Earnings Call: Q1 2019

May 6, 2019

Quarterly report

Good afternoon, ladies and gentlemen. Welcome to XL RCI Pass Earnings Conference Call for the first quarter of 2019 financial year. My name is Desmond, and I'll be your coordinator today. During the presentation, all participants are in a listen only mode. Instructions will be given on how to register us. Now we would like to turn the conference over to our host, Mr. Inda. Please proceed. Thank you, Desmond. Good afternoon, everyone, and welcome to the call. On behalf of the XL 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 Iwudian, our Chief Executive Officer, Pat Adlan, our Chief Financial Officer and Pat Allen, our Chief Commercial Officer. Now, Tidudian will share the highlights of the first quarter of 2019, which will then be followed by the question and answer session. I will now hand the call over to Thank you, Indar, and good afternoon, everyone. We are pleased with our start to 2019 as we continue to see good traction in the market and this has led to our strong Q1 results where we have seen growth across our financial metrics and a return to profit. The continued positive performance is a direct result of the consistent execution and implementation of our strategy. Which aims to position us as the mobile data provider of choice in Indonesia. The key tenants underpinning our strategy continues to be our global strategy, where excellent access service for the financial segment with a traffic data focused product and continued network investment in building out of Fortinet across Indonesia with a focus, particularly in Africa. Our revenue increased 9% year on year mainly driven by service revenue which was 12% year on year. And wrapping this service revenue growth is data revenue which increased 25% year on year. Strong customer traction across both Excel and Axis brands and our efforts on upselling our customers plus monetization of data has led to this strong growth in data revenue. Data revenue now accounts for 86% of service revenue this quarter and this is much higher than our peers and enablers are to weather the negative effects of declining legacy rep, police, and SMS service revenue better than others. Coast continues to be well contained with our EBITDA writing faster than revenue at 15% year on year. And margins increasing two percentage points year on year to 38.1 percent this quarter. The growth in EBITDA coupled with savings on our depreciation expenses meant that we have seen a return to profit with our net profit rising 2 71% year on year. In donations, data safety customers have continued to respond well to our improved network as we are increasingly being recognized as the brand of choice for smartphone users. As of first quarter 2019, our smartphone subscriber stands 46,300,000, up 15% growth compared to same period last year. This make up approximately 84% of our subscriber base which is significantly higher than industry operates. We are pleased to report that our customer numbers continue to increase post the prepaid stream registration in a healthy and sustainable manner. This is due to our focus in 2015 on sustainable customer acquisition and thus we have seen our base of registered customer increase to more than $55,000,000 this quarter, while our ARPU has remained steady. This quarter, the extra brands for the launch of the combo Xtra CIT, which offers priority access to customers on our data network, with an enhanced product no bundle beside the asset to athletes in that sector. We also continue to enter a high quality experience to our customers through continual hours and update of our network. This our total DTS call is now above 100 22,000 BTS with 3 gs totaling models B 2000 and our 4 of our 4 gs 33,004 DBS. We also continue to place a greater emphasis on investing in fiberizing our network as this will help in handling the explosive increase in data traffic We are also increasing the number of our sites that are on the right and this will help us in our home business rollout. Our network investment continued not only within Java, but also focused on Xfi. For the strong performance last year, which has translated to better coverage and network performance in this area. This has also translated to a stronger revenue performance of the delta which continues to grow at a much faster rate in delta an increase of our contribution to revenue. In particular, our rate of our brand, improved net of quality and operate as well as product and value apparel has typically increased the increase of the jabber and we are now increasingly known as a nationwide operator. We intend to build on our strong start to the year with an improved performance over the next few quarters as we expand the products across both our brands and handsets bonding strategies. Continued network investment will ensure we have a strong and reliable data network to back up our services and we will strive to continue to improve our network coverage and experience across Indonesia. We will also continue to monitor competition in the market with the hope that competition remains right here now. This our guidance for 2019 is maintained where we expect revenue to grow better than or at least in line with the market EBITDA margin guidance of high-30s and CapEx spend guidance for 2019 of around 7.5% in RUBIA. Which will remain focused on data network investment in funding and continuous network enforcement and modernization in and also data. Thank you, and let us now proceed to the Q And A session. To cancel, please press hash. Please kindly but strictly limit your questions to only 2 and to allow other participants to raise their questions. So you need to ask more questions, you can go back to the questions queue by pressing star 1 again. We shall end the conference call sharp at 1:30 pm. The first question comes from the line of pu Chaudhry from HSBC. Please ask your question. Yeah. Hi. Thanks for the call. A couple of questions. Firstly, could you talk about the competitive landscape, for both brands separately And what do you think is the probability of, reading data tariffs in 2019? Secondly, can you talk about the progress of X Java strategy, which is a key player pillar of your growth? Like, what percentage of revenue comes from X Java right now? What is the current EBITDA and EBIT margin and how much CapEx you are allocating? And if I may ask one more, you have renewed your managed services contract with Huawei. Could you tell us what are the new contract terms that would lead to a cost increase or decrease Thank you. Okay. Thank you, Piyush. Let me start almost about the competitive landscape. As the audience said in her speech, that was a little bit more rational in the market in Q1. We happen to compare to last in 2018. Year is different in the pricing level and aggressiveness from the player in the market. But at the same time, although some surprises in Q1, and here I'm both talking about access and Excel. All the surprises, what we saw is the incumbent coming down in prices at the level as as we had our use brand, which is the access brand was surprised with a lot. So we came, they came down to be competitive in the low price level as well. We also saw, use aggressive net coming from SmartFrin. So SmartFrin continue what they have launched in last year, meaning that other unlimited product this has become very attractive even for the young people of the intimation. And we saw some of our competitors were copying what margin have done with unlimited. So I would say it's still international. It's still not as aggressive as the war for the last year. And we expect to, going forward, that we will continue to slightly increase the price for the next couple of quarters. But very much depending on how Smart Furnace reacts in the market and the reaction coming from the incumbent as well. Occupition, on the S Java. So if you look at our performance in I think has continued to do very well. I think if you look at our numbers, coming in quarter 1, we continue to grow double digit in extra the good news is also not only at Java, but we also go into Java revenue as well, right? So, end of quarter 1, I think our the composition today Java make up approximately, I would say high teens our total, service revenue today. And I think, moving ahead, I think we're gonna continue with our ex our strategy. From a CapEx standpoint, I think we are probably going to allocate a slightly more than 50% to, X Java, right? So from a return perspective. I think, if you look at, ex Java, I think, at this point in time, I think, you would expect on a total basis, I think we are still probably not in the positive battery, especially on the from the EBIT standpoint. However, I think there are clusters that we have probably started building since 2017 onwards. I think there are some that we are already projecting seeing some project a positive EBIT coming from these clusters. Nevertheless, I think in some of the other new build clusters, I think there's still some readable But anyhow, I think what we are seeing today from the trajectory, the result that we are seeing, I think we are here to plan based on the business case that we have built, terms of our investment outside Java, we are definitely a bit of of time. On your third question on the managed service, the Huawei managed service. Yes, I think we have actually renewed the managed service with Huawei. Obviously, I think with an additional scope to Huawei, I think an I think at a slightly different business model as well. Uh-uh, we have seen that, on a net to net basis, I think, there's some slight increase in terms of the cost, given the fact that I think we have taken, the electricity cost back, and that is to be absorbed by itself. Nevertheless on balance. I think the input on balance, I think I would actually say that the rates we reduced are actually fair and very competitive relative to what other competitors or operators are paying today. In fact, I think if we were to compare against market in Indonesia, I think we are probably the most still the most competitive in terms of the managed service rate. Anyhow, I think, we'll probably give you a little bit more color, on this, when we announce our Q2 numbers, that's going to be sometime in July. Because I think at least at that point in time you probably see and understand the impact to the numbers as well. But there would not be a significant impact to to the overall cost structure. Sure. And just to clarify, you you have seen what's the change in the electricity cost structure in the new contract versus old? And also follow-up on X Java, could you share the EBITDA margin? I understand EBIT is negative with EBITDA margin for X Java Business. Thanks. Yeah. So so I think on the MS, in our previous contract, all the entire electric for all our sites that we have dropped by the managed service partner. Today is a is a pass through with some attack mechanism, right? So So I think, in a hand, I think, the burden to control in terms of the electricity usage and all that now is with us as compared to our previous agreement. Anyhow, I think given that we have modernized a a quite significant portion of our network, in the last 1 or 2 years, I think you would expect that the level of electricity that we are probably paying have been reduced quite substantially from where we were before. So so the depth on the electricity on on the debate. I think, at this point in time, I don't think that we'll probably share, information on the EBITDA margin, coming from But suffice to say, I was, as I informed earlier that some clusters that we have probably been earlier already in a project, a positive territory on the year, it's going to be based itself. Our next question comes from the line of Arthur Bineda from Citigroup. Please go ahead. Hi, thanks for the opportunity. Two questions as directed. Firstly, on the X Java growth, it seems like you're taking share X Java with your double digit growth momentum. Year on year and it's also growing Q on Q, which is contrary to what we're seeing with your, competitor. Are you seeing any reaction so far from from Telkom sales with regard to this issue, or is it still quite, quite relaxed on their side? 2nd question I had is with regard to your OPEC just to clarify the increase in salaries and overhead expenses, is the salary base the new benchmark, or is it loaded by the bonus accruals with piggy in first quarter, also on the overhead side was driving the big jump. Thank you. Okay. Thank you for the question. Let me take the first one. This was regarding XJAVA and if you see any reaction from Telkom. So First of all, I do not want to comment a lot about our competitors how they're doing in ease of the region, the ease of the cluster. But anyway, I think you're right. They have a little bit of dilemma right? Because as you all know, that the used part of the revenue is coming from from X Java and we when we are aggressive in X Java, should they react in X Java or should they do nothing and then react on Jawa instead of. So far, I would say we don't see very aggressive reaction in Xjawa Concerning, we are still seeing some reaction coming in Java instead. So they are actually hitting, hitting back in Java, but not as much in Next Java as but we are continuing our journey without seeing what they're doing. We have a very clear strategy about our go to market, in next job. Answer on your second question on OpEx. I think the salaries here you're promising a slight increase in salaries in quarter 1. I think, I would attribute that to 2 main factors. 1 is, the, salary agreement that we're probably given to our employees, for 2019. So I think you should expect that that improvement would probably be in line with, some inflationary rate and and that's probably 182nd is, yes, it has to do with a provision for bonus as well. Given that we have a stronger start to the year as compared to previous years. I think, there is actually an additional approval bonuses. But I think at the end of the day, the bonus would probably be depend on the actual full year performance which I think we will continue to monitor and track as we progress along. Yeah? Secondly, on over 8 year, over 8 is probably see on the higher side for the quarter 1, I think we made some provision for some professional fee on certain projects that we are probably embarking at this point in time. But I think it's not probably the trend that you should expect moving forward. Our next question comes from the line of Chung Chen from CIMB. Please go ahead. Hi. Thanks for the call. Two questions from me. Firstly, on the infrastructure expenses, there was a marked increase on a Q on 2 basis due to the jump in rental expenses. After being Mashitek for many quarters. Any anyone else there? And how do we expect this to trend going forward? And are there going to be significant lease renewals at lower rates to offset further growth in this top line. That's the first question. 2nd question, regarding the interest expense, that has also reason for the cooperation team to suggest that the average interest cost is now at about 18% for the quarter. Any one off there, and anything we can do to lower the cost of borrowing? That's two questions. Thank you. If you look at the infrastructure expense yet, it has actually gone up, in quarter 1 this year. I think that's primarily, I would say, attributed to a lot of the sites that's coming up, uh-uh, on air. Towards the end of last year, which I think we'll probably start paying rental, for now, right? Obviously, I think, uh-uh, as you expect as well, I mean, this would typically be compensated with some of the early renewals. But at this point in time, at least in quarter 1 itself, we have not has many early renewals as yet, but I think there will be more to come on early renewals probably in a quarter 2, moving from quarter 2 on to end of the year, right? So so yes, I think, uh-uh, we are building a lot more new sites and all these sites have probably coming on air end of last year, which is partly contributing to the increase in the infrastructure expense, right? So Second as well, I think if you look at the infrastructure expense, it also includes probably partly the annual fee with regard to spectrum. Yeah. And you know how spectrum and what spectrum be, I probably structured, moving forward that you know that, every year that the NLP will be increased, with some percentage, and hence, I think that's so for a contributing factor to the increase in the infrastructure expense. Second question on interest I think that's 2 components there, right? I think if you look at the interest expense, it has actually gone up slightly. But I think there's 2 components there. 1 is relating to the interest with regards to, to the, loan, and bonds that we probably have And I think that's a true reflection of probably what our true interest cost is, but that's also included in there are also the interest on finance lease right? That given that uh-uh we are capitalizing some of our fiber that we are building today. As financially, And as a result, we are taking some interest cost on that as well, right? On a net net basis, if you look at our average interest cost uh-uh move. Now, we are at slightly below 9%, right? So if that would actually help in terms of doing your calculation. Okay, got it. Thank you so much. Thank you for the questions. Our next question comes from Ranjan Sharma from JP Morgan. Please go ahead. Hi, good afternoon and thank you for the call. Just a couple of questions from my side. Firstly, you talked about the financial leases and you have discussed this at length earlier as well. You saw the increase, in 2018, but I think 6 trillion or so, how how much should we expect increase in, financial leases this year? And I is it fair to assume that this is still being driven by, the fiber leases? Secondly, big news out today on on your parent, I Sierra and and also Telenor, does that affect your corporate strategy in in in any way? Thank you. Yeah. So, on the first question, I think, yes, I think we are probably going to continue with our fiber investment I think as we have mentioned previously, I think within the next two years or so, we are looking at 5 rising close to 50% of our total sites, right. So yes, the trajectory on the investment on fiber will continue. And I think as a result, you probably see that will be capitalized finance lease, right? From an actual trajectory, it's difficult to say, but, but, from a volume perspective, I you could expect that we would probably continue to build the same sort of volume, moving forward to in this year. On the second question? On the second question, so any feature related to your budget, Akata, we have but, on the question on how they impact to our what we are what we know right now is that we are continuing our current performance and strategy and also execution our business plan of 2019. So we will continue our effort in actually achieving our business plan build for 2019. Okay. So if I can just have a quick follow-up, it's just that I think in the past, you've talked about digitalization and and and and moving, using the digital channels more in Indonesia, I think that's something that Eleanor has done well. So I was just thinking that maybe there might be, something that you can share, that you see that you might be able to bring forward into the market now with a broader, telecom asset base. Thank you. Yes. You're right. I'm coming myself from Telenor. So I don't know what they're doing, and you have to I don't want, not Indonesia, but they are very good in translating and all our customer entities on and get them to use whatever they are doing into the space. So here, we are continuing our progress, even I have KPI on how many customer or subs I can get into my real environment and we continue that journey. But if we can get any help from outside, we will hope to appreciate that. If that's maybe worse going forward, hope it's in that range, then we will be, we will have our open arms for that. So we are continuing our strategy regarding that space at the moment. Okay. Thank you. Thank you for the questions. Next question is from the line of Alex Ko from AMBanc. Please go ahead. Thank you for the opportunity. My two questions is regarding your service revenue in this quarter. If I were to compare quarter on quarter, It is down by 1%. But if I were to look at your postpaid your subscriber base in your group here has increased quarter on quarter as well as your tours have gone up. I'm just or rough flight. I'm just wondering, what caused your full journey to drop quarter on quarter than your other key markets are a digital issue going up instead. Alright. It seems to be a disconnect here. And my second question is regarding your X Java Drive. I just want to find out how different are the margins from the operation of X Java compared to Java? Understand that, definitely, your growth is much stronger, but in terms of your margins, how much is it significantly lower in terms of any kind of guidance as a percentage, point difference? Okay. So firstly, I think, Jess, so I think you've probably got the numbers wrong. So if you look on a service revenue quarter on quarter, we actually up 2%, right? So the numbers are if you look at the ARPU numbers and the customer numbers, I think it will probably translate to 1Q growth of 2%, right? So it's not minus minus 1% is that total revenue. The one that's coming down is probably the month of this revenue, right? So that's one of the first point. Second point, I think on X Java, I think at this point in time, we are still continuing to build outside Java, right? So So, and and I think, while we continue to build, we also think the, good trajectory and growth coming from outside government. But you also understand in this business is also a question of skill, right? So you need to achieve certain skill, before you are able to divide to certain decent profit margins before, right? So as I mentioned, at this point in time, I think from an EBIT perspective, in total, we are still not positive yet. I think there are certain classes which we have started to build much earlier. I think we're already in a positive trajectory, much quicker than what we anticipated in our business plan, right? From a from a total margin perspective at this point in time that given the Java, given the Java has got a much bigger deal. That's why it actually come onto a bigger margin. Can you give any guidance? How big is the difference in terms of the margin? No, as I already mentioned earlier, we are not giving any guidance on margin, between Java and NextEra. We have a follow-up questions from Arthur Pineda from Citigroup. Please go ahead. Hi. I just want to follow-up question, please. Are you able to guide any power renewals? What percent of your current power portfolio will be upper renewal in 2019 and in 2020? Thank you. I wouldn't be specific, Arthur, but what I can say that, within the next 2 years, I think, the the tower that comes for renewal duty in thousands, right? So I think, it's try to say that, it will contribute a fair chunk into compensating that increase in the tau leases. Yeah. So So on net net basis, you still expect that power lease will increase, but definitely as a percentage of revenue, it will come down. Understood. Okay. Thank you. Thank you. We have our next question is from Colleen McCollum from Credit Suisse. Please go ahead. Thanks for the opportunity. 2 for me. 1st, a simple kind of housekeeping 1, what percentage of customers now are on 4 g. I see you give us smartphone penetration, but not 4 g. If you could give us that, that'd be helpful. And then the second one is my kind of usual, strategic question, I guess, for Diane. Your revenue trajectory looks looks okay. Looks pretty good. But when we take into consideration the staff costs have gone up, the fiber related costs are up, interest costs are up, the profitability is still very, very low. Is your view that price points, your current price point per megabyte, is is high enough. It doesn't look like it on the P and L account at the moment. So are you inclined to try to push pricing up? You say that the competitive environment is stable to improving. Is it stable enough to actually push pricing up particularly as we head into Liberum? Following yes, uh-uh quickly on 4 g. We are currently at 62% of our customers are already on 4 g, right? So on the second question, your favorite question, I'm from you. This is regarding the pricing and So, so, as I said before, yes, it's correct that it has eased down a bit on the pricing. And we have increased the price in Q1 and we still believe that we are able to increase the prices even in Q2 and maybe Q3 as well. So the environment is there where we can actually do this with our use negative impact. And as usually, we also have some Liberan offerings, both Ramadan and Liberan offerings. As we know, just before the liver the Liberan is a big purchase season. So we will both monetize and optimize in that period, but most of all, we will have to monetize compared to see what they're doing and be ready to to act accordingly. So that's something will happen during the Ramadan and Liberan. Yes. Okay. Thanks a lot. Thank you. We also have follow-up questions of Prius Chaudhry from HSBC. Please go ahead. Yeah. Hi. A couple of questions. Firstly, on marketing, it rose despite seasonally weak quarter. Could you help us understand what is driving that? And secondly, can you share progress on your fixed line business, like private broadband, fixed wireless, how have been the trials and what's the progress on that business? Thanks. Yes. Marketing costs, I think, if you compare against last year, I think it's gone down quite substantially given the fact that I think we actually spent a lot on prepaid registration last year and a lot of it are probably nonrecurring. If you compare against last quarter, it's flattish. Yeah. So I think, uh-uh, yes, I think, we are even though it's not really a weak quarter for us because if you look from a revenue standpoint, point is actually going at 2% Q on Q, right? And hence, I think we are also starting our campaign earlier as well. To import the 1 itself and not relate to quarter 2 coming follow-up, right? So, but as a percentage of revenue, I think it's is quite stable, a marketing process essentially of revenue at around 7.6%. I think the question on the fixed broadband, Actually, conversion is something that we have always had in our minds for the future of the business, as we have seen in other markets that customer want or wants prepaid solution for home and mobile. So since last year, we have started a roll out for our fiber broadband business. And now we already have more than 120 k home passes and we have tried it in several cities, but it's, in Jakarta, which is Jakarta. In Maharashtra and by Dermatin. And so far, we have seen a very good traction or take up so far. Could you share, in in terms of plants, like, what is the medium term roll out plan and fiber draw plan? Oh, so as I mentioned, this is still a very early stage, so we couldn't share the information at this point. Sure. Thank you. There are no more questions from the line. I would now like to pass the call back to your host. Okay. I think if we have no more questions, we the call a bit early today. So, thank you everyone once again for participation. And always we'll get in touch and release for the information and we'll speak to you again next quarter. Thank you very much. Ladies and gentlemen, that concludes today's conference call. All lines may disconnect.