Good afternoon, ladies and gentlemen. Welcome to XL Axiata's earnings conference call for the first quarter of the 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 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, Mr. Indar. 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 Ibu Dian, our Chief Executive Officer, Pak Adlan, our Chief Financial Officer, and Pak Allan, our Chief Commercial Officer. Ibu Dian 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 Ibu Dian.
Thank you, Indar. Good afternoon, everyone. We are pleased with our start to 2019 as we continue to see good traction in the market. 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 tenets underpinning our strategy continue to be our dual brand strategy, where XL and Axis serve different market segments with attractive data-focused products and continued network investment in building out our 4G network across Indonesia with a focus particularly in ex-Java. Our revenue increased 9% year-on-year, mainly driven by service revenue, which grew 12% year-on-year.
Driving the service revenue growth is data revenue, which increased 25% year-on-year. Strong customer traction across both XL 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. This is much higher than our peers and enables us to weather the negative effect of declining legacy voice and SMS service revenue better than others. Costs continue to be well contained, with our EBITDA rising faster than revenue at 15% year-on-year, and margins increasing 2 percentage points year-on-year to 38.1% 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 271% year-on-year.
Indonesia's data-savvy customers have continued to respond well to our improved network as we are increasingly being recognized as a brand of choice for smartphone users. As of the first quarter, 2019, our smartphone subscriber stand at 46.3 million, a 15% growth compared to the same period last year. These make up approximately 84% of our subscriber base, which is significantly higher than industry average. We are pleased to report that our customer numbers continue to increase post the prepaid SIM registration in a healthy and sustainable manner. This is due to our focus since 2015 on sustainable customer acquisition. Thus, we have seen our base of registered customers increase to more than 35 million this quarter, while our ARPU has remained steady.
This quarter, the XL brand saw the launch of the Xtra Combo VIP , which offers priority access to customers on our data network with an enhanced product now bundled with priority access to applications and data. We also continue to ensure a high quality data experience to our customers through continued rollout and upgrade of our network. Thus, our total BTS count is now above 122,000 BTS, with 3G totaling more than 52,000 and our 4G LTE 33,000 4G BTS. 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 seeing. We are also increasing the number of our tower sites that are fiberized, and this will help us in our home business rollout.
Our network investment continues not only within Java but also focused on ex-Java. Following 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 ex-Java, which continues to grow at a much faster rate than Java and increase overall contribution to revenue. In particular, awareness of our brand, improved network quality and coverage, as well as product and value appeals, has significantly increased ex-Java. 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 product across both our brands and enhance bundling strategies.
Continued network investment will ensure we have a strong and reliable data network to back up our services. 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 rational. Thus, 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 IDR 7.5 trillion. Which will remain focused on data network investment in 4G and continuous network enhancement and modernization in and outside Java. Thank you. Let us now proceed to the Q&A session.
Thank you, Ibu Dian. To ask a question, please press star one. To cancel, please press hash. Please kindly but strictly limit your questions to only two and to allow other participants to raise their questions. Should you need to ask more questions, you can go back to the questions queue by pressing star one again. We shall end the conference call sharp at 1:30 P.M. Jakarta time. The first question comes from the line of Piyush Choudhary from HSBC. Please ask your question.
Yeah. Hi. Thanks for the call. Couple of questions. Firstly, could you talk about the competitive landscape for both brands separately, and what do you think is the probability of raising data tariffs in 2019? Secondly, can you talk about the progress of ex-Java strategy, which is a key pillar of your growth, like what % of revenue comes from ex-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? Does it lead to a cost increase or decrease? Thank you.
Okay. Thank you, Piyush. Let me start talking a little bit about the competitive landscape. As Ibu Dian said in her speech, there was a little bit more rational in the market in Q1. We haven't compared to last year, 2018. This year, huge difference in the pricing level and aggressiveness from the player in the market. At the same time, there was also some surprises in Q1. Here I'm both talking about Axis and XL. One of the surprises was that we saw the incumbents coming down prices at the level as we have our huge brand, which is the Axis brand, which surprised us a lot. They came down to be competitive in the lowest price level as well. We also saw huge aggressiveness coming from Smartfren. Smartfren continue what they have launched in last year, meaning they have an unlimited product.
This has become very attractive even for the young people of Indonesia. We saw some of our competitors as well copying what Smartfren have done with the unlimited. I would say it's still rational. It's still not as aggressive as it was last year, and we expect going forward that we will continue to slightly increase the price for the next couple of quarters. Very much depending on how Smartfren react in the market and the reaction coming from the incumbent as well.
Okay, Piyush, on the ex-Java. If you look at our performance in ex-Java, I think that has continued to do very well. I think if you look at our numbers coming in quarter one, we continue to grow double digit in ex-Java. The good news is also not only ex-Java, but we also grow in Java revenue as well. At end of quarter one, I think the composition today, Java make up approximately, I would say, high teens of our total service revenue today. Moving ahead, I think we're going to continue with our ex-Java strategy. From a CapEx standpoint, I think we are probably going to allocate slightly more than 50% to ex-Java.
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 category, especially from the EBIT standpoint. There are clusters that we have probably started building since 2017 onwards. I think there are some that we are already projecting seeing some positive EBIT coming from these clusters. In some of the other new build clusters, I think there's still some way to go. Anyhow, I think what we are seeing today from the trajectory, the result that we are seeing, I think we are ahead of plan based on the business case that we have built in terms of our investment outside Java. We are definitely ahead of plan.
On your third question on the managed service, the Huawei managed service. I think we have actually renewed the managed service with Huawei. I think with an additional scope to Huawei, and I think at a slightly different business model as well. 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. On balance, I think I would actually say that the rates that we renewed are actually fair and very competitive relative to what other competitors or operators are paying today. If we were to compare against markets in Indonesia, I think we are probably still the most competitive in terms of the managed service rate.
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. I think at least at that point in time, you'll probably see and understand the impact to the numbers as well. There will not be a significant impact to the overall cost structure.
Sure. Just to clarify, you are saying what's the change in the electricity cost structure in the new contract versus old? Also follow up on ex-Java, could you share the EBITDA margin? I understand EBIT is negative, but EBITDA margin for ex-Java business. Thanks.
I think on the MS, in our previous contract, all the entire electricity cost for all our sites are actually absorbed by the managed service partner. Today it's a pass through with some cap mechanism. Right. Hence, 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 quite significant portion of our network in the last one or two 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. That on the electricity. On the EBIT, I think at this point in time, I don't think that we'll probably share information on the EBITDA margin coming from ex-Java.
Suffice to say, as I informed earlier, that some clusters that we have probably built earlier are already in a positive territory on the EBIT itself.
Thank you, Pak Adlan.
Thank you for the question. Our next question comes from the line of Arthur Pineda from Citigroup. Please go ahead.
Hi. Thanks for the opportunity. Two questions as directed. Firstly, on the ex-Java growth, it seems like you're taking share ex-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 Telkomsel with regard to this issue? Is it still quite relaxed on their side? Second question I had is with regard to your OpEx, just to clarify the increase in salaries and overhead expenses. Is the salary base the new benchmark, or is it diluted by the bonus accruals, which may be booked in first quarter? On the overhead side, what's driving the big jump? Thank you.
Okay. Thank you for the question. Let me take the first one. It's just regarding ex-Java and if you see any reactions from Telkomsel. First of all, I do not want to comment a lot of our competitor, how they're doing in each of the region, in each of the cluster. Anyway, I think you're right. They have a little bit of dilemma, right? Because as you all know that a huge part of the revenue is coming from ex-Java. When we are aggressive in ex-Java, should they react in ex-Java or should they do nothing and then react on Java instead of? So far, I would say we don't see very aggressive reaction in ex-Java. On contrary, we actually see some reaction coming in Java instead.
They are actually hitting back in Java, but not as much in ex-Java as we expected. We are continuing our journey without thinking what they're doing, not doing. We have a very clear strategy about our go to market in ex-Java.
Arthur, on your second question on OpEx, I think, salaries, yeah, you've probably seen a slight increase in salaries in quarter one. I think, I would attribute that to two main factors. One is the salary increment that we've probably given to our employees for 2019. I think you could expect that that increment would probably be in line with some inflationary rate and that's probably one increase. Second is, yes, it has to do with provision for bonus as well. Given that we have actually stronger start to the year as compared to previous years, I think, there is actually an additional accrual for bonuses. 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 overhead, yeah, overhead is probably slightly on the higher side for the quarter one. I think we made some provision for some professional fee on certain projects that we are probably embarking at this point in time. I think it's not probably the trend that you should expect moving forward.
Thank you very much. I'll come back later with more questions. Thank you.
Thank you. Our next question comes from the line of Choong Chen Foong 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 Q basis due to a jump in rental expenses after being largely set for many quarters. Any one-off there, and how do we expect this to trend going forward? Are there going to be significant lease renewals at lower rates to offset further growth in this cost line? That's the first question. Second question, regarding the interest expense, that has also risen further, and the calculation seems to suggest that the average interest cost is now at about 18% for the quarter. Any one-off there? Anything we can do to lower the cost of borrowing? Yep, those are my two questions. Thank you.
Foong, I think if you look at the infrastructure expense, yes, it has actually gone up in quarter one this year. I think that's primarily, I would say, attributed to a lot of the sites that's coming up on air towards the end of last year, which I think we have probably start paying rental for now, right? Obviously, I think, as you expect as well, this would typically be compensated with some of the early renewal. At this point in time, at least in quarter one itself, we have not-Had many early renewals as yet. I think there will be more to come on early renewals probably moving from quarter two on to end of the year, right?
Yes, I think we are building a lot more new sites, and all these sites are probably coming on air end of last year, which is partly contributing to the increase in the infrastructure expense. Second as well, I think if you look at the infrastructure expense, it also includes partly the annual fee with regard to spectrum. You know how annual spectrum fee is probably structured, moving forward, that you know that every year that the annual fee will be increased with some percentage. Hence, I think that's also a contributing factor to the increase in the infrastructure expense. Second question on interest. I think there's two component there, right? I think if you look at interest expense, it has actually gone up slightly. I think there's two components there.
One is relating to the interest with regards to the loan and bonds that we probably have. I think that's a true reflection of probably what our true interest cost is. There's also included in there are also the interest on finance lease, right? That given that we are capitalizing some of our fiber that we are building today as finance lease. 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 now, we are at slightly below 9%, right? If that would actually help in terms of doing your calculations.
Okay, got it. Thank you so much. Bye then.
Thank you for the questions. Our next question comes from Ranjan Sharma from JP Morgan. Please go ahead.
Hi, good afternoon. 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 a big increase in 2018 by, I think, IDR 6 trillion or so. How much should we expect increase in financial leases this year? Is it fair to assume that this is still being driven by the fiber leases? Secondly, big news out today on your parent, Axiata, and also Telenor. Does that affect your corporate strategy in any way? Thank you.
Yeah. 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 that I think within the next two years or so, we are looking at fiberizing close to 50% of our total sites, right? Yes, the trajectory on the investment on fiber will continue, and I think as a result, you'll probably see that will be capitalized as finance lease, right? From an actual trajectory, it's difficult to say. From a volume perspective, I think 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, any question related to merger, Axiata will have a call right after this call ended. On the question on how they impact to ours, what we know right now is that we are continuing our current transformation strategy and also execution our business plan of 2019. We will continue our effort in actually achieving our business plan goal for 2019.
Okay.
Okay. If I can just have a quick follow-up. It's just that I think in the past you've talked about digitalization and using the digital channels more. In Indonesia, I think that's something that Telenor has done well. I was thinking that maybe there might be something that you can share that you might be able to bring forward into the market now with a broader telecom asset base. Thank you.
Yeah. Let me try to answer that. Yes, you're right. I'm coming myself from Telenor, I know what they're doing. You are actually right. I don't know, not in Indonesia, they are very good in translating analog customer into digital and then they get them to use whatever they are doing in digital space. Here we are continuing our progress. Even I have KPI on how many customer or subs I can get into my digital environment, and we continue that journey. If we can get any help from outside, we will of course appreciate that. If that's maybe merge going forward to help with leverage, of course we will have our open arms for that. We are continuing our strategy regarding that space at the moment.
Okay. Thank you.
Thank you for the questions. The next question is from the line of Alex Go from AmBank. 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 subscriber base, it has increased quarter-on-quarter, as well as your ARPU have gone up or flat. I'm just wondering what has caused your service revenue to drop quarter-on-quarter when your other key markers are indicating it should be going up instead, right? There seems to be a disconnect here. And my second question is regarding your ex-Java drive.
I just want to find out how different are the margins from the operation of ex-Java compared to Java. I understand definitely your growth is much stronger at ex-Java, but in terms of your margins, how much is it significant lower in terms of any kind of guidance in terms of percentage point difference?
Firstly, you probably got the numbers wrong. If you look on service revenue quarter-on-quarter, we actually up 2%. The numbers are, if you look at the ARPU numbers and the customer numbers, I think it would probably translate to a Q-on-Q growth of 2%. It's not -1%, that's on total revenue. That's on the first point. Second point, on ex-Java, I think, at this point in time, we are still continuing to build outside Java. And I think, whilst we continue to build, we also seeing a good trajectory and growth coming from outside Java. But you also understand in this business, it's also a question of scale.
You need to achieve certain scale, before you are able to derive to certain different profit margins as well. As I mentioned, at this point in time, I think from an EBIT perspective, in total, we are still not positive yet, but I think there are certain clusters which we have started to build much earlier. I think we are already in a positive trajectory, much quicker than what we anticipated in our business plan. From a total margin perspective at this point in time, given that Java have got a much bigger scale, that's why it actually commands a bigger margin.
Can you give any guidance how big is the difference in terms of the margins?
No. As we mentioned earlier, we are not giving any guidance on margin between Java and ex-Java.
Okay. Thank you.
Thank you. We have a follow-up question from Arthur Pineda from Citigroup. Please go ahead.
Hi. Just one follow-up question, please. Are you able to guide on the tower renewals? What % of your current tower portfolio will be up for renewal in 2019 and in 2020? Thank you.
I wouldn't be specific, Arthur, but what I can say that within the next two years, I think the tower that comes for renewal will be in thousands. I think it suffice to say that it will contribute a fair chunk into compensating that increase in the tower leases. On net-net basis, you still expect that tower lease will increase, but definitely as a % of revenue, it will come down.
Understood. Okay. Thank you.
Thank you. We have our next question from Colin McCallum from Credit Suisse. Please go ahead.
Thanks for the opportunity. Two for me. First, a simple kind of housekeeping one. What % of customers now are on 4G? I see you gave us smartphone penetration, but not 4G. If you could give us that'd be helpful. The second one is my usual strategic question, I guess, for Dian. 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 low. Is your view that price points, your current price point per megabyte is high enough? It doesn't look like it on the P&L account at the moment. 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 Lebaran? Thank you.
Yeah. Colin, just quickly on 4G, we are currently at 62% of our customers are already on 4G. On the second question, your favorite question, I'll probably pass to Allan to
This is regarding the pricing and Lebaran. As I said before, yes, it's correct that it has eased down a bit on the pricing. We have increased the prices in Q1, and we still believe that we are able to increase the prices even in Q2 and maybe Q3 as well. The environment is there where we can actually do this with our negative impact. As usual, we also have some Lebaran offerings, both Ramadan and Lebaran offerings, because we know just before the Lebaran is a big purchase season. We will both monetize and optimize in that period. Most of all, we will actually monetize, compare to see what they're doing, and we are ready to act accordingly. Something will happen during the Ramadan and Lebaran. Yes.
Okay. Thanks a lot.
Thank you. We also have follow-up questions from Piyush Choudhary 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? Secondly, can you share progress on your fixed-line business, like fiber broadband, fixed wireless? How have been the trials, and what's the progress on that business? Thanks.
Yeah. Marketing cost, 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 non-recurring. If you compare against last quarter, it's flattish. I think, yes. I think it's not really a weak quarter for us because if you look from a revenue standpoint, it's actually growing at 2% quarter-on-quarter, right? Hence, I think we are also starting our campaign earlier as well in quarter one itself and not wait to quarter two coming quarter. But as a percentage of revenue, I think it's quite stable, marketing cost as a percentage of revenue at around 7.6%.
I think the question on the fixed broadband. Actually, convergence is something that we have always had in our minds for the future of the business, as we have seen in other markets that customers want a one-stop triple play solution for home and mobile. Since last year, we have started a rollout for our fiber broadband business, and now we already have more than 120,000 home passes, and we have tried it in several cities, such as in Jakarta, Greater Jakarta, in Makassar, Denpasar, Balikpapan, and Banjarmasin. So far we have seen a very good traction or take-up so far.
Could you share in terms of plans, what is the medium-term rollout plan in fiber broadband?
As I mentioned, this is still a very early stage, we couldn't share that information at this point.
Sure. Thank you.
Thank you. Once again, to ask a question, please press star one and wait for your name to be announced. There are no more questions from the line. I would now like to pass the call back to your host.
Okay. I think as we have no more questions, we'll end the call a bit early today. Thank you everyone once again for your participation. As always, do get in touch if you need further 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 now.