Ladies and gentlemen, thank you for standing by, and welcome to Axiata Group's second quarter 2018 results briefing. Throughout the presentation, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session. Firstly, three housekeeping rules. Please mute your phone during the presentation and kindly avoid using wireless headsets. Also note that the call duration will be for a maximum of 90 minutes, ending at 6:00 P.M. I would now like to turn the conference over to your speaker today, Tan Sri Jamaludin, President and Group CEO. Thank you, sir. Please go ahead.
Thank you very much for the introduction. My name is Jamal. I'm the Group CEO. I'll be presenting together with my Group CFO, Vivek. We'll go straight to the slide one, slide two rather. Just an intro. This has been one of the most eventful quarters in so many ways. First and foremost, of course, Idea. Finally, we're at the stage where we reached the final regulatory approval for Vodafone Idea merger. From our point of view, it will be the major cutoff point when it comes to our accounting treatment. Again, Vivek will explain in more detail. All opcos, it's very hard to find all opcos to outperform in their respective markets. Typically, we have two, three, a majority of them doing very well.
This time around, all performed very well from an EBITDA and revenue perspective, out of which three performed the best in the industry. One of the best news, although in a small way, but in a big way in the sense that it's a big validation of one of the three core ADA or digital core verticals. Sumitomo invested about MYR 20 million in our analytics data advertising company, implying a valuation of $109 million U.S. Like I said, although the amount is small, given where we have been and what we are doing in the advertising area, which is probably one of the largest in Asia, it's been a major validation for us. The good news is that we are back to after two years of muted dividends. From a DPR perspective, we are moving back towards the 85%.
We are very committed for that for the full year. For the interim, we are announcing My apologies for the short disconnectivity. I must have said something wrong, let me try again. Let me go straight to slide three, which was when I believe when we got cut off. Slide three shows the reported financials or the statutory numbers. As you can see, all these numbers have been very much clouded by so many one-off and significant transactions that made it very hard to understand the underlying performance. Namely, if you look at Idea itself, there are three aspects. There are technical impairment, which is to the tune of MYR 3.4 billion loss. The dilution itself, because we didn't participate in the rights issue or the placement issue, that amounted to MYR 358 accounting loss.
The operational losses of MYR 95 million in the year-to-date. At the same time, there is a major Forex translation on average 10% MYR against the other currency within the footprint and the Forex loss. Actually, the most complicated ones are the accounting changes due to MFRS 15 and 9, where in general, it helps in the revenue but hurts the EBITDA. There are many other one-off items. To really understand the underlying performance, if you can turn to page four, it shows our real actual underlying performance. As you can see from this chart, revenue grew Q-on-Q 3.8%, year-to-date 5.1%. On EBITDA grew 5.6% Q-on-Q, and year-on-year 4.6%. The margins are quite an improvement from 36.5%-37.1% improvement on a quarterly basis.
Normalized PATAMI, however, there is a drop of 22.5% Q-on-Q and 24.1% year-on-year, which we will explain shortly. As you can see from the notes below, what is interesting is that we have revenue gains in all our markets, all the six markets that we operate in with Celcom, Axiata, Digi, performing the best in the industry on a Q-on-Q or year-to-date basis for revenue. Many of them performed very well too on the EBITDA level. The digital investments, fortunately, have helped the revenue growth, although in a small way, 0.3%, but diluted EBITDA growth by 1.7%. In terms of losses for the year-to-date, it was to the tune of MYR 180 million loss due to our investment in these digital businesses.
The cost optimization program, we are on target to deliver MYR 1.4 billion to date, with the first half reaching MYR 800 million, both CapEx and OpEx. Our balance sheet remains very healthy, fortunately. We have also, as you can see, mentioned above, provided for the Idea related, with the recognition of Idea from associate to simple investment and provided for MYR 3.4 billion just for the technical impairment, and from 16 August onwards, we will cease to do any more accounting equity account. As I mentioned earlier, one of the best news for the quarter is the investment of MYR 20 million from Sumitomo into ADA, our digital advertising company. Mitsui also exercised the next 10%.
As you know, they are currently the owner of 10% of Smart, but they have exercised their call option for additional 10% at MYR 92.4 million, taking a stake now from 10%-20%. Unfortunately, Deodar has been delayed again and again. Very unfortunate. We were expecting them to be completed the first quarter, then second quarter, looks like it will be completed more towards September. Lastly, we have declared a MYR 0.05 dividend, translating back to 86% DPR. Very much bringing back our commitment to 85% DPR for the whole year. Let me pass to Vivek to explain the details, especially with regards to the normalization of PATAMI.
Let me just step back to the slide number four, which is what Tan Sri just completed. You would probably, when you look at the numbers we reported last quarter versus what we are reporting this quarter on underlying performance, you would see a difference. Because last quarter, we reported MYR 195 as normalized PATAMI versus MYR 306. What we have done is to make the run rate comparable, we have excluded the operating losses or gain from our reported number, because as Tan Sri said, this is discontinued business. There is no further impact for us coming from Idea. We will continue to exclude that. That is why the quarter one number now looks like MYR 306, because there was an operating loss from Idea, which we had consolidated.
In quarter two, there is actually a positive effect of MYR 20 million, so it should be read as MYR 257 if you want to look at like to like, based on what we reported. On that basis, it is actually a 21% growth. Given that we are now excluding Idea, the normalized PATAMI looks like a negative 22% de-growth. Let me come to, I think, given there has been so much of impact of the translation and some of the other factors, slide number five, kind of gives a bridge between what is the underlying performance last year, same period, which is first half, versus the underlying performance in 2018. We had, last year, MYR 779, MYR 285 million coming out of the EBITDA improvement over last year. However, that has been more or less offset by the increased depreciation consequent to the last couple of years of increased investment.
We are not much concerned about this, given that this is clearly to get the network superiority in all of our markets, and that is what we have been focusing on. There is a one-off MYR 54 million tax, which was a credit in 2017. Then the increased investment of MYR 135 million at PATAMI level, in fact, coming from the digital businesses. So that is kind of a bridge between the last year performance, first half, versus the underlying performance versus the first half of this year. If I switch to the next slide, starting with each of the opcos with first one, Celcom. I think we are extremely pleased with the good execution of strategy and performance of Celcom, where we have seen us gaining 3% quarter-on-quarter service revenue and 2.8% on total revenue, much ahead of the peers in the market.
We have also seen this quarter, and second consecutive quarter, a positive development on net adds in both postpaid and prepaid business, and also an improvement in the ARPU reflective of our strategy of focusing on high-value customers. So you have seen a postpaid ARPU on last year versus this year moving up five MYR and prepaid moving up by four MYR. PATAMI, you would see a negative impact compared to last year, largely on account of the around MYR 140 million gain we got last year in Celcom because of sale of 11street, which is more an internal movement from Celcom into Axiata. So at a group level, there was no impact because this was eliminated. However, from a Celcom standpoint, we did show a profit last year because of sale of 11street in first half of 2017.
As far as, again, the impact this year is also on account of tax, where we have actually settled a tax claim with the tax authorities here in Malaysia. However, at the group level, again, this did not have an impact because there was adequate provision available. From a Celcom perspective, there is a MYR 44 million negative impact coming because of the tax settlement. I think a key focus for Celcom, while on the top line has been a good performance, key focus going forward is really on cost takeout and rationalization of spends to improve the EBITDA margin. If I can go to the next slide. I think XL, the transformation strategy has been working well. I think we've been much better positioned after SIM registration compared to the market.
We've seen a positive growth in revenue as well as EBITDA for a year-to-date basis, compared to the market, which has seen a high single-digit degrowth during the same period of time. I think we continue to position ourselves as a very strong data player where 73% of the service revenue is actually coming from data. When we compare our data users, our share is much higher than what the other operators have. I think the positive news is, while SIM registration is behind us, I think we were able to get around 97% of our customers who had registered as part of the SIM registration back into our network. The loss which has happened from the existing portfolio of customers has been very, very small for XL.
We continue to expand our footprint in 4G in different markets, Java, which is also giving us a much stronger growth in the market. If I go to the next slide. Dialog. Strong performance overall on each line of business, as well as on revenue, EBITDA, and PAT. I think we are gaining market share across segments in Sri Lanka. I think extreme good performance, and we expect that to continue during the year. Robi. As you know, we got the license for 4G in February this year. After that, we've been extremely fast in rolling out 4G network. We've already touched more than 7,000 base stations covering nearly 70% of the population on 4G. That's been reflective of our growth in service revenue by 9.4%. Also, the overall profit improvement, EBITDA improvement, which is nearly 39% on a year-to-date basis.
If I can go to the next slide. Ncell. I think we have seen improvement on revenue at 4.9%, and EBITDA has been flat. However, this is despite a 16% drop in ILD revenue. As you know, ILD contributes nearly 95% of the revenue comes as EBITDA margin. In line with our plans, we expect ILD revenue to come down. However, we are happy that it's been offset with a strong mobile revenue growth, which is 12.3%, and EBITDA growth of 10.2%. I think the Ncell, despite the ILD revenue coming down, maintains an EBITDA margin of 63%. We have, beginning of the year, been able to take out around MYR 208 million of dividend from Ncell. If I go to the next one, which is Cambodia.
I think we are seeing some bit of stabilization of price war in that market, which has resulted in growth of 11% quarter-on-quarter in revenue. We've also seen on a year-to-date basis, flat revenue growth. On a quarter-on-quarter basis, we've seen a positive trend. However, EBITDA has been impacted largely on account of new regulatory charges, specifically the revenue share, which has gone up from 4%-7%. We continue to have a good, strong data growth, and we've also launched our fixed broadband proposition in Cambodia. Early days, but that's something we would track very closely. I think Mitsui did exercise their call option, which was available for them for 10%, which also suggests a strong commitment as well as performance of the business, which reflects as interest from Mitsui. If I go to the next one, which is on edotco.
edotco contributes around 7.5% on revenue and EBITDA. Continues to show a strong revenue growth of 12.2%. EBITDA has been impacted mainly on account of some of the charges relating to the acquisition which we are pursuing in Pakistan and some of the charges relating to the new licensing requirement in Bangladesh. Otherwise, on an underlying basis, EBITDA is also showing a positive trend. When it comes to tenancy, I think strong development on tenancy to nearly 1.6 compared to 1.47. Deodar has been delayed, contrary to our expectations, because of regulatory hurdles as well as delay because of the elections in Pakistan. We are hopeful to resolve this soon. We have still a long stop date of 14th September, which has been extended. Digital businesses. As you know, we are focusing on three verticals in digital businesses.
Boost, which is the financial services wallet in Malaysia, has been doing well. We've got now around nearly 3 million customers registered, around 35,000 merchants on this wallet. We are by far the largest at this point in time in terms of registered customers. ADA, which is the digital marketing business, has been expanding well and has also secured, as Tan Sri said earlier, investment from Sumitomo, which basically reflects a strong commitment to this business. We've also been in the process of rationalizing of our non-core. As we said earlier, our focus will remain in the three vertical digital businesses. Which is FinTech, ADA, advertising, digital marketing, and the platform business. Apart from that, we are planning ways of monetization and we have 1.4 million customers in this quarter of 2018. Idea, I think we've covered fairly in detail.
The only comment which I would have, is that by taking a decision of deconsolidating Idea and converting that into simple investment, we would not see ongoing PNL impact into the results coming from the performance in India. As you know, the market still remains fairly volatile in the Indian space. M1, we continue to follow this closely. It does contribute still to profit and dividend. However, we are cognizant of the fact that there would be a fourth operator coming in shortly. M1 has been preparing well to deal with the increased competition. If I go to the next one, which is on the capital expenditure. I think pretty much in line with the guidance we had given on CapEx.
We may be slightly marginally short of the CapEx, but we will continue to have this focus around the CapEx investment, and in line with what the plans are. However, increased CapEx in quarter two is reflective of lower cash flows in this quarter. The next slide, the financial numbers, as balance sheet continues to be strong, are marginally impacted by the fluctuation in exchange rate between operating currency and ringgit. Consequently, the EBITDA on actual reported numbers has come down, and that's reflective of gross debt to EBITDA marginally moving up. We still remain strong as far as the cash position is concerned. I think also from the risk, because of the exchange, it's around 22% of our loan which remains exposed, and we continue to monitor it very closely with the developments which are happening in the international market.
If I go to the next slide. Here we are trying to explain what would be the KPI adjusted if we exclude Deodar. At the moment, we are still confident of closing that, but we are assuming at this point in time, if that does not happen, what would be the adjusted KPI number? Similarly, the impact of technical impairment on Idea being excluded. Based on that, we are looking at our revenue to be in line with the guidance. EBITDA would be marginally below the guidance. ROIC would be below. However, the ROCE and CapEx will remain in line with the guidance we had given earlier. If I come to the last slide. I think we see opportunity in Indonesia and Cambodia.
Indonesia, mainly because of now SIM registration being behind, and XL has been fairly doing well related to the market, and we are seeing some immediate short-term increase in prices in Indonesia. Hope that continues, and if that we should see a positive landscape in Indonesian market. Similarly, Cambodia, I think Cambodia went through a fair price war over the last three to four quarters. However, last quarter, as we speak, we are seeing relative stability on prices, which should see a positive impact, and we've also seen that in the last quarter numbers. Sri Lanka and Nepal continues to do well. I think we expect that momentum to continue. However, I think we have to be wary of the risks associated with currency and interest rate volatility in markets, specifically Sri Lanka, Bangladesh, and Indonesia.
There are regulatory uncertainties in Malaysia, especially with respect to the SST, which will be imposed from September 1st. We are also concerned about the extent of enforcement on SIM registration that will happen in Indonesia. If that is weak, that may bring back the industry to a situation which is pre-SIM registration, which may not be good for the industry and for XL. The last bit, I think we will continue to rationalize our non-core digital portfolio. We do not see, as we speak, major impact. However, we have to take into consideration any new requirements which come into, or if potential losses, if we have to rationalize this portfolio. That's it from me. Thank you.
Okay. Thank you, Vivek. We are now opening up to question and answers.
We will now begin the questions and answers session. If you would like to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. Your first question comes from Chong Chang Fung of CIMB. Please ask your question.
Hi. Thanks for the call. Couple of questions from me. Firstly, for Celcom. If I look at the prepaid ARPU, it's rising on a Q on Q basis over the last two quarters, couple of quarters, and on a growing subs base. Appreciate if you could give us a bit more color as to what you're doing there to drive this solid performance. Secondly, also for Celcom, can you also give us an update on the competition post the second quarter? Any impact from U Mobile's recent unlimited offers? Another question on costs. Can you also explain to us the drivers for the increase in staff costs Q and Q, whether there were any one-off there, as well as the direct expenses, which were down Q and Q, what drove that as well? I'll leave that here, and I'll come back for more questions later.
Michael?
Taking it one by one. The first one is prepaid ARPU rising quarter on quarter over the last two quarters. In fact, yes, this is due to a very conscious pricing policy coming out with new packages, promoting upsell on the packages. It's one of the key parameters that we are following up, I'm happy to see, obviously, that it works out. The second one, competition, obviously there is an impact from the U Mobile unlimited offer, but it's not at the scale where we would possibly think it should be. That is due to the fact that I think we have competitive offers as well, which deliver enough gigabytes for customers to be happy. We don't see a major impact on this one. Next one is increase in staff costs.
I think there was a one-off in Q1, which brought the staff cost down, was a reversal, and this basically normalized. On a normalized base, there is no increase in staff cost really, quarter-on-quarter. I hope that answers the question.
For direct expenses, it was down Q-on-Q over the last two quarters. Is that seasonal, or is that a trend that we'll see direct expenses continue to come off into the second half of the year?
I think if I may, Michael, I think Q-on-Q, we've seen direct expenses coming down because we corrected one of our IDD products, which is Asia Pass, which we have increased the price or reduced the offering, which was in first quarter, had an impact of nearly MYR 30 million to us in Celcom, which has now been removed in quarter two.
We would expect that to continue the same way.
Yes, will continue.
Okay, got it. Thank you so much.
Your next question comes from Arthur Pineda of Citigroup. Please ask your question.
Hi. Thanks for the opportunity. A number of questions from me, please. Firstly, on the Robi performance, it seems like the revenues are up 1%, but EBITDA was up nearly 38%. I am just wondering what is driving this, if there are any cost items which were reversed. Second question I had is with regard to the Dialog call earlier. I am just wondering, how do you see the removal of the price floors as impacting revenue momentum? Third question I had is with regard to the digital loss. Sorry if I misheard this. Is it MYR 180 million or MYR 118 million as of the first half? Are you keeping the MYR 200 million loss that you guided earlier? Next question is with regard to the Deodar towers. What is pushing the delays on the deal? Is this merely procedural or is there a risk that this may actually not push through?
That's all for now. Thank you.
Let me answer the third and fourth question, then I'll pass to maybe Dr. Hans, you want to answer the first two questions, yeah. On the third question, it's 180, not 118. All right. We were trying to cap it between 200, 250 for the rest of the year. On the fourth question, it's mostly procedural. As you know, there were a couple of changes at the regulatory level. Change of the chairman of the commission, then, of course, the election and change of government has been stalling our approval, I guess, at this point in time. We do foresee that we can close it by end of this quarter. Dr. Hans?
Yeah. I'll take the first question on Robi's performance. Multiple contributors to the increase in EBITDA. Revenue has been growing very significantly as you could see. Even more so, the synergies from the merger coming through. Lot of costs coming out of the system. SIM lifting or the acquisition cost has been reduced during the same period. Multiple contributors, but these three would, I believe, account for a major part of the EBITDA growth.
Sorry, just to clarify my question.
Sorry?
When I look at the revenues for Robi, it's only up around 1% Q on Q. You're seeing nearly 38% rise in EBITDA. Is there any adjustments done on the expense side?
No, no adjustments. There are no one-offs. The SIM lifting, the aggression on the SIM cards going out into the market to drive gross additions is down very significantly. MYR 3.5 billion versus MYR 6 billion on a quarter-to-quarter basis.
Understood. What you were saying?
On Sri Lanka and the removal of the floor price, yes, it's a significant event in the market since the floor price was introduced somewhere in 2010. However, over this intervening period, tariffs themselves have gone down very significantly. Therefore, how much further tariffs, especially the data tariffs which are more relevant today, could go, is a key mitigator to a major factor. However, I think it's very early. We would be able to comment more fully on the next call.
Understood. Thank you very much.
Your next question comes from Prem Jearajasingam of Macquarie. Please ask your question.
Hi. Thank you for the opportunity. A few questions from me, please. First of all, with Celcom, you've shown a pretty good performance, but one thing I noticed is that data consumption of your subscribers has jumped very considerably. My concern here is, do we think we are spending enough on CapEx at Celcom, to support this growth? Or is there any other mitigating factor which would allow you to continue at this rate of growth on the data traffic? Secondly, with Ncell, again, you've done well despite the ILD revenue declines. Could you remind us what ILD revenues were as of the first half as a percentage of total revenues? Also, as data consumption rises in Nepal, are you concerned with either revenue growth or margin softness as function of legacy revenues with data?
Finally, in both Dialog and Robi, again, data revenues are still sub one-third of revenues. As those networks again get rolled out, are you concerned again with revenue and EBITDA trajectories going forward?
Thank you, Prem. Michael, the first question.
Prem, hi. To the first question, yes, in fact, data consumption is on the rise. That's not the first time. Actually, we can see that over the last nearly two years. If you look at competition, it's comparable, we are not far off others in the market with this. Obviously, yes, you are right, we have to spend quite an amount on capacity enhancements. We are doing this. It's catered for, it's in line with the planning, I don't see any major issue coming out of this.
Dr. Hans?
Thank you, Jamal.
Yes. With respect to Ncell's ILD revenue, as a percent of total revenue, range between 26% and 30% during the first half. Your question on whether data consumption rises, whether data revenue growth would stop versus ILD. I guess the effects we are seeing are a mix of transition of ILD traffic onto OTT services, as well as overall a high degree of price competition on the termination rates. It's two impacts, not only the OTT impact. We would drive data growth nevertheless, and the domestic revenues are moving very well in Nepal. The strategy of compensating for ILD through domestic revenue growth, both data and voice, has resulted in the overall performance of the company.
You're not concerned with EBITDA potentially coming down?
No, EBITDA would continue to grow, because as domestic takes over from ILD.
Prem, I think just to add what Dr. Hans was saying, yes, we would expect EBITDA to come down over time. I think, which is part of the plan in Nepal, however, we are seeing the good development on the core revenue to more than offset the impact of ILD revenue coming down. It is positive, but it is obviously from a long-term perspective, not sustainable. We would see as the data consumption increase, data realization also coming down, which will have an overall impact. I think it's safe to say that it is looking much better than what we would have anticipated.
Just to add to that, from a margin perspective, because ILD has very high margin relative to non-ILD, obviously, you should expect margin to compress over the next 2 years, and that has been expected. In fact, our business case when we acquired the company is premised on the fact that ILD will go down significantly, and margin will go down. Still, a very good business.
We actually started when-
Yeah.
-more people's revenue used to be ILD. Now it's actually down to 26. The exposure has come down. However, as a company, they're still been holding on to 63, 64% margin.
Third question. Dr. Hans.
Yes, data revenue as a percentage of total revenue would continue to increase in Dialog and Robi. ILD is not a significant play in Robi due to the fact that termination rates are fixed through the interconnect provider. However, in Dialog, it is very significant. We do expect international revenues to fall in Sri Lanka. With the very healthy growth in data revenues, the EBITDA growth trajectory, we are confident to maintain the EBITDA growth.
Okay, perfect. Thank you very much, and good luck on growing that Ncell EBITDA going forward.
Your next question.
Thank you.
Comes from Gopal Kumar of Nomura. Please ask your question.
Thanks. A few, firstly, on Celcom. Your revenue momentum is pretty good, but the OpEx seems fairly elevated. Going forward, are there opportunities for material cost savings, or should we expect the EBITDA margins to be at these levels? Second is a follow-up on digital business losses. Is there any way to give what you expect for the losses of this business, maybe in a slightly more medium term, say, for the next couple of years? Next is on Robi. Obviously, the benefits on the cost side is coming through. Would you expect further improvement in EBITDA margins on this business? Also, can you remind me what's your current expectation for profitability for this business? Lastly, on Ncell, I'm not sure if I heard it correctly. Can you confirm if you said that you expect EBITDA to decline for this business? Thank you.
Okay. Let me answer the question, except for number 3, Dr. Hans will answer. Then I'll go the other way around. For number 4, we're looking at EBITDA margin to decline, because of the huge margin of ILD, which is obviously declining. Then the other than ILD, of course, the margin's much lower. Still pretty high, but lower than ILD. Margin as a percentage will go down, but margin absolute should be quite stable. The first question actually is a far-reaching question. I wanted to answer because from a strategic perspective. The last two years, our focus, because our revenue engine has broken down back in 2015 and 2016. The main focus has been to repair the revenue engine, quote unquote. It involves product services, building out a better network, and revamping the distribution which was also broken down quite badly, unfortunately.
We have done most part, maybe not quite all, but most part, and that has improved quite a lot. Now, during the process, of course, from a CapEx and OpEx, it has increased, right? Coming into the future, we probably have to shift gear a bit, where the focus on costs will take equal emphasis as revenue. If I were to put it in the right word, it's a profitable growth as opposed to just revenue growth. Hence, you can expect margin to increase, maybe not dramatically, but it will increase more gradually. We have done a lot of things this year. You will see some benefits coming on next year. Some we are very confident that will increase both the margin and margin percentage.
For example, the cost program that we have undertaken across the whole company, from network to other areas, a lot of the benefit will come to next year. One of the things that you will see fairly significantly is our work on the right sizing. Under the leadership of Michael, we have done a major revamp this whole year to ensure that we have a very high productivity next year in the form of right sizing. More detail will be given, but you can expect that the HR cost as a percentage of revenue should reduce quite significantly. Among others, those are the plans that we pledge to make. I hope I've answered your question from a more tactical or strategic perspective. The focus will shift slightly from an equal focus on both revenue growth and profit growth. On the second question, this is very much expected.
In fact, I mentioned much earlier, last year, our plan is to look at the investment to the tune of MYR 200 million-MYR 250 million. And of course, MYR 180 million doesn't mean that we multiply by two for this whole year. We are tapering off. The good and bad thing about ADS, the more success we have, the more losses we will achieve, or we will experience. We are at the same time very guarded not to overdo this, so there'll be a cap somewhere. Net net, we don't expect next year to have the same kind of losses. Perhaps more or less the same, and of course, from then on to be better. Perhaps this year, next year will be our peak. From then on, we expect to do well.
In fact, most of the three businesses that we are focusing on right now will be PBT neutral in the year 2020 onwards.
Thank you.
Thanks. We have the third question, Dr. Hans?
Yeah. On question three, there are some of the merger synergies still ahead of us. We should reach mid to high 20s in terms of margin this year. In terms of profitability, we need to push profitability or bottom line out to next year, driven largely by the increase in interest rates in the local market by a very significant shift from 6% to 7% all the way to plus 12%.
Thank you.
Thank you.
Your next question comes from John Mong of Virgent. Please ask your question.
Hello. Hi, and thanks for taking my question. My question pertains to Robi as well as Dialog. On Robi, I wanted to hear from you what you think the likely impact will be of the recent uniform rates that were introduced in the market. How do you see this impacting on Robi's voice revenues going forward? On Dialog, could you kindly repeat what sort of impacts we're likely to see from the recently introduced regulatory changes, most of all on the removal of the floor rates? Thank you.
Dr. Hans?
In Robi, I believe you're referring to the unified rates for voice.
Yeah.
This would broadly favor Robi because we are a challenger in the market and the incumbent does enjoy a large on-net advantage. Under these circumstances, any unification of the floor rate or the recommended rate by the regulator would move in favor of the challenger.
Okay.
In Dialog, the impact of the floor rate, as I said a little earlier, it is very early days. It has just come into force. The floor rate, as you know, was introduced in 2010 during a price war or in the aftermath of a price war. Tariffs have themselves gone down significantly since then, both voice and data. Data in particular, which is the source of competitive activity right now is pretty low at around $0.80 on incremental basis. Yes, there would be heightened competition, but Dialog, given its very strong market presence, coverage, as well as market share, would, I believe, be in a strong position to bridge this challenge.
Okay. Finally, on Robi, are you intending to maintain the same momentum on marketing and advertisement spending, or will you look to cut down on this to lift margins going forward?
Yes. As the 4G launch took place earlier this year, there has been increased marketing and promotion activity, naturally, with the new service and also the opening of several new coverage areas. Robi now competing with the incumbent across most territories on the 4G network. Obviously, this would be moderated going forward since the launch is behind us.
Okay, sure. Is there a particular timeline whereby you'll start moderating this cost?
No, we'll go with the market. No specific direction or guidance we can give on that.
Okay, sure. Thank you.
Thank you.
Once again, if you would like to ask a question, please press star one on your telephone. Your next question comes from Srinivas Rao of Deutsche Bank. Please ask your question.
Hi. Thank you very much. Two questions. Sorry to be on Robi again. I just want to understand the impact of the merger with Bharti. We haven't seen the revenue line go up materially. I mean, I'm kind of looking at, say, 2Q 2017 levels versus the current numbers. And your market share gain also, which you have mentioned, has been in low 2% odd. I just want to understand, the consolidation of Bharti's revenue should have been a larger impact, or am I getting it wrong? The second question is on EBITDA margins. You were, in the past, and again in 2016, you were at 32% odd. It's come down. When do we see the benefits of merger and going back to at least, I guess, the pre-merger EBITDA margin levels? That's the question on Robi.
On Ncell, the question is that, yes, you have maintained the EBITDA margin despite the fall in ILD. Would that mean that the data pricing has been managed in a manner which remains slightly elevated, and hence, there is a possibility of that pricing coming off sharply in the future? Those are my two questions. I'll come back for more. Thanks.
Let me start with Robi. There has been a discontinuity in the accounting for device sales commencing this year. There are two impacts. You're probably seeing them mixed. The revenue growth in service revenues, which is at around 9.4%, and that is largely driven by the 4G services. Also, the year-to-date service revenue market share, in fact, has been recorded at 28%, up 1.9 points year-on-year. The impact of the device revenues coming off and being accounted on a net basis has, at an accounting level, diluted the revenue growth. Does that answer your question?
Yeah.
Service revenues grew by 9.4%.
Shouldn't that be higher given that when you took over Bharti, it had approximately a 10% share, I believe, or have you got the numbers wrong?
Yeah. Post-merger, our estimate is that market share, over and above the addition of the market share as pre-merger, is a little over 1.5 points as of today.
Understood.
Your second question on-
Then the margin.
Yes. The second question on EBITDA margins, there's a dilution, obviously, due to the margin of the merged entity, meaning Airtel had a much lower margin at the point of merger. There's also the carve-out of the towers, which took place around the same time. Today, we are targeting around 25%-27% margin by year-end. To reach pre-merger levels, we expect that to take place during the course of next year.
Thanks.
Thank you. Yeah. Ncell, as I think Tan Sri also explained, the EBITDA margin no doubt would dilute over the ensuing period due to the high margin international services being replaced by lower margin domestic services. However, at an absolute level, we are confident to hold out in terms of absolute EBITDA because of the very significant market power the company has and also the performance on the data side we are seeing right now. Is pricing elevated? Slightly higher than other countries in the region, yes. There's a graduated or calibrated aggression that will take place in line with market forces, and we don't see the current level of data pricing to be a risk in terms of maintaining absolute EBITDA.
Understood. One more question on Dialog. Both the tower tax and the removal of the floor pricing, that should be a positive for Dialog, right? Because you are the number one player there, and you have almost 75% revenues which are on net. Both these moves are positive for a larger player in the market. Is that a fair assessment?
Yes, you're right. There has been no decree on unified pricing. The removal of the floor pricing does give much more freedom to the incumbents.
Okay, understood. Thank you.
There are no further questions at this time. We will now pass the call back to Jamaludin Ibrahim. Please continue, sir.
Well, thank you very much.
We have one.
Okay. Apparently, there's one more question.
At the moment, there's no questions in the queue.
Okay. Sorry. Well, thank you very much to everyone for joining us for the second quarter results. Any more question, as usual, please refer to me, Vivek, or our IR team. Have a good weekend. Thank you