Ayala Corporation’s net income in the second quarter of 2008 reached P3.7 billion, 38% higher than previous quarter’s net income of P2.7 billion, but 38% lower than net income in the second quarter of 2007. Net income for the first half reached P6.3 billion, 45% lower than the P11.5 billion in the same period last year. Lower earnings during the period were attributed mainly to significantly lower capital gains and lower equity earnings from its key operating units.

Ayala booked P2.7 billion in capital gains from the sale of 3.8 million common shares in Globe. The gains realized were substantially lower than the P7-billion gain booked in the first half of last year. Equity earnings from operating units declined by 23% as net income of certain operating units softened amidst a more challenging economic environment.

“The pressures of rising oil and commodity prices and tightening credit globally have created a much more challenging operating environment,” said Ayala president and chief operating officer Fernando Zobel de Ayala. “electronarnings have been under some pressure this year, we continue to see strong underlying demand in each of our key businesses, particularly in real estate, consumer and corporate loans, telecom services, auto sales, and electronics.”

Ayala Land reported a 37% growth in net income with consolidated revenues up 25% year-on-year buoyed by the sustained growth of its residential and construction businesses. Its strategic landbank management, corporate business, and operations in Visayas and Mindanao also contributed to revenue improvement. ALI’s residential development revenues grew by 12% with unit take-up during the period up by 13% versus the same period last year. Its shopping center revenues remained stable while corporate business revenues registered 8% growth. Ayala Land spent about P7.9 billion in capital expenditure in the first half, 14% higher than in the first half of 2007. The company expects to substantially catch up with its capital expenditure program in the second half of the year.

Its banking unit, Bank of the Philippine Islands (BPI), recently reported net income in the second quarter of P2.3 billion, exceeding first quarter net income of P1.5 billion. However, net income in the first half of the year of P3.8 billion was 33% lower than the P5.7 billion recorded in the first semester of 2007. Margins and securities trading income were tighter amidst a rising interest rate environment which resulted in a 6% drop in net interest income and a 22% decline in non-interest income. Lower operating expenses, however, partly cushioned the revenue shortfall. Loan growth was resilient, expanding by 16% driven by consumer lending, particularly, retail mortgage, credit cards, and auto loans, which rose by 28%, 22% and 17%, respectively. Demand for credit was equally strong from large corporates and SMEs. BPI continued to lead in the remittance business and was awarded for the third straight year by the Bangko Sentral ng Pilipinas as the Top Commercial Bank for OFW Remittances for 2007.

Telecom unit Globe reported a 3% decline in net income in the first half. Consolidated service revenues slipped by 2% due mainly to lower wireless service revenues mitigated by a 5% increase in wireline revenues. The changing pattern in consumer spending tempered revenue growth particularly for voice and value-added services, indicating the shift in consumers’ preference for lower-cost alternatives such as SMS. Overall demand, however, for wireless communications was strong as Globe’s subscriber base expanded by 25% year-on-year, with the highest net adds of 1.5 million achieved in the second quarter. Despite an 11% increase in operating expenses, consolidated EBITDA margins remained high during the period at 62%. Improvements in revenue growth are expected in the second half as key initiatives are in place to focus on priority segments, support a more aggressive broadband roll out, and develop new growth areas. Globe also announced a special cash dividend of P50 per share to its shareholders putting total dividends this year to P125 per share, on top of the regular cash dividend of P37.50.

Equity earnings from companies under AC Capital were lower this year mainly due to a decline in earnings of Ayala Automotive Holdings Corporation, international arm AG Holdings, and one-time loss provisions at Integrated Microelectronics, Inc. (IMI). Double-digit earnings growth of Manila Water, however, partly cushioned the earnings shortfall.

Manila Water reported a 21% increase in net income in the first half of the year to P1.4 billion from P1.1 billion the prior year. Its continued focus on its capital investment plan has allowed it to consistently improve operating efficiencies. Non-revenue water declined to 20% with billed volume up 6%. MWC added 25,000 new service connections during the period in expansion areas within the East Zone. The company continues to explore opportunities beyond its concession zone. It recently signed a contract for technical consulting services with the Boracay Water and Sewerage System and was also awarded a 5-year management contract for a non-revenue water reduction project with the Saigon Water Company in Vietnam.

IMI registered a net loss of US$16 million due mainly to currency hedging-related transactions which were all fully unwound as of the end of June. Revenue growth, however, remained strong and was up 14% year-on-year due to higher volumes from its key customers. Excluding losses from the currency hedging contracts, IMI’s net income would have been up 31% year-on-year. IMI’s business prospects remain strong and the company is continuing to explore opportunities to expand its geographic footprint and enhance its capabilities through value-adding acquisitions.

Ayala’s BPO investee companies continued to generate positive performance despite tougher economic conditions. Listed customer care company eTelecare will be announcing its second quarter earnings results on August 13 (5pm US Eastern time). When it released its first quarter results last May, it provided guidance of Q208 revenues of US$72-74 million (up 18%) and net income of US$1.5-2.1 million.

Its unlisted BPO unit, Integreon, completed its acquisition of a New York-based eDiscovery company, Datum, Inc., pushing revenues up 44%, post-acquisition, and 38% on a stand-alone basis. Margins improved significantly both at the gross profit and EBITDA levels on the back of favorable foreign exchange rates and Datum’s strong performance. In the meantime, graphics and creative design outsourcer Affinity Express made major customer acquisition wins last quarter, which are ramping up to full volumes.

Ayala chairman and CEO Jaime Augusto Zobel de Ayala said, “We expect operating conditions to remain challenging for the balance of this year and perhaps into early next year as we continue to feel the pressure from higher inflation and interest rates. However, we believe the fundamentals of each of our businesses remains solid and we are optimistic that as global markets adjust and normalize, we are well-positioned, given the group’s scale and financial and market strengths, to achieve our growth targets and value creation objectives.”

The above statement refers to the disclosure submitted to the PSE and SEC today, August 11, 2008, by Rufino Luis T. Manotok, Ayala CFO and senior managing director for strategic planning.