Earnings Call: Q2 2019

Aug 1, 2019

Quarterly report

Good morning, ladies and gentlemen. Welcome to X El Axiata's earnings conference call for the first half of twenty nineteen Financial Year. My name is Albert and I will be your coordinator today. During the presentation, all participants are in a listen only mode. Instructions will be given on how to register your questions when we get to the question and answer session. As a reminder, This conference is being recorded for replay purposes. Now, we would like to turn the conference over to our host, Ms. Sundar. Please proceed. Thank you, Albert. Good morning, everyone, and welcome to the call. On behalf of the HR management team, I would like to thank all of you for taking the time to join us today. With us on the call today, we have Ba'aden, our Chief Financial Officer, Pa'aden, our Chief Commercial Officer, and Bhapuri Finance Group Head. You would hear an extensive apologies for not being able to join the call today. Now, Fatima will share the highlights of the first half of twenty nineteen which will then be followed by a clear question and answer session. I will now hand the call over to Paola. Thank you, Inda, and good afternoon, everyone. So, I think we are pleased to announce that, that our first half performance where we continue to see good traction in the market. This is the 4th consecutive quarters where we have recorded a sequential increase in service revenue. And we're also seeing a very strong growth across all financial metrics as well as our growing profitability. The continued positive momentum is a direct result of the consistent execution and implementation of our strategy. Which aim to position us as the mobile provider of choice in Indonesia. Our strategy is focused on 3 main drives, being our small brand strategy where Excel and access to different market segments with attractive data focused products, continued network investment in building our 4 g network across India. And focus on growing our ex Tiara market share. In the first half of twenty nineteen, our revenue increased 11% year on year mainly due to service revenue, which rose 15% year on year. And driving this is data revenue, which increased 29% year on year. Strong customer traction across both the exit and the Excel brands has success and the success of our upselling exercise to our customers coupled with the monetization of data actually has led to the strong growth in data revenue. Data revenue in the latest quarter now accounts 88% of service revenue. And continues to be higher than our peers, enabling us to weather the effect of declining legacy services data. Profitability growth has also seen has also been strong with EBITDA rising faster than revenue at 90% year on year due to our focus on cost efficiency with margin increasing 2.7% year on year to 38.7% in the first half year of twenty nineteen. The growth of EBITDA, coupled with savings of our depreciation expense mandate, we have seen a return to sustainable profit. Adonation Data Therapy customer has continued to respond well to our improved network as we are increasingly being recognized as the brand of choice for smartphone users. At our first half to twenty nineteen, Our smartphone customer stands at 48,900,000, a 24% growth compared to the same period last year. These make up approximately 86% of our subscriber base, which is significantly higher than the industry average. And we also continue to see 1st week of migration of stocks to 4G, where 4G starts now account more than 65% of our total subscriber base. We are pleased to report that our customer numbers continue to increase post the prepaid registration implementation in a healthy and sustainable manner. This is due to our focus on sustainable customer acquisition. And thus, we have seen our base of registered customer increased to more than 56,000,000 this quarter. Importantly, our R2 has also increased 3% this quarter. Which is evidenced by the success of our efforts in upselling our customers and monetizing data. This quarter, the XL brand saw the launch of several packages in conjunction with the Libera session. Including the extra risky package, which offers attractive cashback benefits. The access brand also expanded its product portfolio with the launch of awesome and Booster package catering to the new segment. As a result, we enjoyed a very good balance season this year. Both XL and Axis maintained a strong NPS within each of the brand segment as a segment. In parallel, we continue to ensure a high quality data experience to our customers through the ongoing roll out and upgrade of our network. But our total BTS count is now above 127,000 BTS and 340 EOB totaling more than 57,000 covering 400 and HCTs across Indonesia. Our network investment continues not only within Java, but also focused in X Java. And this has actually started for the last 3 years, which has translated to better coverage and network performance in these areas. This has also led to a stronger revenue performance outside Java, which continued to grow at an exponentially faster rate than Java and increased overall contribution to revenue. In particular, awareness of our brand improved network quality, coverage as well as innovative products has significantly increased outside Java. And we are now increasingly known as a nationwide operator. We intend to build on the strong first half of twenty nineteen We continue to focus on executing our strategy to become the preferred mobile internet operator in Indonesia. We will also continue to monitor competition in the market with a group of competition remains rational, but Our guidance for 2019 is maintained where we expect revenue to grow better than our efforts in line with the market. EBITDA margin guidance of high-30s and CapEx spend guidance for 2019 of around 7,500,000,000, which will remain focused on data network investment in 4G and continuous network improvement and modernization in and outside government. Thank you and let us now proceed to Hi. Ladies and gentlemen, we will now begin the question and answer session. From the telephone feedback. Should you need to ask more questions, you can go back Your first question comes from the line of Piyush Chowdhari from HSBC. Your line is now open. Hi. Good morning. Thanks for the presentation and congrats for the results. Two questions. Firstly, could you talk about the current competitive environment and the outlook for our pool. Secondly, in the X Java business, Could you elaborate how has been the revenue growth in the first half? And what proportion of subscribers and revenues come from Exjawa right now? Thank you. Okay, good morning. Let me take the first question regarding the current balance situation. As you can see from the results, we have pretty good first half and especially the second quarter of 2019. But I can hear from you, from you, Chris, on that there's a little bit of a change in the mind at the moment and just to be right. So what we have seen, we started from the, from Smart we've introduced a month ago, they introduced unlimited product in Indonesia. And unfortunately, you see that Angel Science will have follow-up and as well have introduced an unlimited, value proposition in Indonesia. Nothing that we are going this way of this route, but at least we see there are some changes in the market, which could take down the ARPU in the future. We are monitoring at the moment. We are not panicking and you're not guiding, but we are seeing this little bit of change in the market at the moment. Okay. On ex Java, I think since our investment for the last 2 to 3 years, I think we have seen significant, performance outside Java, right? So today X Java account for, now it's already slightly more than 20%, right, of our total revenue. And I think if you look at Q1Q, I think you'll probably see that DAVA X DAVA is actually growing at a double double digit, and I would probably say high teens, right? So on the first half of the number, actually quite significantly. So we will probably not be able to dispose the number, but So suffice to say that, we believe that we will probably gain some market share Sure. Thank you. And just on these unlimited plans, are these, you know, an RDSB limits on these plans and what price points are these launched, if you can elaborate on that? Yes, I'm not going to go into too much detail, but you're right. It's not real unlimited from AFP and there's some struggle on it. And for the starting point, it's around 80,000 will be up in the meeting for the anonymous points. Okay. Thank you. I'll come back in the queue. Question comes from the line of Colin McCallum from Credit Suisse. Your line is now open. Thanks. And congrats on the results. Two questions for me. First of all, just on I know you'd pushed up the pricing a little bit into Liberum as usual. Am I right in saying that you've tried to maintain those higher price points in some areas? Is that still being able to be maintained? That's my first question. And then my second question is, I guess, for Adlan, just obviously, the monetization's getting a bit better now. But obviously your profitability overall still a little bit low. What are you guys thinking on CapEx? I see you've maintained the CapEx guidance for this year. What are you thinking as we go forward a little bit? Is it worth investing more into the Indonesian market? Or you think these levels are about right, what's your view? Yes. Thank you, Carmen. Let me take the first question regarding the price contribution. If I compare the previous year, this year in terms of Liberum, I think we see a significant change in price increase in the market. We haven't changed surprised a lot. Yes. We have done a little bit here now, but it's not as it's been the previous year. What has been successful, this is mainly the upselling path. So Our architectural marketing machinery has worked fantastic. Meaning that we can upsell each of our customer. We can, we can actually approach each of our customer with new value position of offsetting what they have today. And we know that during the liver brand, they are more data savvy, they are more hungry for data. So we were able to offset a lot. The prices will continue what they have done so far and we continue the offsetting part as well because it has been pretty successful during the run. I'd like to see that continue into the Q3. Yes. So on your second question, I think on the CapEx side, yes, we are spending around 7,500,000,000 this year. I think the way we look at, CapEx moving forward I think, what we definitely see, there's definitely opportunity outside Java, right? Because if we look at the revenue growth, what we're seeing today is actually going faster than what we usually anticipate. Okay? So definitely there's opportunity there, right? So whether we're probably going to accelerate the investment on new coverage area, that's a potential, right? Having said that, I think, the other part that we're probably going to be a bit more tighter in our investment case is on the capacity expansion. So we we we probably set a a higher than the rate, for example, for any additional capacity expansion Yes. So and in that case, I think we would probably try and monetize more in some of the investment that we've done before, right? On a net net basis, I think, obviously, I think the actual CapEx, we can only come once we finalize the business plan. But in any case, I think there will be some compensation between coverage and capacity And I think moving forward, maybe at least at this point in time, the numbers that we're seeing that are probably at level is probably the right level of investment. Nevertheless, I think if there are opportunity, obviously, we'll probably not hesitate to put in the investment. Fair enough. Very clear. Your next question comes from the line of from CIMB. Your line is now open. Hi. Thanks for the call and congrats on a good set of results. Two questions from me. Firstly, on, the revenue growth for mobile, You talked about X Java, but could I also get the sense of the growth in Java and especially if you compare it to peers, do we know whether we are, outpacing our peers in terms of Java growth? And what do you think in terms of the notion that, that we could solve that there may be some under investment in the Java region for Excel even the focus in next job, but it's not 2 to 3 years. Second question, I wanted to ask about, the EBITDA margin, outlook going to the second half. You've done very well in the third half, despite the fact, that this network managed services contract renewal, going to the second half, do you see further improvement in the EBITDA margin, or or do you see any sort of cost pressures coming in? Those are my two questions. Thank you. Yes, I think generally, we are, let me look Davala. I think, if you look at first half, I think, both regions are actually growing, right, whether we are growing the, competitive or not, we don't have, that's it. But I think what we can see definitely in, some of the big clusters, we are we are maintaining or it's not growing our market share in some of these big factors. Nevertheless, there are some of our strong factors that are probably also under attack, right? But on a net net basis, I would say that, if relative to competitors, we believe that, we have either Mazim or has actually grown slightly, in reading Java, right? Obviously, I think the rate of growth is probably less than what we see, at Java. But I think as we as we united our strategy, Java is all about defending our market position and monetizing existing customers. Right? So we are probably staying through, to that strategy. And extra value is all about growing market share. Yeah. So So that's on your first question. 2nd question, I think, on EBITDA, if you look at EBITDA margin growth in the first half, is actually primarily driven by, also the book in revenue, right? As you can see in our numbers, right, that, our operating leverage is quite high, right? Given the, good growth that we see on the top line, it has translated into a high EBITDA as well as a high margin. So I think the key driver to to our EBITDA growth would definitely be revenue growth. If you are able to maintain the sort of revenue growth that we're seeing in the first half, I think, there's a good chance that, our margins will continue to improve. Right? But, having said that, I think, you probably have heard from Alan as well. The market is also getting more competitive, as we speak today, right? So So I I I would I would expect that that income would probably be, competition would probably testify, as compared to the first half. I think that's the indication that we're seeing today. Your next question comes from the line of prem Ziyara Jazimyan from Macquarie. Your line is now open. Hi. Thank you for the opportunity and congratulations on a good numbers. Two questions from me. First of all, Padlyn, you know, when you talked about how well you're doing outside of Java, Could you remind us on the profitability of the ex Java business? I recall at the beginning, we were planning towards pre year break even, if I'm not mistaken, how are you faring in terms of that break even process? Are we also ahead on that, or are we just ahead on a revenue front. That's one. And secondly, I know a bit further out looking, but, with regards to the Telenor Adriata proposed merger, what do you think the implications are for Excel in terms of your growth trajectory. Do you think it will accelerate it, or do you think it's gonna be, life as usual or business as usual going forward? Thank you. Yes. On your first question, Agjawa, I think, what we are actually see now in terms of a revenue growth that has actually exceeded our expectation, our initial plan, right? So so I think especially in areas where we we go with, staff himself as a a monopoly. I think the the trend that we see in those markets are quite significant. So on the revenue front, we are probably on, we are probably ahead, right? On profitability, yes, I think as Java, as we speak today, probably still not profitable, never delivered. I think what we're also doing in X Java as well today, we're also looking at the cost aspect of it, right? How do we also operate this in a more efficient manner, right? And I think we are not just looking at our network, but also all the other cost line item. Right? So, if you look at overall, I think from a profitability perspective, I think, we are still probably on track as what we have probably planned for, before, right? Just going back to what you said, right, in terms of return and all that, right? Today, as part of the shifting year, we probably have a higher credit rate, in terms of that we are probably looking at Exelba, right? So I think we are also setting ourselves a higher bar now. Given the the the shift and focus, on on on on profits and and returns. And I think, in whatever we do, we'll probably be focusing more on smart investment outside of Yes. So, Taldino, on Taldino, I think, at this point in time, I think for it is business as usual, I cannot comment much, in terms of how that's going to be moving forward, right? But, but in any case, I think when a new, as far as, we are present at least from some initial discussion. I think as much as, the most entity are also very attractive looking at the opportunities that are seen in the medium. And I believe that I think the strategy will also be similar to what we actually have and looking at opportunity to grow in, in aided, especially in our sector. Alright. What that means for us, I think it's still too early to to to comment, right, at this point in time. And then and I can still probably, the the deal is actually completed. So so I probably I'll probably just leave it at that at this point in time. Alright. Thank you. I appreciate your thoughts. Your next question comes from the line of Ranjan Sharma from JP Morgan. Hi. Good morning, and thank you for the presentation. A couple of questions from my side, on more on the balance sheet and cash flows, perspective. I see that your, lease liabilities have increased further, but your depreciation and, interest expenses have come down quarter on quarter. Have you seen any change in your interest rate assumptions or your WACC assumptions, which allows you to record a lower depreciation and interest expense. That's the first question. The second question is, again, coming from lease liabilities, you've seen significant increase from second quarter last year to 2nd quarter this year. I think it's to the tune of, 7,000,000,000,000 how much of that explains the margin expansion, margin expansion from 36% to 39%. Thank you. I think the number that you're going, it's not gonna come down. Right? Yeah. And I think partly contributed by the fact that all right. I think if you look at, on quarter to quarter, interest is also come down as well. And I think in the in the, at the end of the first quarter as well, we have paid down some taxes, right? So that's probably probably contributed to the reduction on the fuel tube. But, if you come back to last year, I think it's probably it has probably increase. Right? So so on the liability, obviously, I think as we continue to build our hydro, and that's that, we can apply it as finance fees. And that's what you spoke. Do you see why our, finance fees numbers are probably, going right. So and I think, as we go end of this year, we are hoping to fiberize close to about a a third of our sites. And probably by next year, probably extended more to close to 50%. Right? So His financial lease liability will continue to go up, as we continue to expand and fiber our site. Right? In any case, I think, in 2020, I think, Indonesia will adopt the IFRS 15. I think there will be a complete change in terms of how you'll probably see the margin and the balance sheet structure, right? So that will probably take effect on input and liquidity. But in any case, I think that financial lease liability continue to grow, as we continue to fiberize more and more of our sites. Okay. Thank you. On the margin expansion part that you've seen 36% is going to 29%. How much of that is explained by the lease liabilities, or rather if I have to ask the other way around, like, let's say you're going to normalize all your liabilities as operating leases, how what would be the margin be? Thank you. No, as I explained, right, the margin patients is, is driven primarily by the, by the operating leverage, the high operating leverage, right? Given that revenue have actually gone quite significant and the majority translates back to the, to EBITDA to EBITDA line and profitability, right? So if you were to see on the lease liability, I think the impact will not be that significant but I think the expected in margin primarily is actually driven by the operating by the high operating leverage because of the higher revenue. Just to put in perspective, if if you were to look at in quarter 2, we have also seen a quite a significant increase of the new managed service at all. It's part of that fact. I think you probably have seen as well out expansion in our EBITDA margin, right? So hence that proves the point that our operating leverage number are quite high, and other, cost efficiency that we are doing are probably starting to show results. Okay. Thank please kindly limit your question. I'm the only 2 to allow other participants to raise their questions. Your next question comes from the line of Troy Leiden from Goldman Sachs. Your line is now open. Hi, congrats again on the good set of results. First question for me is that, you mentioned earlier that the ex Java business is still not profitable. And how how long do you think that this business would actually be reach a profitable state? And the second question is more of a housekeeping question. So I saw that there's salaries expense increase. I know that employees employee count has increased, but the cost for employees actually increased even more Is there any one off this quarter? Because, in last quarter, you mentioned there are some provisions for annual bonuses. So why is it still could you give some color on why the number is still pretty high? Okay. Those are my two questions. Thanks. Yes, okay. On ex Java, yes, I think ex Java is all about going skill, right? I think at this point in time, I think we are growing market share, we are growing skill and then, in those areas. Right? Obviously, I think one of the key driver is, is probably to gain more subscriber and subscriber share in those market. And And I think that's what we have been doing at this point in time. And we are seeing good traction on that, right? So on profitability, I think when we at the cost, initially, I think we are looking at a payback period of slightly more longer payback, right, between 4 to 5 years. However, having seen some of the success, on our expansion at Java, I think we have taken up in terms of our expectation on, on retail and payback coming from Xyawa. And that's why we are probably looking at a slightly shorter period, between 3 to 4. And if you look at overall job, Jawa, obviously, it's not profitable, but there are certain areas which we have probably built 3 years earlier that we have actually moved into a a a a profit already. Right? So so as we continue to expand, think, you probably would expect that, that would probably need a, a, a, a, some time before you move it to profit. But in any case, I think you've probably seen in certain areas that we've invested, the last, 3 to 4 years have passed a super into profitability, right? So the way we look at Java is, edge Java is not in total, but we probably evaluate from a cluster to cluster abilities, right? So overall, still not profitable. But certain trusted, I have that when you turn around. Or labor costs. The second one, I think in quarter 2, the increase in labor, if you look at our performance today, right? Uh-uh, we are probably, striving for, you know, an active expectation in terms of performance, right? Last year, we did the, an accrual on the bonus side. But this year, I think in this quarter, we actually approved for our long term incentives given that I think we are not only going to meet, but we are probably going to exceed, this hit number. And hence, I think, we are topping up in terms of our LTI, for the reward to employees. Right? So so and that's probably explained the the the increase or that you probably see in this current quarter. Okay. Got it. Should we expect this to be the current base, or should we actually gonna come down in the next quarters as there's there's no more one offs like this? It's probably, coming down slightly, but you should expect that it's probably higher slightly higher than what we thought before. We want to hire a payout. Your next question comes from the line of Pierce Chaudhry from HSBC. Your line is now open. Yeah. Hi. Thanks. Just as a follow-up on your coming, when you were saying few clusters in X JAVA has become profitable. Are you talking about EBITDA rating, or we have already started seeing EBITDA gain or 3 plus years? Secondly, with an infrastructure expense, you used to disclose the managed services expense for Huawei. Can you tell me how much was that figure in 1st half of twenty nineteen? Thank you. Yeah. So so I think I think in most of the clusters that we have built for the last 3 years or so, at EBITDA, definitely we are already at a positive territory. But there are clusters, especially in some of the major cities that we've managed to gain quite significant market share. I think we are EBIT positive, right? So, I wouldn't say, at this point in time, let's say, plus the 3 years, there are many, but there are clusters that will be started to Second one is online service. Sure. 2nd question. Yeah. Sure. Thanks a lot, Pablo. Your next question comes from the line of a Seward Rubin from Goldman Sachs. Your line is now open. Okay. Another two questions from me. So, in the last call, you mentioned that there's some aggressive competition from Telkom within Java. Are you still seeing that's that trend, or is it actually come down a bit? And second one is another housekeeping question. So your G and A has been quite volatile since of fourth quarter 2018. So is there any reason for the volatility and especially for the drop in the second quarter 2019 the q the q on q drop in the second quarter 2019 and also what level should we expect it to go going forward? Thanks. Let me take the first one regarding the competition from Telkomselco. You're right. They were pretty aggressive in defending in Java. The last couple of quarters. And we have not seen Turkey is down in Djaro where they're changing whatever they have in Djaro. We have even seen Telkom still introducing, those package, we need to have attacking our access brands. This is the value for the Money brand. I mean, this is Frank. So they are using those patches targeted in this matter. So we have not seen certain service down and when they're defending. On the overhead, I think one of the big expenses sitting in over, which is probably on professional fee, right? So that variation is probably due to some projects, with consultants that's publicizing those numbers. So, is that actually one off, or do you is it still gonna continue in the second half of twenty nineteen? No. It will it will it will, move up and down depending on the project that we run over the years. Right? For the year. Right? So because, if contacting fee is basically you paid for project basis. Right? Okay. Got it. Thank you. Your next question comes from the line of Chung Chen from CIMB. Your line is now open. Hi, thanks. 2, on follow-up question on the network manage, contract with Huawei. I just wanted to to find out whether the network management fee is a fixed percentage of revenue or if not, how is it structured? And also on the duration of the contract, I noticed that it's a 3 year contract compared to a 7 year contract previously. So, why the short evaluation, is there a specific project that we're we are working on and and thereafter, if that that that contract will then be renewed on a different term, Those are my questions. Thank you. So the managed service contract, the new one, I think we have stated the business model a little bit, right? I think the first the previous one was more on an adjusted revenue sharing. However, now I think the contract is based on a fixed amount, not a fixed amount, but it's a variable amount depending on the various scopes that we are probably going, right? But it's not a very, not no variation to revenue, right? So it's not a cost base. And I think the contract that we are it's not 3 years, it's actually 5 years. Okay. Got it. Okay. As you know, further questions, I would like to thank everybody for the participation in today's call. As always, we'll get back to us if you need further information, and we'll speak again next quarter. Thank you very much. Ladies and gentlemen, this does conclude our conference call for today. Thank you for participating. You may all disconnect.