Good afternoon, ladies and gentlemen. Welcome to XL Axiata's earnings conference call for the first half of 2018. My name is Rachel, 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. We would like to turn the conference over to our host, Mr. Indar. Please proceed.
Thank you, Rachel. Good afternoon, everyone, 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, Pak Allan, our Chief Commercial Officer, Pak Feiruz, Group Head Finance. Ibu Dian will share the highlights of the first half of 2018, which will be followed by a question and answer session. I will now hand the call over to Ibu Dian.
Thank you, Indar, Good afternoon, everyone. We are pleased to report that despite the challenges during the first half of 2018 with steep data price competition and structural changes of prepaid SIM registration, we have come out much stronger than others. This belief is further reinforced from very recent disclosures, which discretionary implies that the industry has declined year-on-year in the first half of 2018 by a double-digit decline. In contrast, through our diligent and consistent execution of our strategy, we have delivered a positive revenue growth on year-on-year basis, outperforming our competitors. Such regulatory reforms have had a negative short-term impact to the industry, we firmly believe that the change is a positive one in the form of a healthier market environment for the mobile industry and there's long-term value creation for us.
The change is very much in line with our transformation strategy in becoming a data leader, focusing on value customer and experience rather than price. We have been very consistent in the acquisition of our strategy throughout our transformation journey, This has enabled us to gain further traction in the market. Our data leadership and transformation is also gaining external recognition with Frost & Sullivan recently awarding us the Asia Pacific Mobile Data Service Provider of the Year. In the recent quarter, we were the only operator among the top three which managed to deliver positive Q-on-Q and year-on-year growth, with gross revenue grew both 1% Q-on-Q and year-on-year. This was mainly driven by continued growth in data revenue, which has been our main driver of growth.
Innovative data offerings and improvement in data service quality have successfully pushed data revenue growth in the first half to 19% year-on-year. Data revenue contribution now makes up the majority of our service revenue at close to 80% in this quarter. This percentage is far higher than our peers, which enables us to weather the negative effects of declining legacy service of voice and SMS far better than the others. The data business continues to be our main engine of growth, offsetting the decline from legacy service revenue. The key reason for the good performance so far in 2018 is the continued success of our data-led product strategy, coupled with continued investment in our data network.
Indonesia's data service customers have continued to respond well to our improved network, as smartphone subscribers now stand at 77% of our subscriber base, which is almost four out of every five customers. These numbers continues to be significantly higher than the industry average. The total number of smartphone users now amounts to about 41 million and has grown substantially at 21% year-on-year compared to the same period last year. We are pleased to report that our customers' numbers post the prepaid SIM registration implementation have only seen a slight reduction, and this reduction is due to non-active subscribers, as evidenced by our ARPU, which increased Q-on-Q. We manage this through proactive efforts in communication, providing ease of registration via multiple channels, engaging our customers via call redirects to get them registered, and promotional incentives to register, among others.
We were also the operator with the highest number of registration as a percentage of our base in the industry due to our focus in 2015 on sustainable customer acquisition. Our overall base of registered customers is 53 million as of the first half of 2018. We have always remained supportive of the government's efforts to implement prepaid SIM registration as this will be positive for the mobile industry. We are hopeful that these efforts are continued by all industry players to ensure that these benefits are reaped over the long term. In establishing the XL brand as the choice for high-value customers, both reliable high-speed data and superior network quality are essential. As such, we continue to ensure a high-quality data experience to our customers through continued rollout and upgrade our network.
Thus, our total BTS count is now above 111,000 BTS, with 3G totaling more than 49,000 and our 4G LTE service is now available in 380 cities and areas across Indonesia with almost 25,000 4G BTS. We also continue to invest in transmission, backhaul, and network modernization to support the rising data traffic across our network and deliver stability, expand our network capacity, and improve quality of our data services for our customers. We were well prepared during the Lebaran traffic season in the second quarter, which typically sees strong traffic growth. Data traffic grew 95% during this period compared to the previous years, driven by 4G. The strongest driver of traffic continues to be streaming, both video and music, followed by web browsing, instant messaging, and social media.
Our network investment continues not only within Java, but with a greater focus on ex-Java this year 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 outside Java, which continues to grow at a better rate than Java. The dual brand strategy has successfully led to XL Axiata making strong inroads in different segments through innovative offerings in each segment. During the quarter, we launched our Xtream smartphone, which is co-branded with YouTube at affordable prices for our customers. This offering has done extremely well, and customers who purchase this handset have a high retention rate for us, while 73% of those who bought and activate the handset are coming from other operators.
AXIS also continues to do well with the youth segment as its products such as Hitz geared around social media and OTT offerings. Our postpaid brand, XL Prioritas, continued to gain further traction through attractive offerings and smartphone repair programs. Our performance in the first half of 2018 was very promising despite the data price competition in the industry. We are seeing signs of improvement in the market with gradual price increases, both by us and by some of our peers, which is positive for the industry, and we remain supportive of efforts to monetize data. With our positive results, strong fundamentals, coupled with our focus on transforming into a data-centric company, we are confident of delivering a stronger second half performance. Nevertheless, we will closely monitor how the market unfolds postpaid registration, which will have a bearing in our overall performance.
Taking all this into account and recent developments in the market, our revised guidance for 2018 is for revenue to grow above market, EBITDA margin guidance of high 30s, and CapEx spend guidance for 2018 of around IDR 7 trillion, which will remain focused on data network investment in 4G and continuous network improvement 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. If you wish to cancel your request, please press the pound or hash key. 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 queue by pressing star one again. Your first question comes from the line of Sachin Salgaonkar from Bank of America. Go ahead, please ask your question.
Hi. Thank you for the opportunity and congratulations for a good set of numbers. I have two questions. Number one is regarding your Xtream smartphone partnership. I just wanted to understand the impact of this on EBITDA margins and if you are subsidizing any handsets in this bundling proposition. Second question is with respect to your data growth. It appears to be a bit slow in this quarter as compared to last quarter. Is this a one-off? Should we see the growth normalizing into second half?
Okay, Sachin. Yeah, I think we started doing a huge promo on the cheap 4G handsets. If you look at since we launched, we've got quite tremendous traction on this. If you look at this program, we are not subsidizing the handset, but obviously the margin that we are making from this program itself is not high. Obviously, from a margin perspective, we are still making positive margin, but it's a low single-digit margin from this program. What is going to be the impact? The way that we measure this is this program is actually beneficial for us in promoting and translating people, the non-4G to 4G. Typically, we see that people that migrated to this program typically will actually increase their ARPU.
Margin-wise, if you look from margin perspective, it's probably going to be impacted slightly, but the way we look at this is we look from an absolute EBITDA. Absolute EBITDA is still going to be positive for us. Margin-wise, it's probably going to generate a low single-digit margin coming from this program alone. On a longer term basis, the impact is going to be quite significant for us.
Just let me try to answer the second question regarding our data traffic and the value of all users In the same speed for Q2 as we've seen before. If I look at what happened in Q2 and what will happen going forward regarding the product that we want to introduce, I do not see any reason for why it should slow down regarding the data growth. We will still introduce products and handset as well, where we will bundle it with YouTube, we will bundle it with iflix, et cetera, going forward. Again, at the same time, we also recognize that the customer in Indonesia, the first movers, they have kind of taken that into their pocket and are using it. For sure, we will not see this gigantic growth going forward, but the growth does not stop for sure.
As we introduce product, this will be bundled with some both freebies and paid monetized products when it comes to the data.
Okay, got it. Just a follow-up. I notice you changed your guidance from being growing in line with the industry to above industry. What do you estimate currently could be the industry growth for 2018?
Sorry.
Sorry.
Sorry, we were on mute, I was talking to myself. Sorry. Let me repeat again. I think if you look at the We've just got results coming from competitors this morning. Hence, I think looking at where the industry is in the first half, I think you probably can compute the numbers yourself. Industry itself in the first half, excluding XL, I think is at -12%. That's far worse than what we initially expected. Given that fact and where we are today based on first half and looking at our trajectory and momentum in the market, I think we are quite optimistic in terms of how we're going to perform in the second half. Hence change in guidance from inline to industry to above industry growth. What industry growth is going to be?
I think at this point in time, I think we are probably looking industry to be declining negative for 2018, at least looking at where we are at this point in time in the first half.
That implies a 2%-3% kind of a growth for second half?
Well, it could be higher than that in the second half, but the rate that I think if you look where industry has to catch up overall is quite significant given the position of where the industry is in the first half. Bear in mind as well, I think if you look at the quarter last year, I think the overall industry is still grew. I think putting all that in perspective, I think that's why I think we think that a likelihood the industry is going to be negative this year. Industry growth.
Okay, thank you.
Your next question comes from the line of Piyush Choudhary from HSBC Singapore. Go ahead, please ask your question.
Hi, good afternoon, and congrats for a great set of results. Couple of questions. Firstly, on competitive dynamics post-SIM registration, can you kind of update us whether XL Axiata has taken tariff hikes in proportion to peers, or are you kind of looking to further increase the tariffs, what's the outlook over there? Secondly, some of your peers, as you know, is lagging on network investments. Are you looking this as an opportunity where probably you can increase your CapEx significantly and strengthen your number two market share position meaningfully, given some of your peers are not investing? Just your thoughts around that. Thanks.
Thank you. Let me start with question number one regarding the tariff hikes and what we have seen so far and what we're going to expect in the second half of this year. We have got this question so many times, both from analyst guys and from our competitors as well. We made our own analysis and looked into how does the figures look like. When we take the hero product in the market, there's no doubt we are one of the leaders when it comes to price increase in the market for the first half of 2018. Now, at the same time, we also recognize that it's a pretty unhealthy price level in Indonesia at the moment. We will welcome, and we will also try ourself to be one of the front runners when it comes to price increase and price hike in this market.
As many of you have said before and what we have seen and the rumors in the market and what we've seen so far, yes, we believe that the price will go up in Indonesia.
On network investment, I think, yes, I think so far, our network investment have actually started to show positive results. I think whether from the network quality survey or index, I think we are in most of the big cities, we probably fare quite well versus our competition. As of now, I think we are still sticking to the IDR 7 trillion target, obviously, I think we are reviewing the situation as we speak. I think whether we are going to accelerate or not the investment moving forward is something that we're probably going to come back to the market once we finish looking at all this assessment.
Sure. If I may ask on the tariff hikes, can you clarify whether you have done hikes in third quarter which is similar to your peers or you are kind of looking to match that in future?
I think it's very much depending on who you're asking for the second half, right? There's so many products, it's almost unbelievable to find a comparison product or a neck-to-neck product, right? If we just take our couple of hero products compared to what we believe is our competitive hero product, as I said before, we are the leader in the price hike. Again, there's a lot of circumstances in the market at the moment, especially as you said yourself, regarding SIM registration process, how strict is it at the moment and what's going to happen in the future, right? It's very difficult to predict what's going to happen, but all indications right now is that it will actually go in upwards direction.
The reason I'm kind of stressing on this point again and again is because if I look at your data realization from your results, it's still down 18% quarter-on-quarter in second quarter results. There doesn't seem to be any evidence that the data tariffs are stabilizing in the market. Thank you.
Yeah. I think you probably need to look from this perspective, right? Very clearly, I think we know that we have increased the prices for our hero product, right? Obviously, I think what really matters is, I think, is the end prices to consumer, right? Obviously, that is what really matters in the market. I think when we track in terms of the effective data prices, we actually track the prices to end consumer. Unfortunately, that you can't see just solely from a pure yield given that I think the end consumer prices will also depend on the commission and the trade commission that I think operators are paying to retailers as well, right? We know as far as our hero products and all that comparing to the competition, we've increased accordingly.
In fact, we think in some areas that we are probably more aggressive than the rest. You are absolutely right that it's probably not reflected in the yield, but that's not the only measure.
Got it, Mohamed Adlan. Thanks a lot.
Your next question comes from the line of Arthur Pineda from Citigroup. Please ask your question.
Hi. Thanks for the opportunity. Two questions, please. Firstly, on the pricing, how much do you think you need to see pricing levels rise for your hero products in order to see the industry revenues normalize? Basically, where is the pricing now versus to Q1 '18? Second question I had is with regard to your growth momentum. It's been very divergent versus peers, and I know you've mentioned that you're focusing on key segments and all. I'm just wondering, what are you exactly doing differently from the rest? Is your revenue growth coming from specific regions or is it specific customer segments? Any favor there would be great. Thank you.
Sorry, Arthur, can I understand a little bit your first question, pricing, when you say normalized, what do you mean by that?
For the industry to go back to the growth levels that it was seeing before all this price war happened, what kind of pricing adjustments do you need to see? Basically, where the pricing is now versus, let's say, one year ago before all this discounting happened.
Yeah. I think if you look at the price points today, right? In the earlier part of this year or late last year, right? Technically, prices dropped by almost 30%-40%, right? I think where we are today, obviously, I think as we go along up to Lebaran, going post-Lebaran, definitely price has actually increased, but we are probably not back to the level that where we were last year, right? There's still probably, if you talk from a price increase perspective in some of the key products, you'll probably see a 15%-20% increase, right? We have not had a full recovery in terms of the original price where we were last year yet, right?
Just looking at if you are talking about looking at a growth rate last year, for example, you probably need to see that from where we are today, price probably need to go another 20%-30%, right? From our latest position today.
Again, impossible to look into a crystal ball where we are still going. When I look at our scope of new products to be launched, we are very welcoming that the prices should go up.
Understood.
The second question, as I understood it, was regarding the segment. What are we doing in regards to different segment in the market, right? As part of the transformation that was introduced more than three years ago, we are very much segment based in all the things that we do. We are talking about mass segments, we are talking about enterprise segment, and we are talking about premium segments. At the same time, the products we introduce in the market is also linked to each of these segments, right? Recently we launched this Xtream handset in the market, and that was very much focused towards the blue collar. As we can see that the penetration of 4G handset is very low among the blue collar.
The traction we can see is very positive, that the blue collar are actually able to buy this handset and use a 4G smartphone for the first time in the market. We will not stop this journey right now. Within the next couple of weeks, maybe months, we will also introduce some phones for the white collar as well, with kind of the same value proposition to attract this segment. I would say what we're doing different is the product we are launching is very much segmented focused and very much tailor-made to different segments in the market.
Your next question comes from the line of Myung-Sub Kim from Goldman Sachs. Please ask your question.
Hello. A couple questions. Firstly, on your network infrastructure expenses, it was down QOQ and YOY. Can you explain how XL has achieved this despite rapidly rising data traffic? Can we actually expect more cost cuts ahead? Second question is that we've seen, obviously, prepaid subs decline for all the telcos QOQ, given the prepaid SIM registration effect. Has that prepaid SIM registration effect been fully factored in the second Q numbers, or will we still see some lingering impacts in Q3? Thank you.
Yeah. On the network cost, I think part of the contribution, why you probably see network cost has declined is partly to do with our tower lease rental. As you know that today, for renewal of towers, we are paying 50% less than what we used to pay. I think within the next 2 to 3 years, we are probably renewing the bulk of our towers that was leased 10 years ago. Whilst we are building new sites, but we're also renewing quite a significant number of our towers that's probably coming to an end. That has, to a certain extent, resulted in a better QOQ and year-on-year on network cost. Second factor is, I think if you look at our managed service as well, we are entering into the seventh year of our managed service.
The way that the managed service is structured, every year, I think we probably see an improvement in terms of the commercial that we are getting as a result of this managed service. I think for this year, I think the reduction that we are getting as a percentage of revenue, the decline is quite meaningful, and that actually contributes to the improvement in terms of our network as well. Last but not least, I think we are also working together with the group to really see how we can optimize and capitalize on the group's strength in terms of discussion and negotiating with the vendors. In a lot of our OPEX and maintenance, for example, we have managed to leverage on the group's strength to reduce some of these costs.
I think that has helped us significantly in terms of driving our network cost down, despite I think building a lot more sites of new towers, for example, to improve our coverage.
Regarding the number of customers, the number of subs in this market, both pre- and post-the SIM registration, I agree with you. It's a very good question because it must be very difficult to read from each of the operators at the moment. Some have increased by significant amount, represented new subs here in Q2, and some have actually maintained the number of subs. From our point of view, what we can see, we are back to the same level as before the SIM registration and now after the SIM registration, the same level of customers. We do not see it should have any impact going forward anymore regarding the SIM registration. We're seeing the first hit has been taken so far.
Got it. Thank you.
Your next question comes from the line of Colin McCallum from Credit Suisse. Please ask your question.
Thanks for the opportunity. Couple of questions from me. I'm back to the pricing issue actually, because there is quite a difference between the sort of tone you're talking to us here and what we're actually seeing in your numbers. In particular on this data yield issue, where the gap between you and the number one player actually widened in second quarter. Let me ask the question direct again. In July, so in the last four weeks, have you actually increased any standard pricing? That's the first question. Second related question is, I think you mentioned hero product a couple of times. What % of your total revenue comes from that product? What exactly did you change there on that product, and when did you change it? Thank you.
Colin, I think the answer to your question, yes. I think we have been increasing our price since April. Obviously, not in big steps.
Sorry, Adlan. That wasn't my question. I said, did you increase prices in July, in the last four weeks? That was my question.
Yes. We did increase in July, Colin. That's the answer to your question. I think if you look at the hero product, obviously, there are quite I would say if you look at the portfolio, at least four to five products probably make up, I would say, 50%-60% of the total revenue. I think we have touched most of the hero products. Obviously, some is more than the rest, but definitely, I think since we came over this year, I think we have actually touched and increased prices for almost all the hero products. The extent of it, the quantum of it may differ depending on the segment and the target market.
Got it. Thanks a lot.
Your next question comes from the line of Ranjan Sharma from JP Morgan. Please ask your question.
Hi. Thank you for the call. I just have one question. Can you please help us understand what is the ARPU that you would require in your ex-Java rollout that will allow you to break even on your investments? Thank you.
Sorry. ARPU, you are talking about ARPU to break even in ex-Java?
Yeah, that's right.
Firstly, we don't break down our ARPU Java, ex-Java. I don't think that's information that we probably want to share in the market. As we said today, you're absolutely right. Probably generally you see the ARPU in Java is probably higher than outside Java. What is more assuring, in outside Java, we are at the stage of building up our market share. Definitely we want to expand our market share outside Java. If you can see that the investment that we've been making so far has started to show some results. If you look at the growth outside Java today, it's still contributing to a double-digit growth. That trend would continue as we move along.
At this point in time, we are probably not breaking even in outside Java yet, but obviously this is investment we are looking at to capitalize maybe in the next two to three years.
Thank you for that. Maybe I can elaborate a bit more. We're just doing a bit more analysis outside of Java, and I'm happy to talk about this in more detail offline. It just seems that your investments might not be profitable for the next four or five years at least. There is questions on, and it's not certain if you'll actually generate any returns on capital. I appreciate that there will be growth in revenues, but I'm struggling with the returns on capital part of the equation. That's why I was trying to figure out what is the ARPU that you would need to generate returns on capital. Even if I take your ARPU that you have in Java, I'm struggling to get the returns on capital. Would appreciate your thoughts. Thank you.
It's a long journey. Obviously, when you take the investment in this area, for example, you're not expecting an immediate return. One fact that you need to understand as well, the price point outside Java is probably much higher within Java. In some cases, you probably see that the average price point outside Java is probably 1.5 times higher than within Java. There is clearly an opportunity there. Second as well, what we also think that when we invest for new coverage outside Java, we also think our traffic on existing tower actually growing as well. From our perspective today, by putting additional investment outside Java, we also think that the return on our previous investment are also starting to show results.
I think it's still a way to go in terms of way to break even. I think we see that there is a huge opportunity and I think the ability to win and capture market share outside Java at this point in time, given the competitive landscape, I would say would be a lot more feasible at a more decent margin if you were to compare within Java. It's a long term journey, no doubt about it. It's something that we are willing to stay true to realize our goal to achieve a nationwide coverage.
All right. Thank you.
Your next question comes from the line of Andrean A. Saputro from Bahana Sekuritas. Please ask your question.
Hi, good afternoon, thanks so much for the opportunity. Congrats for outperforming your peers. Just a couple of questions from me. One is we just want to understand your interest expense, since it's been increasing quite a bit on the second quarter versus the previous quarters. My second question is, would appreciate if you could comment a little bit on, my understanding is that there is a Smartfren is quite aggressive in the market. Yes, no doubt it's a very small revenue base compared to XL. We just want to understand your thoughts on them, especially given their sparse 4G network.
Yeah. Let me answer on the interest. I think you probably have seen our portfolio. I think beginning of this year, we had a portfolio of fixed to floating is around 50/50. Obviously, I think some of the debt that we paid during the year happens to be a fixed debt. As a result, I think as of today, we have a debt portfolio fixed and floating at around 64% floating and 36% fixed. You know, I think over the last four weeks or so, the last six weeks or so, you have probably seen that interest rates have probably gone up. Likelihood of it going up further in the coming months is extremely high. That to a certain extent, have led to a slightly increase in our interest expense. Having said that, I think we are looking at a more balanced portfolio.
How do we address this thing? Obviously we are looking at various instruments to make sure that we manage this interest rate risk moving forward.
I think there was a question regarding Smartfren, how they're doing any noise in the market, that's going to be a very short answer because we don't see them in the market. We don't see them in our touch points. They are there, but they're not doing a lot of noise in the market right now or disturbing the business that we're doing. That's a concrete answer.
Got it. All right. Thanks very much. It's very clear.
Your next question comes from the line of Marvin Kairupan from UBS. Please ask your question.
Hi. Thank you for the opportunity. I had a couple of questions. One, I just wanted to understand what is your current level of network utilization, particularly outside Java? I guess a related question to that, probably in contrast to some of the previous questions that have been asked, why would we actually much rather not be more aggressive on tariffs to gain market share outside Java, given one of your competitors is struggling with network rollout and the other, as an incumbent, will probably be limited in terms of how much they can respond? That's question number one. The second question I had was, I know previously you have talked in the past about ambitions in the fixed broadband space. It's obviously a trend we are seeing in other markets, more bundling, if not from a product perspective, at least from a network perspective.
What are your thoughts there, and do you see an opportunity, either organically or inorganically, to become bigger in that space? Thanks.
Yeah. From network utilization, I think overall, you probably see that we are currently at around 50% utilization. Obviously, I think it's slightly lower outside Java. Right? I think there is still a lot of room in terms of loading up traffic into the network. Are we aggressive outside Java? Yes, we are. I think to a certain extent that I think our pricing will also depend on the price level in various clusters outside Java, right? No doubt that I think in areas where we see absolute dominant or monopoly by the market leader, you probably see prices as high as IDR 50,000 per gig or so, right? Typically, even if you price it at a 50% discount, you are probably pricing at a price that is much higher than what prices that you probably see into most areas within Java.
I think we are aggressive in terms of pricing outside Java, obviously, I think our pricing will probably depend on the level of competition, what we see outside Java. In certain areas, yes, we could be a lot more aggressive than the pricing within Java, right? The strategy depends on the various clusters that we are probably attacking. On the fixed broadband, I think, yes. Wait one second.
For the fixed broadband, related to the consumption, we can say that consumption is something that we have always had in our minds for the future of our business. As we have seen in other markets that customers want a one-stop triple-play solution for home and mobile. As such, we have communicated that we intend to have a fixed broadband product to be in line with this aspiration. Actually, we are currently gauging interest for a fixed broadband product on a small scale. We did a soft launch in early May for our fixed broadband product, we are currently fine-tuning the plans for the rollout, then we'll come back to the market when we have something to share, including the required investment that you asked about.
Thank you.
Your next question comes from the line of Arthur Pineda from Citigroup. Please ask your question.
Hi. Two follow-up questions, please. Firstly, can you just clarify how you assign the revenues on the bundled plans? I know that you've mentioned that 79% or so of your revenues are on data. Is this like for like versus your peers? Second question I had is with regard to this Java, non-Java issue. I'm just wondering about your pricing strategy. Is the strategy to undercut Telkomsel, or is it to push on other items like network quality and coverage? I'm just wondering how much flexibility do you actually have in terms of cutting rates, given that the costs are relatively higher outside of Java.
Yeah. On the assigning of revenue per bundle, I think, firstly is I think we don't know what our competitors adopt in terms of assigning the revenue, right? From our perspective, I think it's very clear that I think when we do assigning revenue, we look at the total traffic. We translate even voice SMS into megabits per second. Based on that translation, for example, and take on that traffic, and I think that's where you assign the revenue. That's probably one. On the Java and non-Java?
No, I can take that. Yes, you're right that we have Telkomsel in non-Java, and they are very strong when it comes to network, and we are the newcomers in non-Java. Of course, to gain market share in these places, we need to be aggressive on the pricing as well. Not saying that we want to go down to the same level as we have in Java, because we still see potential in non-Java. Also they're saying that according to our plan for expanding the network out there, of course, we need to be aggressive on some other items like network quality, like throughput, et cetera. So far, at the stage where we are right now, we of course, need to be aggressive on the pricing to gain market share in these areas.
Thank you.
Next question comes from the line of Gopa Kumar from Nomura. Please ask your question.
Yeah. Hi, thanks. I just want to confirm a few things. Firstly, I mentioned 2%-3% growth in second half. Is that for the industry or is it the growth you expect for XL on a YOY basis? Also, if I look at the second half 2017, it was quite strong for XL. Do you think that in order to achieve a YOY growth, would you have to raise pricing or would it be possible with the current pricing in the market and should be driven by data usage? Lastly, on the follow-up question on the debt, do you have any thoughts on reduction of debt or on the foreign currency debt? Thank you.
Firstly, Gopa, I don't think we mentioned the 2%-3%, right? I think it came from one of the caller, right? I think what we actually said that the industry was going to see overall negative growth, I think, in 2018, right? We expect that the second half industry growth is going to be much stronger than the first half, right? From our perspective, I think, we have actually revised our guidance looking at the situation where we are today. We have actually revised our guidance to be above the industry growth, right? You definitely can expect a much stronger growth in the second half. Obviously, I think, looking at price point, and this needs to be driven by a few things, right? Obviously, the healthier environment as a result of the enforcement of the prepaid registration.
Secondly, as well, with what we seeing now, the assumption of a more rational pricing. Obviously, I think, if we see as where we were today, right? Price has gone up, but we were probably not at the level that we were before last year, right? Obviously, I think, that's an important assumption as well, that market competition be a bit more rational, in the second half. Thirdly, on the reduction of debt, I think firstly is, I think we do have about $300 million of foreign debt, and I think you know that these are actually hedged up to maturity. All these debts are probably due in Q1 next year, right? I think from an exposure perspective at this point in time, we should be covered.
Thanks. Just a follow-up question. Just want to clarify. Is it fair to expect XL to grow on a YOY basis in 2018, or would you be able to quantify it?
If you, at least based on the current trajectory, it's possible looking at the market condition and.
Okay. Thank you.
With the assumption of a better market in the second half.
Okay. Thank you.
Your next question comes from the line of Karthik Chellappa from Buena Vista Fund Management. Please ask your question.
Thank you for the opportunity. Two questions. Firstly, your paid CapEx for the first half is actually down materially year-on-year. Although there is going to be some sort of a catch-up in the second half, the low paid CapEx, is this also an outcome of better credit terms you are getting from, let's say, some of your vendors, especially from China? My second question is on our 4G base station, which is currently now at about, let's say, about 25,000. I presume all of this is basically loading on existing 3G sites. Any color or flavor on how much of this will actually be non-Java versus Java?
Okay. If you look at paid CapEx, you are absolutely right. I think, one of the things that we have probably gone out as a group is to negotiate for better credit terms with our vendors, right? Essentially, we have managed to secure better credit term with some of our vendors. As a result, I think you probably have seen that similar CapEx amount, committed CapEx, but I think a slightly lower paid CapEx, in the first half, right? Secondly, I think if you look at 4G, yes, I think you probably would see that the bulk of this 4G is actually loading on a 3G tower. I would say that, from a tower perspective today, out of the total, Java would probably still constitute around 60-40, right? Java, non-Java.
Got it. These better credit terms that you're getting, are they confined just to, let's say, Chinese equipment, or is it pretty much across the board?
I think across the board. Yeah.
Okay. Thank you very much. Wish you all the best.
Your next question comes from the line of Alex Goh from AmBank. Please ask your question.
Yeah. Thank you. I've got a couple of questions. One is on your sales and marketing. Your first half, it accounts for about 11% of your service revenue. I'm wondering whether it's going to revert back to your normal 7%-8% after the SIM registration campaign is over, and that is going to come in the second half of this year. My second question is, after the completion of the registration campaign, have you seen your prepaid subscribers start to move upwards on a net basis, in June and in July? Third one is, could you give us your effective tax rate guidance? I mean, the first quarter was a positive tax charge. Now in the second quarter, it's a negative one. I'm wondering, going for the full year, what sort of rate should we be looking at?
Yeah. Let me take the first and the third question. If you look at the sales and marketing, yes, you're absolutely right. As you know, during the prepaid registration time, I think we did spend a lot of money to get our customer registered. Hence, I think you see sales and marketing going up to about 10.3% as a percentage of revenue. However, not all of these expenses that we incurred in the first half will continue to recur in the second half. There'll definitely be some savings. A small amount of these expenses will probably recur in the second half. We expect, I think, the sales and marketing expenses to probably stabilize at around, in quarter three at least, between 8.5%-9%. Yeah.
Tax rate, I think this is a bit difficult for you to see, because I think what we have probably seen in Q1, Q2, there was some element of tax refund that you have probably seen that's probably skewing a little bit in terms of the effective tax rate. Obviously, there are quite a number of tax appeals that we are probably doing, appealing with the government at this point in time. Obviously, in this pipeline, there are some that we probably stand a good case of winning the tax case. In all these cases, I think the way that we do our treatment, we are always very conservative. When there's a dispute, we typically provided full for it.
In any case that we win, there will probably be a refund, and hence, that's why you're probably seeing that in some cases you probably see a positive tax income as a result of the successful appeal. I think it's going to be a bit more difficult to give a guidance on this tax rate for this year, given some of the tax refund that we are probably getting.
Regarding the customer and the behavior post the SIM registration, what we see in the first indication is that there's a bit more engagement from these customers post the SIM registration. What also surprised us that they are willing to pay more to have a hassle-free customer journey going forward, meaning that they are actually ready to pay a bit more not to have to change the SIM every time. Instead of being a recurring customer, they buy a scratch card or they buy something, they can continue using the existing SIM that they have. We see that kind of change in behavior from our customers at the moment.
Just to follow up on that, was there any net increase after that, after the campaign? Inching up in June and July.
Number of customers? Yes.
Yes.
Yeah.
There was.
Okay. Thank you.
Your next question comes from the line of Kathryn Tatoulis from AGI. Please ask your question.
Hi. Thanks for this opportunity. I have one question regarding the margin guidance. You are guiding a high 30 for the EBITDA margin, but at the same time you are mentioning that you are also doing some of the Xtream 4G smartphone bundling program that has a much lower margin. Is this already factored into your high 30 guidance for the full year already?
Yeah, I think the answer is yes. I think there's two parts to it. I think we are also expecting better revenue growth in the second half. Obviously, I think if you look at our numbers, we do have a high operating leverage, and increase in revenue would contribute significantly to margins. Nevertheless, I think you are absolutely right. With the Xtream campaign and all that, it would probably be dilutive from a margin perspective. Also bear in mind that we also do have some other cost initiatives that we are working on at this point in time, which would probably be realized in the second half as well. On a net basis, I think the high 30% as the guidance are probably still intact.
Okay. Thank you. Thanks.
Your next question comes from the line of Norman Choong from CLSA Indonesia. Please ask your question.
Hi, guys. Thanks for having me. I have two questions. The first is actually back to pricing again. I think one of the key concerns of me now is that, yes, you have raised prices already similar to your competitor, can you give a clearer guidance on how are you going to bring prices up going forward? Is checking Xtra Combo a good way to really track your implied data use going forward? Second thing is that on this Xtream smartphone combo, is there a limit to how many phones you can sell, or is there a timeline where you will stop the promotions, or it will just ongoing until you are satisfied? Thanks.
Yes. Let me start with the first one regarding the pricing and give some guidance. It's very difficult. You still have to remember that one big player in this market is the incumbent player. Usually in markets like this, it should be the incumbent who start this journey, and we will of course follow. Anyway, we are determined. We want to increase the prices. As I said before, it's pretty healthy. To give exact plans for when we're going to do it and how we're going to do it on this product, I cannot reveal at this stage, of course, because I think my competitor would like to see that as well. When it comes to the Xtream handset, if there's any limitation how many we want to sell, yes, we want to sell as many as we can, of course.
In the beginning here, was a little bit of a production issue. Of course, it's difficult to get the right handset for the right price, et cetera. Right now, we are selling everything we can get into our stocks at the moment, right? We haven't sat down and said, "Okay, this is the limit, and here we stop," or anything. No. Now we are on the journey, and we'll see how it goes for the next couple of months before we take a decision again what to do.
Just put in perspective, right? We are not subsidizing the handsets, and we are still making a positive EBITDA on the handsets, right? On the whole campaign, right? I think, as far as that's concerned, yeah, it may have an impact on margin, but from an absolute EBITDA perspective, it's still positive for us.
Again, it's not a single standalone handset. It's a bundled package.
Correct.
It's a handset and a package device with a 12-month all-in pack allocation .
Is that going to be a risk of cannibalization to your existing user base, or are you just waiting for this to expire and it will convert to your existing?
Yes, of course, there will be some cannibalization of our existing base. Again, the first survey that we have done regarding our Xtream handsets shows very positive that we're actually gaining customers from our competitor. The survival rate as well for these customers are much, much higher than we see for a traditional customer in our market. Because as maybe you know, that you have to recharge IDR 25,000 every month to keep this alive.
Correct.
It's pretty healthy business.
Oh. Okay. Thank you. Thank you so much.
Your last question comes from the line of Piyush Choudhary from HSBC Singapore. Please ask your question.
Yeah, hi. Thanks for the opportunity again. Just want to follow up again on the rental expenses, which have fallen quite sharply, 11% quarter-on-quarter. Can you confirm that this is now kind of a recurring base, there is no one-off reversal over here? We understand the tower deals are coming down, but it seems a bit sharp reduction on a Q-on-Q basis.
Yeah, we can confirm there is no one-off, Piyush.
There's no one-off reversal. Okay.
Yeah.
Clearly then, as your marketing expenses will come down in the second half, there is a significant room for margin expansion then in the second half.
That's why we're keeping our high EBITDA guidance.
Great. Thanks a lot, and all the best.
Okay.
I now would like to pass the call to your host. Please continue.
Very well. Thank you again for participation in today's call. As always, do get back to us if you need further information. We'll speak to you next quarter. Thank you.
That concludes today's conference call. All lines may disconnect now.