared the first semi-annual cash dividend in 2007 of P33 per common share with a record date of 19 February 2007 and payment date of 15 March 2007. On 10 August 2007, the BOD declared the second semi-annual cash dividend in 2007 of P33 per common share with a record date of 29 August and payment date of 14 September 2007. These declarations are consistent with our cash dividend policy of distributing 75% of prior years net income, and represent an increase of 10% over the previous semi-annual rate of P30. Consolidated Return on Average Equity (ROE) registered at the 22% level for the 2007 and 2006 periods due to a lower after tax net income after considering non-recurring charges related to the bond redemption. Excluding forex/MTM gains and losses and bond redemption-related costs, ROE would have been 25% for the first half of 2007 compared to 23% for the same period in 2006.
FOREIGN EXCHANGE AND INTEREST RATE EXPOSURE

As of 30 June 2007, the Philippine Peso stood at =46.246, a 13% appreciation versus =53.220 at the end of P P the first half of 2006 and a 6% improvement over the P49.045 rate at the end of 2006. The foreign exchange differentials arising from revaluation of foreign currency-denominated accounts are charged against/credited to current operations. Globe Groups net foreign exchange gains credited to current operations amounted to a P602 million gain and a P31 million loss for the six months ended 30 June 2007 and 2006, respectively. To mitigate foreign exchange risk, the Globe Group enters into short-term foreign currency forwards and long-term foreign currency swap contracts. Short-term forward contracts are used to manage our foreign exchange exposure related to foreign currency-denominated monetary assets and liabilities. For certain long term foreign currency denominated loans, we enter into long term foreign currency and interest rate swap contracts to manage our foreign exchange and interest rate exposures. As of 30 June 2007, our Company had US$47 million in notional amount of outstanding foreign currency swap agreements and US$160 million in short-term forward contracts, some of which have option features. Interest rate swaps are used to manage our interest rate risk in a cost-efficient manner. As of 30 June 2007, our Company had US$43 million in notional amount of US$ swaps under which it effectively swapped some of its floating US$ denominated loans into fixed rate, with semi-annual payment intervals up to January 2011. We also have US$5 million in notional amount of US$ swaps under which the Company receives a fixed rate of 9.75% and pays a floating rate based on LIBOR, subject to a cap. The performance of the swap is linked to the 10-year and 30-year US$ Constant Maturity Swap Rates. Our Company also has a fixed to floating interest rate swap contract with a notional amount of P1 billion, in which it effectively swapped a fixed rate Philippine peso denominated bond into floating rate with quarterly payment intervals up to February 2009 and float to fixed interest rate swap contracts with a notional amount of P1 billion which converts the floating rate back to fixed rate.
34
The Group also has embedded forwards and options in certain financial and non-financial contracts with total notional amount of US$26 million. Gains (losses) on derivative instruments represent the net mark-to-market (MTM) gains (losses) on derivative instruments. As of 30 June 2007, the MTM value of outstanding derivatives of the Globe Group amounted to (US$12.8 million) while losses on derivative instruments arising from changes in MTM reflected in the consolidated income statements amounted to P743 million, which includes the losses on the bond option value prior to the bond call date amounting to P454 million. (See related discussion under Results of Operations) On the other hand, the Globe Group also has foreign currency-linked revenues 1 and expenses which serve as natural hedges against our foreign exchange exposure. Consolidated foreign currency-linked revenues were at 25% and 30% of total net revenues for the periods ended 30 June 2007 and 2006, respectively. For the first half of 2007, foreign currency-linked revenues comprised 24% of net wireless revenues and 34% of net wireline revenues. In contrast, our foreign-currency linked expenses were at 13% and 10% (as a percentage of total operating expenses) for the periods ended 30 June 2007 and 2006, respectively.
Include the following revenues: (1) billed in foreign currency and settled in foreign currency, and (2) billed in Pesos at rates linked to a foreign currency tariff and settled in Pesos.
35
RECENT DEVELOPMENTS
Globe is an intervenor in and Innove is a party to Civil Case No. Q-00-42221 entitled "Isla Communications Co., Inc. et. al., versus National Telecommunications Commission (NTC) et al.," before the Regional Trial Court (RTC) of Quezon City by virtue of which Globe and Innove, together with other cellular operators, sought and obtained a preliminary injunction against the implementation of NTC Memorandum Circular (MC) No. 13-6-2000 from the RTC of Quezon City. NTC MC 13-6-2000 prescribed new billing requirements for cellular service providers. The NTC appealed the issuance of the injunction to the Court of Appeals. On 25 October 2001, we received a copy of the decision of the Court of Appeals ordering the dismissal of the case before the RTC for lack of jurisdiction, but without prejudice to the wireless companies seeking relief before the NTC, which the Court of Appeals claims had jurisdiction over the matter. On 22 February 2002, we filed a Petition for Review with the Supreme Court (SC) to annul and reverse the decision of the Court of Appeals. The Supreme Court (SC), on 2 December 2003, overturned the CAs earlier dismissal of the petitions filed by SMART and Globe. In its 13-page decision, the SC said that the Quezon City trial court could hear and decide the case, contrary to NTCs argument. The SC has also since denied the NTCs motion for reconsideration. We are still awaiting resumption of the proceedings before the RTC of Quezon City. On May 22, 2006, Innove received a copy of the Complaint of Subic Telecom Company (Subictel), Inc., a subsidiary of PLDT, seeking an injunction to stop the Subic Bay Metropolitan Authority and Innove from taking any actions to implement the Certificate of Public Convenience and Necessity granted by SBMA to Innove. Subictel claimed that the grant of a CPCN allowing Innove to offer certain telecommunications services within the Subic Bay Freeport Zone would violate the Joint Venture Agreement (JVA) between PLDT and SBMA. Innove has since filed its Opposition to the Prayer for Injunction with Motion to Dismiss, citing that SBMA is not entitled to an injunction on the basis of the grounds it has cited in the complaint, that an injunction in this case would be contrary to public policy, and that the complaint is forum-shopping since Subictel had already previously objected to the grant of the CPCN in the proceedings before the regulatory body. SBMA also filed its Opposition pointing out, among others, that Subictel is not a proper party in this case since Subictel is not a party to the JVA. The court granted Innoves Motion to Dismiss and Subictel has filed a Motion for Reconsideration. The Motion for Reconsideration was subsequently denied and Subictel has appealed to the Court of Appeals. The appeal is pending. On July 4, 2006, Smart Communications, Inc. (Smart) filed a letter-complaint with the National Telecommunications Commission (NTC) against the 500 free text promotion offered by Innove on its Speak and Surf product. The promotion allows Speak and Surf subscribers to send 500 free text messages to Globe and Touch Mobile subscribers. Smart complained that this promotion was predatory and discriminatory. On July 17 the NTC issued a Show-Cause order requiring Globe to explain its position on this matter. On July 25, 2006, Globe filed its answer. In its answer, Globe explained that Innove actually pays Globe the regular termination rate of P0.35 per text message, and that the cost of the free texts are sufficiently covered by the monthly service charge of P995 paid by Speak n Surf subscribers. In this light, the offer is neither discriminatory nor predatory. In its answer, Globe also extended an invitation to Smart and other networks to join the promotional offer. The company is currently awaiting the disposition of the NTC on this matter. On 6 August 2007, Globe and Innove unveiled its new brand identity to reinforce its commitment to serve its customers better, strengthen consumer recall and serve as a unifying symbol for the Globe Groups products and services. The new Globe brand is symbolized by the Globe Life logo and an encompassing commitment to offer ease and relevance to our customers. The logo illustrates the wealth of products and services offered by the Globe Group which surround a hand, symbolizing our customers, to whom we are focused on providing customer satisfaction.
36
MAJOR STOCKHOLDERS
The following are the major stockholders of Globe Telecom as of 30 June 2007:
Stockholders Ayala Corporation Singapore Telecom Asiacom Public Total Common Shares 43,959,713 58,833,614 29,347,553 132,140,880 % of Common Shares 33% 45% 22% 100% Preferred Shares 158,515,021 158,515,021 100% 100% % of Preferred Shares Total 43,959,713 58,833,614 158,515,021 29,347,553 290,655,901 % of Total 15% 20% 55% 10% 100%
BOARD OF DIRECTORS
As of 30 June 2007, the members of the Board of Directors of the Globe Group are as follows:
Jaime Augusto Zobel de Ayala II Delfin L. Lazaro Lim Chuan Poh Gerardo C. Ablaza, Jr. Romeo L. Bernardo Fernando Zobel de Ayala Dr. Roberto F. de Ocampo Koh Kah Sek Xavier P. Loinaz Guillermo D. Luchangco* Jesus P. Tambunting*
* Independent Directors
Chairman Co-Vice Chairman Co-Vice Chairman Director Director Director Director Director Director Director Director
Key Officers - Globe

Name Gerardo C. Ablaza, Jr. Ferdinand M. de la Cruz Rebecca V. Eclipse Rodell A. Garcia Delfin C. Gonzalez, Jr. Susan Rivera-Manalo Rodolfo A. Salalima Renato O. Marzan Position President and Chief Executive Officer Head Consumer Business Group Head Office of Strategy Management Chief Information Officer Chief Financial Officer Head Human Resources Head - Corporate Affairs and Regulatory Matters Corporate Secretary
Consultants
Name Lee Han Kheng* Robert L. Wiggins
* Replaced Andrew Buay effective 1 April 2007.
Position Chief Operating Adviser Chief Technical Adviser
Key Officer - Innove

Name Position
Gil B. Genio
Chief Executive Officer
37
Annex I
Draft for Discussion Purposes Only
GLOBE TELECOM, INC. AND SUBSIDIARIES

Condensed Consolidated Financial Statements June 30, 2007 and 2006 (Unaudited) and December 31, 2006 (Audited)
GLOBE TELECOM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
Notes ASSETS Current Assets Cash and cash equivalents Short-term investments Available-for-sale investments Held-to-maturity investments Receivables - net Inventories and supplies Derivative assets Prepayments and other current assets Total Current Assets Noncurrent Assets Property and equipment - net Investment property - net Intangible assets - net Investments in an associate and a joint venture Deferred income tax - net Derivative assets Other noncurrent assets - net Total Noncurrent Assets
June 30 2007 (Unaudited)
December 31 2006 2006 (Unaudited) (Audited) (In Thousand Pesos) =13,859,601 P 1,581,740 713,797 6,557,509 1,331,520 938,015 1,833,485 26,815,667 95,637,479 250,588 1,128,139 41,148 997,304 17,387 1,256,704 99,328,749 =126,144,416 P =7,505,715 P 6,155,349 293,614 857,563 5,527,905 993,495 1,626,667 1,254,682 24,214,990 96,073,413 314,503 1,129,624 37,332 801,863 2,008,108 100,364,843 =124,579,833 P
10 10
P9,533,961 = 1,676,783 2,038,444 6,115,469 1,546,266 182,617 1,770,511 22,864,051 93,649,185 302,855 1,106,356 60,157 715,901 14,151 2,586,927 98,435,532 P121,299,583 =
10
LIABILITIES AND EQUITY Current Liabilities Accounts payable and accrued expenses Provisions Derivative liabilities Income taxes payable Unearned revenues Current portion of: Long-term debt Other long-term liabilities Total Current Liabilities Noncurrent Liabilities Deferred income tax - net Long-term debt - net of current portion Derivative liabilities Other long-term liabilities - net of current portion Total Noncurrent Liabilities Total Liabilities Equity Paid-up capital Cost of share-based payments Cumulative translation adjustment Retained earnings Total Equity
10 10
P15,964,260 = 247,712 786,524 2,169,527 1,738,592 5,510,444 93,204 26,510,263 4,919,678 27,668,509 2,916,923 35,505,110 62,015,373 33,540,021 350,275 12,066 25,381,848 59,284,210 P121,299,583 =
=15,032,447 P 198,972 270,005 1,383,341 1,699,519 7,704,277 100,122 26,388,683 4,221,466 37,670,274 367,306 2,669,935 44,928,981 71,317,664 33,386,263 304,795 (211,761) 21,347,455 54,826,752 =126,144,416 P
=16,485,265 P 248,310 558,087 831,381 1,270,075 6,271,601 93,422 25,758,141 5,539,999 32,935,256 528,036 2,870,250 41,873,541 67,631,682 33,484,361 340,743 (193,790) 23,316,837 56,948,151 =124,579,833 P
5, 10 10
10 10 10
6 4
See accompanying Notes to Condensed Consolidated Financial Statements.
GLOBE TELECOM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Notes INCOME Service revenues Nonservice revenues Interest Others
Three Months Ended June 30 2006 2007
Six Months Ended June 30 2006 2007
(In Thousand Pesos, Except Per Share Figures)

=16,012,407 P 624,282 140,185 93,062 16,869,936 5 =14,259,924 P 684,206 220,456 101,644 15,266,230 4,504,452 4,046,637 1,088,933 2,000,735 240,043 2,702 11,883,502 3,382,728 1,277,963 (201,327) 1,076,636 =2,306,092 P =17.35 P =17.33 P = P P31,621,237 = 1,387,664 315,083 177,136 33,501,120 =28,447,403 P 1,536,939 434,976 170,497 30,589,815 8,632,174 8,001,305 2,317,964 2,972,558 290,299 3,300 22,217,600 8,372,215 2,669,486 (56,147) 2,613,339 =5,758,876 P =43.40 P =43.29 P =20.00 P
COSTS AND EXPENSES General, selling and administrative Depreciation and amortization Cost of sales Financing costs Impairment losses and others Equity in net losses of an associate and joint venture
5 5
5,097,505 4,269,187 835,693 538,804 325,306 5,151 11,071,646 5,798,290
9,839,968 8,385,455 1,994,911 3,267,148 283,864 5,687 23,777,033 9,724,087
INCOME BEFORE INCOME TAX PROVISION FOR INCOME TAX Current Deferred
2,169,528 (209,269) 1,960,259 =3,838,031 P 9 P28.95 = P28.79 = 4 P =
3,934,378 (634,952) 3,299,426 P6,424,661 =
NET INCOME Earnings Per Share Basic Diluted Cash dividends declared per common share
P48.44 = P48.20 = P33.00 =
GLOBE TELECOM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Notes As of January 1, 2007 Changes in fair value of cash flow hedges Transferred to income and expense for the period Changes in fair value of available-for-sale equity investments Gain recognized directly in equity Net income for the period Total income for the period Dividends on common stock Cost of share-based payments Collection of subscriptions receivable - net of refunds Exercise of stock options As of June 30, 2007 As of January 1, 2006 Changes in fair value of cash flow hedges Transferred to income and expense for the period Changes in fair value of available-for-sale equity investments Gain recognized directly in equity Net income for the period Total income for the period Dividends on common stock Cost of share-based payments Collection of subscriptions receivable - net of refunds Exercise of stock options As of June 30, 2006 4 10 4 6 10
Capital Stock P7,349,654 = 3,486 3,055 P7,356,195 = = P7,333,741 7,798 4,461 = P7,346,000
Additional Paid-in Capital
Cost of Share-Based Payments
Treasury Shares
Cumulative Translation Adjustment
Retained Earnings
Total P56,948,151 = (43,382) 230,197 19,041 205,856 6,424,661 6,630,517 (4,359,650) 47,465 3,486 14,241 P59,284,210 = =51,618,810 P 27,705 (6,562) 2,988 24,131 5,758,876 5,783,007 (2,638,071) 45,467 7,798 9,741 =54,826,752 P
For the Periods Ended June 30, 2007 and 2006 (Unaudited and In Thousand Pesos) P26,134,707 = P340,743 = P = (P193,790) = P23,316,837 = 49,119 P26,183,826 = =25,981,667 P 58,596 =26,040,263 P 47,465 (37,933) P350,275 = =312,644 P 45,467 (53,316) =304,795 P P = = P = P (43,382) 230,197 19,041 205,856 205,856 P12,066 = (P235,892) = 27,705 (6,562) 2,988 24,131 24,131 (P211,761) = 6,424,661 6,424,661 (4,359,650) P25,381,848 = =18,226,650 P 5,758,876 5,758,876 (2,638,071) =21,347,455 P
-2-
Notes At January 1, 2006 Changes in fair value of cash flow hedges Transferred to income and expense for the year Changes in fair value of available-for-sale investments Gain recognized directly in equity Net income for the year Total income for the year Dividends on: Common stock Preferred stock Cost of share-based payments Collection of subscriptions receivable - net of refunds Exercise of stock options At December 31, 2006 4
Capital Stock
Additional Paid-in Capital
Cost of Share-Based Payments
Cumulative Translation Adjustment
Retained Earnings
Total
10
For the Year Ended December 31, 2006 (Audited and In Thousand Pesos) = P7,333,741 =25,981,667 P =312,644 P (P235,892) = =18,226,650 P =51,618,810 P (254,589) (254,589) 6,946 8,967 P7,349,654 = 153,040 =26,134,707 P 161,628 (133,529) =340,743 P 285,452 11,239 42,102 42,102 (P193,790) = 11,754,673 11,754,673 (6,599,817) (64,669) =23,316,837 P 285,452 11,239 42,102 11,754,673 11,796,775 (6,599,817) (64,669) 161,628 6,946 28,478 =56,948,151 P
GLOBE TELECOM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30 2006 2007 (In Thousand Pesos) P9,724,087 = 5 5 6 5 8,385,455 1,730,431 614,696 446,531 47,465 13,277 5,687 (14,021) (104,529) (315,083) 20,533,996 = P8,372,215 8,001,305 2,197,183 531,582 45,467 33,071 3,300 (5,043) 38,153 (434,976) 18,782,257 552,994 40,939 (710,513) 861,957 397,835 (124,496) 19,800,973 (2,107,914) (1,446,600) 16,246,459
Notes CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax Adjustments for: Depreciation and amortization Interest expense - net of amortization of bond premium Bond redemption cost Loss on derivative instruments - net Cost of share-based payments Provisions for other probable losses Equity in net losses of an associate and a joint venture Gain on disposal of property and equipment Impairment losses (reversal of impairment losses) on property and equipment Interest income Operating income before working capital changes Changes in operating assets and liabilities: Decrease (increase) in: Receivables Inventories and supplies Prepayments and other current assets Increase (decrease) in: Accounts payable and accrued expenses Unearned revenues Other long-term liabilities Cash generated from operations Interest paid Income taxes paid Net cash flows provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Additions to: Property and equipment Intangible assets Capitalized borrowing costs Proceeds from sale of property and equipment Decrease (increase) in: Short-term investments Available-for-sale investments Held-to-maturity investments Other noncurrent assets Interest received Net cash flows used in investing activities
(Forward)
(1,920,415) (552,771) (672,919) 2,248,132 468,517 (50,172) 20,054,368 (1,993,052) (2,596,233) 15,465,083
(6,544,669) (184,825) (46,067) 24,378 4,478,566 312,655 (1,180,881) (607,331) 387,208 (P3,360,966) =
(5,334,445) (33,653) (28,501) 28,938 (1,038,790) (243,310) 334,251 (P6,315,510) =
-2-
Notes CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term borrowings Repayments of long-term borrowings Payments of dividends to stockholders: Common Preferred Collection of subscriptions receivable and exercise of stock options - net of related expenses Net cash flows used in financing activities NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD CASH AND CASH EQUIVALENTS AT END OF THE PERIOD
Six Months Ended June 30 2006 2007 (In Thousand Pesos) P13,121,045 = (18,790,324) (4,359,650) (64,669) 17,727 (10,075,871) 2,028,246 7,505,715 = P (4,293,443) (2,638,071) (68,334) 17,539 (6,982,309) 2,948,640 10,910,961
5 4
P9,533,961 =
= P13,859,601
GLOBE TELECOM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Financial Statement Preparation The accompanying condensed consolidated financial statements have been prepared in accordance with Philippine Accounting Standard (PAS) 34, Interim Financial Reporting. Accordingly, the condensed consolidated financial statements do not include all of the information required in the December 31, 2006 annual audited financial statements. The preparation of the financial statements in compliance with Philippine Financial Reporting Standards (PFRS) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The estimates and assumptions used in the accompanying condensed consolidated financial statements are based upon managements evaluation of relevant facts and circumstances as of the date of the condensed consolidated financial statements. Actual results could differ from such estimates. The condensed consolidated financial statements include the accounts of Globe Telecom, Inc. (herein referred to as Globe Telecom or Globe) and its wholly owned subsidiaries Innove Communications, Inc. (herein referred to as Innove) and G-Xchange, Inc. (herein referred to as GXI), collectively referred to as Globe Group. The condensed consolidated financial statements are presented in Philippine peso (PHP), the Globe Groups functional currency, and rounded to the nearest thousands except when otherwise indicated. On August 10, 2007, the Board of Directors (BOD) approved and authorized the release of the condensed consolidated financial statements of Globe Telecom, Inc. and Subsidiaries as of June 30, 2007 and 2006 (unaudited) and December 31, 2006 (audited).
2. Accounting Policies The accounting policies adopted in the preparation of the condensed consolidated financial statements are consistent with those followed in the preparation of the Globe Groups annual financial statements for the year ended December 31, 2006, except for the adoption of new Standards and Interpretations enumerated below. PFRS 7, Financial Instruments: Disclosures, introduces new disclosures to improve the information about financial instruments. It requires the disclosure of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk, as well as sensitivity analysis to market risk. It replaces PAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and the disclosure requirements in PAS 32, Financial Instruments: Disclosure and Presentation. It is applicable to all entities that report under PFRS. Adoption of this standard resulted in inclusion of additional disclosures (see Note 10).
-2 Amendments to PAS 1, Presentation of Financial Statements, introduce disclosures about the level of an entitys capital and how it manages capital. Adoption of the Amendments resulted in inclusion of additional disclosures (see Note 13). Philippine Interpretation IFRIC 8, Scope of PFRS 2, requires PFRS 2 to be applied to any arrangements where equity instruments are issued for consideration which appears to be less than fair value. As equity instruments are only issued to employees in accordance with the employee stock option scheme, adoption of this Interpretation does not have significant impact on the condensed consolidated financial statements. Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives, establishes that the date to assess the existence of an embedded derivative is the date an entity first becomes a party to the contract, with reassessment only if there is a change to the contract that significantly modifies the cash flows. Adoption of this Interpretation does not have significant impact on the condensed consolidated financial statements. Philippine Interpretation IFRIC 10, Interim Financial Reporting and Impairment, provides that the frequency of financial reporting does affect the amount of impairment charge to be recognized in the annual financial reporting with respect to goodwill and available-for-sale (AFS) investments. It prohibits the reversal of impairment losses on goodwill and AFS equity investments recognized in the interim financial reports even if impairment is no longer present at the annual balance sheet date. Adoption of this Interpretation does not have significant impact on the condensed consolidated financial statements.
3. Change in Estimated Useful Lives In the first quarter of 2007, Globe changed the estimated useful lives (EUL) of certain wireless network elements resulting from new information affecting usability of these assets. The wireline business also recognized additional depreciation due to shortened remaining useful lives of certain assets as a result of continuing network upgrade and expansion. The net effect of the change in EUL resulted in higher depreciation of =28.43 million and =47.85 million for the three months and P P six months ended June 30, 2007, respectively.
4. Equity Cash Dividends Information on Globe Groups BOD declaration of cash dividends follows:
Date Amount Record Payable (In Thousand Pesos, Except Per Share Figures) =68,334 P 64,669 December 31, 2005 December 31, 2006 March 15, 2006 March 15, 2007
Per Share Preferred stock dividends declared on: December 13, 2005 December 11, 2006 (Forward)
=0.43 P 0.41
-3Date Per Share Common stock dividends declared on: February 1, 2005 August 2, 2005 February 7, 2006 July 31, 2006 February 5, 2007 Amount Record Payable (In Thousand Pesos, Except Per Share Figures)
= P20.00
20.00 20.00 30.00 33.00
= P2,798,077
2,637,940 2,638,071 3,961,745 4,359,650
February 18, 2005 August 19, 2005 February 21, 2006 August 17, 2006 February 19, 2007
March 15, 2005 September 14, 2005 March 15, 2006 September 12, 2006 March 15, 2007
Restrictions on Retained Earnings The retained earnings include the undistributed net earnings of consolidated subsidiaries and the accumulated equity in net earnings of an associate and joint venture accounted for under the equity method totaling =5,225.92 million as of June 30, 2007. This amount is not available for dividend P declaration until received in the form of dividends from subsidiaries and joint venture. The Globe Group is also subject to loan covenants that restrict its ability to pay dividends.
5. Costs and Expenses 5.1. General, selling and administrative expenses consist of:
Three Months Ended June 30 Six Months Ended June 30 2006 2006 2007 2007 (Unaudited and In Thousand Pesos) =957,771 P =1,901,387 P =1,585,981 P P1,121,761 = 878,465 1,681,648 1,032,420 2,014,442 588,875 538,531 526,703 403,476 361,513 256,669 267,557 =5,097,505 P 507,445 563,233 538,578 219,733 382,837 218,811 237,579 =4,504,452 P 1,067,474 1,115,135 1,121,617 795,639 756,418 537,062 530,794 =9,839,968 P 998,848 1,053,338 1,092,895 490,570 770,241 452,526 506,127 =8,632,174 P
Selling, advertising and promotions Staff costs Utilities, supplies and other administrative expenses Rent Repairs and maintenance Professional and other contracted services Insurance and security services Taxes and licenses Others
5.2. Impairment losses (reversal of impairment losses) and others consist of:
Three Months Ended June 30 Six Months Ended June 30 2006 2006 2007 2007 (Unaudited and In Thousand Pesos) Impairment loss (reversal of impairment losses) on: Receivables Property and equipment Inventory obsolescence and market decline Provisions for other probable losses
P163,588 = 64,083 90,191 7,444 P325,306 =
=181,990 P 35,037 (5,095) 28,111 =240,043 P
P271,822 = (104,529) 103,294 13,277 P283,864 =
=305,616 P 38,153 (86,541) 33,071 =290,299 P
-4In the first quarter of 2007, the Globe Group reversed a portion of estimated provision for impairment losses amounting to =178.80 million on a certain network asset component based on P adjusted component values resulting from its continuing implementation of comprehensive asset component accounting. In the second quarter of 2007, the Globe Group recognized a provision for losses amounting to = P61.14 million as a result of ongoing impairment reviews and reconciliation exercise based on recent physical count of network assets. 5.3. Financing costs - net consist of:
Three Months Ended June 30 Six Months Ended June 30 2006 2006 2007 2007 (Unaudited and In Thousand Pesos) Interest expense - net of amortization of bond premium and debt issuance costs Loss (gain) on derivative instruments Swap costs Foreign exchange loss (gain) - net Other financing costs - net P729,316 = 222,119 20,805 (394,551) (38,885) P538,804 = =1,102,838 P (187,074) 93,199 991,772 =2,000,735 P P1,730,431 = 743,090 94,118 (602,000) 1,301,509 P3,267,148 = =2,197,183 P 529,024 215,705 30,646 =2,972,558 P
On February 23, 2007, Globe Telecom exercised its option to call its USD 293.54 million 2012 Senior Notes via an irrevocable notice issued to the Agent, the Bank of New York. On April 16, 2007, Globe Telecom fully settled and redeemed the 2012 Senior Notes through the Agent. Under the bond indenture, Globe Telecom was liable to pay the bondholders 104.875% of the outstanding principal of the 2012 Senior Notes. Globe Telecom charged to other financial costs (included in the Financing costs account) the bond redemption premium of 4.875%, accelerated the unamortized bond premium of =356.48 million over the remaining period up to settlement, and P derecognized the carrying value of the bifurcated call option on the Senior Notes of = P971.18 million. Consequently, the total amount of bond redemption-related financing costs incurred for the six months ended June 30, 2007 amounted to =1,301.51 million of which the cash P component amounted to only P686.81 million, representing the 4.875% bond redemption = premium. Loss on derivative instruments for the six months ended June 30, 2007 includes the losses on the bond option value prior to the bond call date amounting to P454.09 million. Following the bond = redemption, the mark-to-market losses of =263.88 million on Globe Telecoms cross currency P swaps entered into to hedge the Senior Notes and deferred under Cumulative translation adjustment account was charged to profit and loss in April 2007.
-55.4. Interest expense is incurred on the following:

Three Months Ended June 30 Six Months Ended June 30 2006 2006 2007 2007 (Unaudited and In Thousand Pesos) =1,043,892 P =2,077,374 P P667,520 = P1,594,124 = 58,490 117,644 61,796 136,307 348 1,792 108 373 =1,102,838 P =2,197,183 P P729,316 = P1,730,431 =
Long-term debt Accretion expense Suppliers credit Others
6. Share-based payments On May 17, 2007, the Globe Group granted additional stock options to key executives and senior management personnel under the Executive Stock Option Plan 2 (ESOP 2). The grant requires the grantees to pay a nonrefundable option purchase price of P1,000.00 until July 30, 2007, which is = the closing date for the acceptance of the offer. The additional stock options provide for an exercise price of =1,270.50, which is the average quoted market price of the last 20 trading days P preceding May 17, 2007. Fifty percent of the options become exercisable from May 17, 2009 to May 16, 2017, while the remaining fifty percent become exercisable from May 17, 2010 to May 17, 2017. In order to avail of the privilege, the grantees must remain with Globe Telecom or its related parties from grant date up to the beginning of the exercise period of the corresponding shares. The estimated fair value of the stock option as of May 17, 2007 amounted to =375.89, determined P using the trinomial option pricing model. The following assumptions were used to determine the fair value of the stock option. Share price Exercise price Expected volatility Option life Expected dividends Risk-free interest rate P1,340.00 = P1,270.50 = 38.14% 10 years 4.93% 7.04%
The expected volatility measured at the standard deviation of expected share price returns was based on an analysis of share prices for the past 365 days. As of June 30, 2007, the Group has a total of 2,038,890 outstanding stock options on its ESOP 2 grants from 2003 to 2007, of which 317,090 stock options are exercisable. Compensation expense for the three months and six months ended June 30, 2007 amounted to = P12.16 million and =43.25 million, respectively. P
-67. Agreement with VSNL International Globe Telecom has entered into a Memorandum of Understanding (MOU) with VSNL International (Bermuda) Limited to invest in the capacity of the Intra-Asia Cable System (IACS) through an Indefeasible Right of Use (IRU) arrangement at an estimated cost not exceeding USD 37.00 million. The MOU also entitles Globe to be the exclusive landing party of the IACS cable in the Philippines.
8. Contingencies Globe Telecom and Innove are contingently liable for various claims arising in the ordinary conduct of business and certain tax assessments which are either pending decision by the courts or are being contested, the outcome of which are not presently determinable. In the opinion of management and legal counsel, the eventual liability under these claims, if any, will not have a material or adverse effect on the Globe Groups financial position and results of operations. There are no new material legal claims and no developments on previously disclosed legal cases for this quarter.
9. Earnings Per Share Globe Groups earnings per share amounts were computed as follows:
Three Months Ended June 30 2006 2007 Net income attributable to common shareholders for basic earnings per share Add dividends on preferred shares Net income attributable to common shareholders for diluted earnings per share Weighted average number of shares for basic earnings per share Dilutive shares arising from: Convertible preferred shares Stock options Adjusted weighted average number of common stock for diluted earnings per share Basic earnings per share Diluted earnings per share Six Months Ended June 30 2006 2007
(Unaudited, In Thousand Pesos and Number of Shares, Except Per Share Figures)
P3,825,157 = 12,874
=2,289,510 P 16,582
P6,399,461 = 25,200
=5,726,331 P 32,545
3,838,031 132,126 603 580
2,306,092 131,968 871 193
6,424,661 132,115 601 589
5,758,876 131,937 908 180
133,309 P28.95 = P28.79 =
133,032 =17.35 P =17.33 P
133,305 P48.44 = P48.20 =
133,025 =43.40 P =43.29 P
-710. Risk Management and Financial Instruments
10.1. General Globe Group adopts a risk management approach that systematically views the risks that could prevent the Globe Group from achieving its objectives. These policies are not intended to eliminate risk but to manage it in such a way that opportunities to deliver the Globe Groups objectives are identified, uncertainties are managed, efficiency and effectiveness of processes are achieved, profits are maximized and losses are minimized. Globe Group risk management takes place in the context of the normal business processes such as strategic planning, business planning, operational and support processes. The application of these policies is the responsibility of the BOD through the Chief Executive Officer. The Chief Financial Officer and concurrent Chief Risk Officer champions and oversees the entire risk management function supported by a risk management unit. Risk owners have been identified for each risk and they are responsible for coordinating and continuously improving risk strategies, processes and measures on an enterprise-wide basis in accordance with established business objectives. The risks are managed through the delegation of management and financial authority and individual accountability as documented in employment contracts, consultancy contracts, letters of authority, letters of appointment, performance planning and evaluation forms, key result areas, terms of reference and other policies that provide guidelines for managing specific risks arising from the Globe Groups business operations and environment. The succeeding discussion focuses on Globe Groups financial risk management. 10.2. Financial Risk Management Objectives and Policies The main purpose of the Globe Groups dealings in financial instruments is to fund its operations and capital expenditures. The main risks arising from the use of financial instruments are liquidity risk, foreign currency risk, interest rate risk, and credit risk. Globe Telecom also enters into derivative transactions, the purpose of which is to manage the currency and interest rate risk arising from its financial instruments. Globe Telecoms BOD reviews and approves the policies for managing each of these risks. The Globe Group monitors market price risk arising from all financial instruments and regularly reports financial management activities and the results of these activities to the BOD. The Globe Groups risk management policies are summarized below: 10.2.1. Interest rate risk The Globe Groups exposure to market risk for changes in interest rates relates primarily to its long-term debt obligations. Please refer to table presented under 10.2.5. Liquidity Risk. Globe Telecoms policy is to manage its interest cost using a mix of fixed and variable rate debt.
-8Globe Telecoms policy was revised in 2006, to target a ratio of between 31-62% fixed rate United States Dollar (USD) debt to total USD debt, and between 44-88% fixed rate PHP debt to total PHP debt. To manage this mix in a cost-efficient manner, Globe Telecom enters into interest rate swaps, in which Globe Telecom agrees to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount. As of June 30, 2007, after taking into account the effect of currency and interest rate swaps, 36% and 57% of the Globe Groups USD and PHP borrowings, respectively, are at a fixed rate of interest. The following table demonstrates the sensitivity of income before tax as of June 30, 2007 to a reasonably possible change in interest rates, with all other variables held constant. Increase/decrease in basis points USD PHP +5 bps -5 bps +100 bps -100 bps Effect on income before tax Increase (decrease) (In Thousand Pesos) (P2,858) = 2,910 61,708 (63,815)
The Globe Groups other financial instruments that are exposed to interest rate risk are cash and cash equivalents, AFS investments and held-to-maturity (HTM) investments. These mature in less than a year and are subject to market interest rate fluctuations. The Globe Groups other financial instruments which are non-interest bearing and therefore not subject to interest rate risk are receivables, accounts payable and accrued expenses and other long-term liabilities. 10.2.2. Foreign exchange risk The Globe Groups foreign exchange risk results primarily from movements of the PHP against the USD with respect to USD-denominated financial assets (such as cash and cash equivalents and short-term investments) and USD-denominated financial liabilities. Majority of revenues are generated in PHP, while substantially all of capital expenditures are in USD. In addition, 25% of debt as of June 30, 2007 are denominated in USD.
-9Information on the Globe Groups foreign currency-denominated monetary financial assets and liabilities and their PHP equivalents are as follows:
June 30 2007 (Unaudited) Assets Cash and cash equivalents Short-term investments Receivables Prepayments and other current assets Liabilities Accounts payable and accrued expenses Long-term debt Other long-term liabilities 2006 (Unaudited) (In Thousands) $114,709 61,099 40 175,848 = P6,104,817 3,251,702 2,130 9,358,649 December 31 2006 (Audited)
$48,635 14,634 60,636 137 124,042
P2,249,196 = 676,784 2,804,168 6,346 5,736,494
$140,430 88 53,849 750 $195,117
=6,887,362 P 4,326 2,641,048 36,774 9,569,510
88,763 182,869 23,066 294,698
4,104,915 8,456,941 1,066,729 13,628,585
58,918 551,750 25,028 635,696
3,135,630 29,364,136 1,332,000 33,831,766
88,118 492,199 23,679 603,996
4,321,763 24,139,882 1,161,337 29,622,982
Net foreign currency-denominated $408,879 =20,053,472 P liabilities $170,656 P7,892,091 = $459,848 P24,473,117 = Notional amount of currency derivatives* $232,550 P = $213,863 P = $181,029 = P *Refer to Note 10.3 for the details of notional amounts (which were added regardless of position).
The following table demonstrates the sensitivity to a reasonably possible change in the USD exchange rate, with all other variables held constant, of the Globe Groups income before tax (due to changes in the fair value of financial assets and liabilities). Increase/decrease in Peso to US Dollar rate +12.5 centavos -12.5 centavos Effect on income before tax (In Thousand Pesos) (P15,503) = 15,503
In addition, as of June 30, 2007, the consolidated expected future payments on foreign currency-denominated purchase orders related to capital projects amounted to USD86.14 million. The settlement of these liabilities is dependent on the achievement of project milestones and payment terms agreed with the suppliers and contractors. Foreign exchange exposure assuming a +/- 12.50 centavos movement in PHP to USD rate on commitments amounted to =10.77 million gain or loss. P In 2006, the Globe Group revised its foreign exchange risk management policy. The policy is to hedge its foreign currency denominated debt such that it maintains a fully hedged balance sheet position, after taking into account expected USD cash, USD swaps and expected USD revenues. Globe Telecom enters into short-term foreign currency forwards and long-term foreign currency swap contracts in order to achieve this target. As of June 30, 2007, USD debt that has been swapped to PHP and PHPdenominated loans amounted to approximately 81% of the total debt.
- 10 10.2.3. Credit risk Applications for postpaid service are subjected to standard credit evaluation and verification procedures. The Credit Management unit of the Globe Group continuously reviews credit policies and processes and implements various credit actions, depending on assessed risks, to minimize credit exposure. Receivable balances of postpaid subscribers are being monitored on a regular basis and appropriate credit treatments are applied at various stages of delinquency. Likewise, net receivable balances from carriers of traffic are also being monitored and subjected to appropriate actions to manage credit risk. With respect to credit risk arising from other financial assets of the Globe Group, which is comprised of cash and cash equivalents, available for sale financial assets, and certain derivative instruments, the Globe Group's exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments. Globe Group's investments are comprised of short term bank deposits and government securities. Credit risk from these investments is managed on a group basis. For its investments with banks, the Globe Group has a counterparty risk management policy which allocates investment limits based on counterparty credit rating and credit risk profile. Globe Group makes a quarterly assessment of the credit standing of its investment counterparties, and allocates investment limits based on size, liquidity, profitability, and asset quality. For investments in government securities, these are denominated in local currency and are considered to be relatively risk- free. The usage of limits is regularly monitored. For its derivative counterparties, Globe Group deals only with counterparty banks with investment grade ratings. Credit ratings of derivative counterparties are reviewed quarterly. The Globe Group has not executed any credit guarantees in favor of other parties. There is also no concentration of credit risk within the Globe Group. The table below shows the aging analysis of the Globe Groups receivables as of June 30, 2007.
Neither Past Due Nor Impaired Wireless receivables: Consumer Corporate SME Wireline receivables: Consumer Corporate SME Traffic receivables Foreign Local Other receivables Total Past Due But Not Impaired Less than 30 days 31 to 60 61 to 90 More than days days 90 days (Unaudited and In Thousands Pesos) = P49,349 41,850 19,484 110,683 35,216 118,776 17,261 171,253 = P281,936 = P17,480 32,119 5,760 55,359 22,557 98,292 9,442 130,291 = P185,650 = P134,494 219,776 55,912 410,182 358,396 2,329 360,725 = P770,907 Impaired Financial Assets
Total
= P753,956 222,323 134,709 1,110,988 176,842 197,410 98,547 472,799 1,986,653 444,194 2,430,847 252,969 = P4,267,603
= P191,474 111,985 20,966 324,425 65,029 187,925 31,993 284,947 = P609,372
= P921,405 159,990 170,104 1,251,499 261,731 286,552 107,396 655,679 51,596 178,042 229,638 26,019 = P2,162,835
= P2,068,158 788,043 406,935 3,263,136 561,375 1,247,351 266,968 2,075,694 2,038,249 622,236 2,660,485 278,988 = P8,278,303
- 11 10.2.4. Impairment assessment Full allowance for impairment losses is provided for receivables from permanently disconnected wireless and wireline subscribers. Permanent disconnections are made after a series of collection steps following nonpayment by postpaid subscribers. Such permanent disconnections generally occur within a predetermined period from statement date. For wireless postpaid subscribers, the allowance for impairment losses is determined based on the results of the net flow to write-off methodology. Net flow tables are derived from account-level monitoring of subscriber accounts between different age brackets, from current to 1 day past due to 210 days past due. The net flow to writeoff methodology relies on the historical data of net flow tables to establish a percentage (net flow rate) of subscriber receivables that are current or in any state of delinquency as of reporting date that will eventually result in write-off. The allowance for impairment losses is then computed based on the outstanding balances of the receivables as of balance sheet date and the net flow rates determined for the current accounts and each delinquency bracket. For active residential and business wireline voice subscribers, full allowance is generally provided for outstanding receivables that are past due by 90 and 150 days, respectively. Full allowance is likewise provided for receivables from wireline data corporate accounts that are past due by 150 days. Regardless of the age of the account, additional impairment losses are also made for wireless and wireline accounts specifically identified to be doubtful of collection when there is information on financial incapacity after considering the other contractual obligations between the Globe Group and the subscriber. For traffic receivables, impairment losses are made for accounts specifically identified to be doubtful of collection regardless of the age of the account. Full allowance is generally provided after review of the status of settlement with the carriers for net receivables not settled within industry observed settlement periods. Other receivables from dealers and credit card companies are provided with allowance for impairment losses if specifically identified to be doubtful of collection regardless of the age of the account. 10.2.5. Liquidity risk The Globe Group seeks to manage its liquidity profile to be able to finance capital expenditures and service maturing debts. To cover its financing requirements, the Globe Group intends to use internally generated funds and available long-term and short-term credit facilities. As of June 30, 2007, Globe Group has available uncommitted short-term credit facilities of USD39.00 million and =6,600.00 million. P The Globe Group currently has no committed long-term facilities.
- 12 As part of its liquidity risk management, the Globe Group regularly evaluates its projected and actual cash flows. It also continuously assesses conditions in the financial markets for opportunities to pursue fund raising activities, in case any requirements arise. Fund raising activities may include bank loans, export credit agency facilities and capital market issues.
- 13 The following table shows information about the Globe Groups financial instruments as of June 30, 2007 that are exposed to interest rate risk and presented by maturity profile including forecasted interest payments for the next five years (in thousands).
<1 year Liabilities: Long-term debt Fixed rate USD notes Interest rate Philippine peso Interest rate Floating rate USD notes Interest rate >1-<2 years >2-<3 years >3-<4 years >4-<5 years >5 years Total (in USD) Total (in PHP) Debt Issuance Carrying Value Costs (in PHP) Fair Value (in PHP)
$14,749 6.44% - 6.55% =1,978,350 P 8.65% - 10.72%
$11,116 6.44% =4,300,000 P 8.65% - 11.7%
$582 6.44% =1,350,000 P 8.65% - 9% $32,222 Libor+0.85%
$ =290,000 P 16.00% $37,222 Libor + 0.85%
$ =6,317,000 P 5.97%-16.00% $5,000
$ = P $
$26,447 156,699
=1,223,095 P 14,235,350 7,246,715
= P 45,900 13,232
= P1,223,095 14,189,450 7,233,483
=1,241,594 P 15,390,352 7,376,384
$46,834 $35,421 Libor+1.375% Libor + 0.85% Libor+1.75% Libor+1.20% Libor+3.20% 3mos or 6mos Libor+1.20% Libor + 0.43% Libor+0.85% margin (rounded 3mos or 6mos to 1/16) Libor + 0.43% margin (rounded to 1/16) =706,026 P
Philippine peso Interest rate
Mart 1 + 1.00% margin
=1,302,873 P =2,496,923 P Mart 1 + 1.30% margin; Mart 1 + 1.00% margin Mart 1 + 1.00% 3 mo Mart 1 + 3 mo Mart + 1.375% margin 1.30% margin
=248,462 P Mart 1 + 1.00% margin
=5,800,000 P Mart1 + 1.50% margin Mart 1 + 1.10% margin 3mo Mart 1 + 1.30% margin
= P
10,554,283
21,358
10,532,925
10,532,925
$183,146 Interest Expense* P2,489,271 = =2,016,838 P =1,294,072 P = P1,004,891 * Used month-end Libor and Philippine Dealing and Exchange Corporation (PDEX) rates =756,344 P = P
= P33,259,443 = P7,561,416
=80,490 P = P
=33,178,953 =34,541,255 P P = P = P
- 14 -
The following tables present the maturity profile of the Globe Groups other liabilities and derivative instruments (undiscounted cash flows including swap costs payments/receipts) as of June 30, 2007. Other Liabilities:
Less than 1 year = P15,062,626 40,741 = P15,103,367
On demand Accounts payable and accrued expenses Other long-term liabilities = P901,634 = P901,634
1 to 2 years = P 81,102 = P81,102
2 to 3 years = P 88,443 = P88,443
3 to 4 years = P 96,447 = P96,447
4 to 5 years = P 105,177 = P105,177
Over 5 years = P 709,263 = P709,263
Total = P15,964,260 1,121,173 = P17,085,433
Derivative Instruments:
2007 Receive Projected Swap Coupons: Currency Swaps Principal Only Swaps Interest Rate Swaps = P 29,077 P1,662 = 72,443 = P 54,719 P818 = 128,948 = P 29,108 P = 95,421 = P = P 70,834 = P = P 38,190 = P = P 10,239 Pay Receive 2008 Pay 2009 Receive Pay 2010 Receive Pay Receive 2011 Pay 2012 and beyond Receive Pay
2007 Receive Projected Principal Exchanges*: Currency Swaps Principal Only Swaps Forwards (Deliverable and Nondeliverable) $833 P15,300 P41,354 = $833 10,000 Pay Receive
2008 Pay =41,354 P 562,200 Receive $ 10,000
2009 Pay = P 562,125 Receive $ 5,000
2010 Pay = P 280,675 Receive $ 15,000
2011 Pay = P 842,075
2012 and beyond Receive $ 5,000 Pay = P 281,650
*Projected principal exchanges represent commitments to purchase USD for payment of USD debts with the same maturities. Nondeliverable instruments are shown at gross values.
- 15 10.3. Derivative Financial Instruments The Globe Groups freestanding and embedded derivative financial instruments are accounted for as hedges or transactions not designated as hedges. The table below sets out information about the Globe Groups derivative financial instruments and the related fair value:
June 30, 2007 (Unaudited) Notional Derivative Amount Asset (In Thousands)
Notional Amount Derivative instruments designated as hedges: Cash flow hedges: Interest rate swaps Currency and cross currency swaps Derivative instruments not designated as hedges: Freestanding: Nondeliverable forwards Currency swaps and cross currency swaps Interest rate swaps Embedded: Embedded forwards Embedded options Net
* ** Buy position: USD80,000; Sell position: USD 80,000 Buy position: USD 7,014; Sell position: USD 18,285
Derivative Liability
$37,066 833
P =
P14,652 =
P = 4,520
160,000* 45,833 11,000 25,299** 585***
2,000,000
16,935 115,384 49,795 2 P196,768 =
28,094 691,069 42,098 20,743 P786,524 =
*** All embedded options are long call positions.
Notes Derivative instruments designated as hedges: Cash flow hedges: Interest rate swaps Currency and cross currency swaps Derivative instruments not designated as hedges: Freestanding: Nondeliverable forwards Currency swaps and cross currency swaps Interest rate swaps Sold currency call options (including premiums receivable) Embedded: Call option on 2012 Senior Notes Embedded forwards Embedded options Net
* ** Buy position: USD 3,470; Subsidized: USD 11,500 All embedded options are long call positions
Notional Amount
June 30, 2006 (Unaudited) Notional Derivative Amount Asset (In Thousands)
$22,130 74,675
= P
=21,025 P 6,629
= P 389,187
14,970* 75,652 23,000 14,000 5.3 300,000 978 754**
1,000,000
16,293 21,295 99,169 791,914 (1,143) 220 =955,402 P
210,613 31,070 411 6,030 =637,311 P
- 16 December 31, 2006 (Audited) Notional Derivative Amount Asset (In Thousands)
Notes Derivative instruments designated as hedges: Cash flow hedges: Interest rate swaps Currency and cross currency swaps Derivative instruments not designated as hedges: Freestanding: Nondeliverable forwards Currency swaps and cross currency swaps Interest rate swaps Sold currency call options (including premiums receivable) Embedded: Call option on 2012 Senior Notes Embedded forwards Embedded options Net
* ** All embedded options are long call positions
Notional Amount
$12,098 55,807
= P
=8,644 P
= P 574,654
74,000* 73,742 17,000 3,000 5.3 293,540 6,416 898**
2,000,000
23,526 139,178 1,425,270 30,029 20 =1,626,667 P
66,633 402,365 17,705 24,766 =1,086,123 P
Buy position: USD 5,000;Sell position: USD 40,000; Subsidized: USD 29,000
10.3.1. The table below also sets out information about the Globe Groups derivative instruments as of June 30, 2007 that were entered into to manage interest and foreign exchange risks related to the long-term liabilities shown under liquidity risk (in thousands).
<1 year Derivatives: Currency Swaps: Notional amount Weighted swap rate Pay fixed rate Cross-Currency Swaps: Floating-Fixed Notional amount Pay-fixed rate Receive-floating rate Weighted swap rate Floating-Floating Notional amount Pay-floating rate Receive-floating rate Weighted swap rate Interest Rate Swaps Fixed-Floating Notional Peso Notional USD Pay-floating rate Receive-fixed rate Floating- Fixed Notional Peso Notional USD Pay-fixed rate Receive-floating Rate $10,000 >1-<2 years $10,000 >2-<3 years $5,000 >3-<4 years $15,000 >4-<5 years $5,000 >5 years Total $45,000 P56.194 = 4.62%-6.00% $833 11.4% USD Libor P49.760 = $833 Mart + 1.50% USD Libor P49.490 = $21,623 $5,000 Libor+ 4.23%Mart+1.375% 9.75%-11.7% $21,623 $43,066 USD 2.31% - 4.84%, PHP 9.75% USD Libor Mart+1.375%
$833
$833
=1,000,000 P
$5,000
$13,066
=1,000,000 P $10,000
$10,000
$10,000
- 17 10.4. Fair Value Changes on Derivatives The net movements in fair value changes of all derivative instruments are as follows:
Six Months Ended 2007 2006 (Unaudited and In Thousand Pesos) =540,544 P =817,145 P (43,382) (1,501,987) (1,004,825) (415,069) (P589,756) = 27,705 (444,793) 400,057 81,966 =318,091 P
At January 1 Net changes in fair value of derivatives: Designated as accounting hedges Not designated as accounting hedges Less fair value of settled instruments At June 30
11. Segment Reporting The Globe Groups reportable segments consist of: Wireless Communications Services - represents cellular telecommunications services that allow subscribers to make and receive local, domestic long distance and international long distance calls to and from any place within the coverage area. Revenues principally consist of one-time registration fees, fixed monthly service fees for postpaid, subscription fees for prepaid, revenues from value-added services such as text messaging, content downloads and web browsing, proceeds from sale of phonekits, handsets and other phone accessories, one-time allocation of upfront fees for the excess of selling price of SIM packs over the preloaded airtime and per minute airtime and toll fees for basic services which vary based primarily on the monthly volume of calls and the network on which the call terminates and exchange rate movements to a certain extent. Wireline Communications Services - represents fixed line telecommunications services which offer subscribers local, domestic long distance and international long distance services in addition to a number of value-added services in various service areas covered by the Provisional Authority granted by the National Telecommunications Commission (NTC). Revenues consist principally of fixed monthly basic fee for service and equipment, one-time fixed line service connection fee, value-added service charges, and toll fees for domestic and international long distance traffic usage for voice and data services and internet subscription fees of wireline subscribers. This also includes a variety of telecommunications services tailored to meet the specific needs of corporate communications such as leased lines, Very Small Aperture Terminal (VSAT), international packet-switching services, broadband, and internet services.
- 18 The Globe Groups segment information follows:

June 30, 2007 (Unaudited) Wireless Wireline Communications Communications Services Services Eliminations Service revenues Nonservice revenues Intersegment revenues Interest income Other income - net Total revenue General, selling and administrative Depreciation and amortization Cost of sales Financing costs Impairment losses and others Equity in net earnings of an associate and a joint venture Income (loss) before income tax Benefit from (provision for) income tax Net income (loss) Other segment information Capital expenditure =4,657,813 P = P1,181,596 = P = P5,839,409 (5,687) 13,139,478 (3,386,626) P9,752,852 = (248,861) 87,200 (P161,661) = (3,166,530) (P3,166,530) = (5,687) 9,724,087 (3,299,426) P6,424,661 = P28,313,203 = 1,379,863 666,732 253,634 3,578,517 34,191,949 (8,432,023) (6,933,859) (2,348,498) (3,196,904) (135,500) P3,308,034 = 7,801 1,386 61,449 67,412 3,446,082 (2,149,262) (1,290,510) (36,563) (70,244) (148,364) P = (668,118) (3,468,793) (4,136,911) 741,317 (161,086) 390,150
Consolidated P31,621,237 = 1,387,664 315,083 177,136 33,501,120 (9,839,968) (8,385,455) (1,994,911) (3,267,148) (283,864)
Service revenue Non-service revenue Inter-segment revenue Interest income Other income - net Total revenue General, selling and administrative Depreciation and amortization Financing costs Cost of sales Provisions Equity in net earnings of an associate and joint venture Income before income tax Provision for income tax Net income Other segment information Capital expenditure
Wireless Communications Services =25,227,996 P 1,531,815 189,499 394,528 1,820,383 29,164,221 (7,523,596) (6,579,307) (2,968,557) (2,280,173) (51,011) (3,300) 9,758,277 (2,580,787) =7,177,490 P =4,189,934 P
June 30, 2006 (Unaudited) Wireline Communications Services Eliminations =3,219,407 P = P 5,124 59,022 (248,521) 40,448 7,805 (1,657,691) 3,331,806 (1,906,212) (1,722,325) 613,747 (1,237,405) (184,593) (4,001) (33,782) (4,009) (239,288) 95,005 (32,552) =62,453 P =974,566 P (1,481,067) (P1,481,067) = = P
Consolidated = P28,447,403 1,536,939 434,976 170,497 30,589,815 (8,632,174) (8,001,305) (2,972,558) (2,317,964) (290,299) (3,300) 8,372,215 (2,613,339) =5,758,876 P = P5,164,500
- 19 The segment assets and liabilities as of June 30, 2007 and 2006 and December 31, 2006 are as follows (in thousand pesos):
June 30, 2007 (Unaudited) Wireless Wireline Communications Communications Services Services Eliminations P121,597,548 = P21,110,615 = (P22,184,639) = 60,157 P121,657,705 = P59,587,834 = P21,110,615 = P3,512,051 = (P22,184,639) = (P6,004,191) =
Segment assets Investments in an associate and a joint venture under equity method Consolidated total assets[1] Consolidated total liabilities[1]
Consolidated P120,523,524 = 60,157 P120,583,681 = P57,095,694 =
Segment assets Investment in associates and joint venture under equity method Consolidated total assets[1] Consolidated total liabilities[1]
Wireless Communications Services =123,879,723 P 41,148 = P123,920,871 P66,679,978 =
June 30, 2006 (Unaudited) Wireline Communications Services Eliminations =18,960,723 P (P17,734,482) = =18,960,723 P =2,299,252 P (P17,734,482) = (P1,883,032) =
Consolidated =125,105,964 P 41,148 =125,147,112 P =67,096,198 P
Segment assets Investments in an associate and a joint venture under equity method Consolidated total assets[1] Consolidated total liabilities[1]
[1]
December 31, 2006 (Audited) Wireless Wireline Communications Communications Services Services Eliminations =125,242,295 P =17,463,845 P (P18,965,502) = 37,332 P125,279,627 = =63,070,580 P =17,463,845 P =1,974,920 P (P18,965,502) = (P2,953,817) =
Consolidated =123,740,638 P 37,332 =123,777,970 P =62,091,683 P
Consolidated total assets and liabilities do not include deferred income taxes.
12. Notes to Condensed Consolidated Statements of Cash Flows The principal noncash transactions are as follows:
December 31 June 30 2006 2006 2007 (Unaudited) (Audited) (Unaudited) (In Thousand Pesos) Increase (decrease) in liabilities related to the acquisition of property and equipment Capitalized ARO Dividends on preferred shares
(P936,153) = 56,296
(P232,099) = 41,383
=2,246,425 P 281,557 64,669
- 20 13. Capital Management The primary objective of the Globe Groups capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business and maximize shareholder value. The Globe Group monitors its use of capital using leverage ratios, such as debt to total capitalization and makes adjustments to it in light of changes in economic conditions and its financial position. The management, upon review of its dividend policy, recommended an increase in the dividend payment to stockholders. On July 31, 2006, Globe Telecoms BOD approved an amendment to its dividend policy, increasing the pay-out from 50% to 75% of prior years income. As of June 30, 2007, the ratio of debt to total capitalization was at 36%. The Globe Groups policy is to target a ratio of 53% by 2010.
14. Event After the Balance Sheet Date On August 10, 2007, the BOD approved the declaration of the second semi-annual cash dividends in 2007 of P4,360.65 million (P33.00 per common share) to common stockholders of record as of = = August 29, 2007 payable on September 14, 2007.
ANNEX II Globe Telecom, Inc. and Subsidiaries Balance Sheet Accounts Variance Analysis (June 30, 2007 vs. June 30, 2006)
Assets Current
a) Cash and Cash Equivalents Decreased by P4.33 billion attributable to cash flows used in financing and investing activities mainly due to additional capital expenditures, payments of dividends and full redemption of Senior Notes net of proceeds on loan borrowings and cash provided by operating activities due to better operating performance during the intervening period. b) Short-term investments , Available-for-sale investments and Held-to-maturity investments Increased by P1.42 billion mainly due to the group's higher amount of money market placements of beyond 90 days. c) Receivables - net Down by 7% or P442.04 million attributable to higher traffic receivable collections from various carriers during the intervening period. d) Inventories and Supplies Increased by 16% or P214.75 million due to higher units purchased over sales of CDMA telephone sets and modem for Innove's wireless broadband and telephone services and increase in wireline spare parts inventories offset by net issuance of handset, phone kits and simpacks as a result of Globes various promotional offers . e) Derivative Assets Decreased by P755.40 million, mainly attributable to derecognition of the embedded bond call option resulting from full settlement and early redemption of the 2012 Senior Notes in April 2007. f) Prepayments and other current assets Down by 3% or P62.97 million attributable to lower interest accrual on maturing placements and lower creditable tax offset partly by the higher value-added taxes (VAT) for the additional purchases and services availed in support of the network expansion and 3G rollout and to assist current operations.
Noncurrent
g) Property and Equipment - net Decreased by 2% or P1.99 billion due to depreciation and impact of change on the Estimated Useful Life (EUL) of certain network elements resulting to a higher depreciation, net of additional purchases and project accruals for the additional network assets put into service and the 3G sites rollout. h) Investment Property - net Increased by 21% or P52.27 million due to the additional area in Innove IT Plaza leased to third parties, net of the related depreciation. i) Intangible Assets - net Down by 2% or P21.78 million due to amortization net of the additional acquisitions of various computer software and telecom equipment licenses and other value added software applications in support of the expanded network and subscriber base. j) Investments in an Associate and a Joint Venture Up by 46% or P19.01 million attributable to additional investments in Bridge Mobile Alliance net of equity in net losses during the period. k) Deferred Income Tax - net Pertains to adjustment on Innoves reversal of certain deferred income tax items which have been realized during the intervening period. l) Derivative Assets Down by 19% or P3.24 Decrease in derivative assets is due to reduced gain on MTM value of interest rate swap contracts. m) Other Noncurrent Assets Up by 106% or P1.33 billion due to higher deferred VAT on capital asset purchases and advances to suppliers and contractors for the additional equipment bought for network expansion and 3G rollout.
Liabilities Current
n) Accounts payable and Accrued Expenses Up by 6% or P931.81 million due to accrual of obligation to suppliers for high-value 3G equipment shipments coupled with net accrual to local and foreign suppliers in support of network expansion and 3G rollout and to assist current operations. o) Provisions Increased by 24% or P48.74 million attributable to the additional accrual made on probable regulatory claims and assessments. p) Derivative Liabilities Increased by 191% or P516.52 million to the reclassification of total MTM value of the 2012 Senior Notes related swaps from noncurrent to current classification in March 2007. There is also a significant increase in the MTM value loss of outstanding freestanding derivative instruments. q) Income Taxes Payable Increased by 57% or P786.19 million attributable to higher taxable revenues during the second quarter of 2007 compared to the same period in 2006. r) Unearned Revenues Up by 2% or P39.07 million caused by higher sales over consumption of prepaid airtime and fixed line credits.
Noncurrent
Deferred Tax Liabilities Pertains to adjustment on Globe's provision for deferred income tax. The adjustment to adjustment mainly coming from higher unrealized foreign exchange gain coupled with a higher depreciation claims under sum-of-the-years digit method used for tax reporting versus straight line depreciation used in the books and decrease in allowance of trade receivables for write-off during the intervening period. t) Long-term Debt (current and noncurrent) Net decrease of P12.20 billion is attributable to the April 2007 redemption of 2012 Senior Notes coupled with scheduled loan installment repayments to foreign and local creditors in July to December 2006 and up to June 2007 offset by various loan availments during the period. u) Derivative Liabilities Decreased by P367.31 million due to the MTM reclassification of 2012 Senior Notes related swaps to current as a result of the early redemption in April 2007. v) Other Long-term Liabilities (current and noncurrent) Up by 9% or P240.07 million due to the additional accrual and accretion of asset retirement obligation cushioned by amortization of C2C related liability. s)
Equity
w) Paid-up Capital Increased by P153.76 million mainly attributable to the issuance of Globe shares due to exercised stock options triggered by favorable increases in Globe's share price during the intervening period. x) Cost of Share-Based Payments Increase represents additional compensation expense over value of stock options exercised during the intervening period. y) Cumulative Translation Adjustment (CTA) Lower translation loss of 106% or P223.83 million due to dedesignation of certain swap instruments from cash flow hedge to nonhedge classification resulting to transfer of related fair value gain/loss to profit and loss. z) Retained Earnings Increased by 19% or P4.03 billion attributable to net income during the intervening period reduced by dividends declaration to common stock shareholders.
Globe Telecom, Inc. and Subsidiaries Breakdown of Liabilities

A. Accounts Payable Accrued Project Cost Accrued Expenses Traffic Settlements Dividends Payable 06/30/2007 6,017.97 3,668.07 4,698.10 1,580.12 15,964.26 06/30/2006 5,418.39 2,688.86 4,694.78 2,230.42 15,032.45

Globe SEC 17Q June 2007

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SEC Number File Number

GLOBE TELECOM, INC.

SEC FORM 17-Q

SEC Form 17Q - 2Q 2007

SEC Form 17Q - 2Q 2007

GLOBE TELECOM, INC. AND SUBSIDIARIES

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS

SEC Form 17Q - 2Q 2007

SEC Form 17Q - 2Q 2007

The following is a summary of the key sections of this MD&A:

SEC Form 17Q - 2Q 2007

OVERVIEW OF OUR BUSINESS

SEC Form 17Q - 2Q 2007

SEC Form 17Q - 2Q 2007

SEC Form 17Q - 2Q 2007

SEC Form 17Q - 2Q 2007

KEY PERFORMANCE INDICATORS

SEC Form 17Q - 2Q 2007

SEC Form 17Q - 2Q 2007

FINANCIAL AND OPERATIONAL RESULTS GROUP FINANCIAL HIGHLIGHTS

For the First Half ended 30 June 2007

SEC Form 17Q - 2Q 2007

GROUP RESULTS OF OPERATIONS

14,960 14,341 619 1,677 1,671 6 16,637

14,733 13,972 761 1,639 1,637 2 16,372

29,693 28,313 1,380 3,316 3,308 8 33,009

26,760 25,228 1,532 3,224 3,219 5 29,984

SEC Form 17Q - 2Q 2007

QoQ Change (%) 2% 4% 3%

7,648 6,693 14,341

7,523 6,449 13,972

15,171 13,142 28,313

14,903 10,325 25,228

SEC Form 17Q - 2Q 2007

SEC Form 17Q - 2Q 2007

13,279,095 9,282,321 3,996,774

SEC Form 17Q - 2Q 2007

SEC Form 17Q - 2Q 2007

SEC Form 17Q - 2Q 2007

SEC Form 17Q - 2Q 2007

SEC Form 17Q - 2Q 2007

Domestic and international remittances

SEC Form 17Q - 2Q 2007

SEC Form 17Q - 2Q 2007

QoQ Change (%) 2% 1% 1% 29%

389,506 1,094 969 1.51% 89,299

380,573 1,088 960 1.60% 69,170

389,506 1,090 964 1.50% 89,299

356,441 1,149 1,014 2.09% 30,285

SEC Form 17Q - 2Q 2007

158 219 148 525

326 410 311 1,047

Includes revenues from value-added services and corporate internet services.

SEC Form 17Q - 2Q 2007

OTHER GLOBE GROUP REVENUES

Q2 2007 3,695 23% 557 491 66 7.44

SEC Form 17Q - 2Q 2007

SEC Form 17Q - 2Q 2007

SEC Form 17Q - 2Q 2007

SEC Form 17Q - 2Q 2007

(729) (222) 17 395 (539) 140 (53) (452)

(1,001) (521) (1,413) 207 (2,728) 175 172 (2,381)

(1,730) (743) (1,396) 602 (3,267) 315 119 (2,833)