Ladies and gentlemen, good afternoon to Digi's second quarter of financial year 2022 earnings presentation. Today, we are pleased to have Praveen Rajan, Acting Chief Executive Officer and also our Chief Marketing Officer, as well as Otto Risbakk, our Chief Financial Officer, to present to you our earnings highlights and the prospects for the year. Now, I know we are counting towards the weekend, but let's make today ridiculously amazing. Now, might I remind you to mute your mic, and also you can use the chat box to post your queries, your questions, or for those who are dialing in via phones, reach out to me on my WhatsApp and I can address your questions later. Without any further delay, over to you, Praveen, to kick off the pre-presentation.
Thank you, Christine. Good afternoon to everyone, and welcome to Digi's second quarter earnings results. Let's start with a quick overview of the quarter. Overall, this has been a positive quarter for Digi. We registered sequential service revenue growth and healthy margins and have continued investing to drive our leading network position. On growth, we registered top-line improvements on the back of our strategy to drive growth from Postpaid, Prepaid, Fibre, and B2B. EBITDA margin strengthened by 2.3% year-on-year from 45.9% to 48.2%, underscored by our continued discipline in operational efficiency. Our efforts in pushing for growth are materializing, as Postpaid continued its positive net additions for seven quarters in a row, while Prepaid recovered for the first time after three quarters.
Fibre and B2B both continued to demonstrate good growth in Q2. All of these positive trends reaffirm our ambition to return to core service revenue growth. Otto will of course cover more of this in the financial review section, later. On modernization, we remain committed to drive digitalization through high-speed internet propositions, modernizing our customer touchpoints, and improving operational efficiencies. Our investments into the next-generation digital billing and CRM platforms have also progressed further in the second quarter. On our network, we have fully delivered on the JENDELA ambitions in terms of site deployments, population coverage, and improvements in speeds while catering to record high data traffic. On responsible business, which is a key part of how we run our business, we continue to lead industry dialogues in responsible business and also recently organized the second telco roundtable for climate agenda.
We also drove good initiatives through Yellow Heart with new awareness campaigns against scam and phishing attacks. I will now provide on the next slide updates on two ongoing developments. I will start with what's on the right on the 5G network first. We remain committed to deliver 5G services for the benefit of Malaysia and all Digi customers. We are actively participating in both the equity process and the access process, and are optimistic on making further progress in these processes. We will of course share more details at the right time, but will not comment more on this matter in this call. On the left side, on the proposed merger with Celcom Axiata. It is proceeding as planned. You would have also noticed the issuance of a notice of no objection by MCMC on the 29th of June.
It's part of the merger assessment process in accordance with the regulator's guidelines on mergers and acquisitions. The notice signifies that MCMC does not object to the proposed merger, and that the parties can advance to the next phase of the proposed transaction. We are of course positive on the prospects of the proposed merger having passed this significant milestone in the approval process. Let me cover a little bit of the rationale on the next slide. Those of you who followed the various announcements when we first disclosed the proposed merger in April 2021 and also signed the definitive agreements in June 2021 will recognize the points on this particular slide. We believe that the rationale of the merger is still strong and that the synergies and benefits to be derived are very much intact. We won't comment more on this matter in this particular call.
The merger approval by MCMC was definitely a major milestone, but one of several more milestones before the merger may be perfected and completed. We still have the Securities Commission Malaysia, Bursa Malaysia, the EGM, and other customary approvals to conclude. We will announce more to the market as those milestones are reached. I will now move to a summary of our second quarter results. Overall, we are happy with these positive results, which was backed by healthy subscriber additions and improved efficiencies. On service revenue, we were up 1.3% quarter-over-quarter and down by 1.1% year-on-year to MYR 1.325 billion. Year-on-year was down due to a weaker prepaid performance despite the steady growth in postpaid, B2B, and Fibre. Having said that, the sequential momentum is in line with our expectations.
We are seeing positive trends with Postpaid, Prepaid, B2B and Fibre showing Q-on-Q growth. On gross profit, we improved our gross margins to MYR 1.154 billion with both Q-on-Q and year-on-year growth. This was driven by our strategic decisions to reduce dependence on lower value segments, shifting some revenue, some of our revenue mix, and also changes to the operating model for our digital business. We have been also very prudent and careful with our spending on devices. On EBITDA, it's relatively flat Q-on-Q at MYR 742 million due to the flow-through from a better top line and gross profit. OPEX was higher at 5.4% year-on-year due to underlying inflation effects and further investments required for our technology modernization journey. We maintained a resilient EBITDA margin of 48.2% for the second quarter.
On PAT, we declined 6.8% Q-on-Q and 21.4% year-on-year to MYR 220 million, and this was mainly due to the temporary tax rate increase from 24% to 33% for the implementation of Cukai Makmur in FY 2022. We remain focused to be disciplined in our cost management to deliver a profitable business, as demonstrated by our PAT margin of 14.3%. Lastly, on CapEx, we continued commitments to invest in network modernization and our digitalization initiatives with an investment of MYR 175 million. The CapEx amounts that you see Q-on-Q do vary according to stages and completion of main projects. We are happy so far with the progress of our ongoing projects and are on track to meet our committed ambitions and internal targets for touch-free operations.
Now, we'll move on to a quick overview of our network and data traffic. The left side of this slide gives an overview of the efforts we have put in to strengthen our network quality and reliability. Since September 2020, we are sustaining the number one network leadership position in Malaysia in terms of consistency, video experience and download speed. We have recorded better average download speeds of 44.1 Mbps in the second quarter, a record high speed since the start of the pandemic. Our 4G coverage grew to 95%, whereas 4G+ coverage grew to 78%, up from 75% the same period last year. This was also partly driven by the 3G network shutdown last year.
This development reflects our priority to accelerate Malaysia's 4G connectivity and coverage to support JENDELA, while catering to high data traffic, which rose by 4.9% Q-on-Q. On the right side of this slide, we are showing you the increasing high demand for high-speed connectivity and smartphone adoption. We've seen a stable yet high internet subscriber penetration of 86.9% and a smartphone penetration of 92.6%. The average usage per user has also gone up by 4.9% Q-on-Q and 2.3% year-on-year to 21.9 GB per user. Let me now give you a quick overview of the solid subscriber development in the second quarter. You will notice, firstly on this slide, some changes in the chart as we now segregate Fibre from the mobile business, given the positive momentum on Fibre.
It's only natural for us to share its growth trajectory to the market. On mobile subscribers, specifically, the Q-on-Q net additions of 267,000 users was very encouraging. It was up 127,000 users, if we exclude 140,000 due to technical adjustments from the prepaid product rationalization. We'll explain this a bit more in the subsequent slides. We are happy to see the postpaid subscriber run rate, which continues to grow for the seventh quarter in a row, up by 41,000 subscribers. The prepaid mobile subscriber base was up 226,000 users on good trends, both in the Malaysian and migrant segments, and with the after effects of exiting the low-value, high rotational prepaid segment, together with changes to standardize the prepaid validity period to 90 days.
The Fibre subscriber base now exceeds 20,000 subscribers, where about just over 90% of them are existing Digi customers. We have also successfully sustained the blended mobile ARPU for the second quarter at MYR 42. That brings me to an end of the summary. Let me now hand over to Otto, our CFO, for a detailed walkthrough of our operational and financial performance. Otto, over to you.
Thank you, Praveen. Yes. The second quarter definitely has been a good quarter for us. I'm particularly pleased to see that all segments are contributing to the positive result. I will take you through a little bit what happened in the market segment by segment. I will walk through the financials, and then I will sum up with the guiding. If we look first at the mobile, at the postpaid mobile segment, we can see that subscribers are up for the seventh quarter in a row, now reaching almost 3.4 million subscribers. We added 41,000 subscribers in this quarter. If we look back for compared to last year, we have added 183,000 subscribers.
I'm happy to also to see that this growth is not only due to good gross adds, but also to lower churn. We see that the customers see value in our brand and our services and that they are pleased with the services we are delivering. Next please. If you go to Prepaid segment. The Prepaid segment. In the Prepaid segment, we have done a significant restructuring over the last year, and I'm very pleased now to see the result of this strengthening this segment.
As Praveen also explained, in 2019, we made a quite difficult decision to exit the low and high rotational part of the migrant segment and redirect our main focus towards the migrant segment, demanding more advanced high-speed data products. At the same time, we also increased the focus to grow the Malaysian segment. Looking back, I have to say I'm very pleased with the result of this transformation. Not only did we, in second quarter, demonstrate that we can grow the prepaid segment as a whole, but we also have a base now with a much higher quality. Compared to when we started the transformation in 2019, at the end of 2019, early 2020, churn is now down by more than 1/3.
You can see that the ARPU has increased from below MYR 30 now to over around MYR 33, and that's an industry-leading margin within the prepaid segment. Overall in the quarter, the prepaid service revenue also grew at 0.2%, and we added 226,000 subscribers in the quarter or 86,000 subscriber if I exclude the technical adjustment. The technical adjustment is related to a standardization of the period in which we include prepaid customers in our customer base, and they are all now all subscribers are maintained for a 90-day period, which is standard in the industry. I'm very pleased with the result of the prepaid segment.
Going forward, if the government should decide to allow a higher influx of migrant workers, we're well placed also to grow that segment. We also see that the effect of this transformation and the exit of the low end of the migrant segment has come to an end, and we don't expect any further decline in our results as a result of that. Next, please. This slide shows you the development of the Fibre segment. This is a rather new segment that we started in 2020, and we have a very focused strategy in Fibre, mainly to offer Fibre to our Postpaid mobile subscriber base. This leads to a deeper customer relationship with our customers and also is contributing to lowering churn.
By doing this, we are also contributing to the digitization agenda of Malaysia by bringing more Fibre out to homes around the country. Over the last five quarters, you can see that we have managed to grow the Fibre customer base from around 4,000 at the beginning of 2021 to more than 21,000. This is now adding more than MYR 7 million in revenue per quarter. Next, please. In the B2B segment, we see that the positive trend is continuing, and this growth is supported by many factors. One of the main drivers, I would say, is the investment we have done over time in building up a strong team and competent base to sell advanced solutions to both small and large companies in Malaysia.
This allows us to benefit from underlying market growth from large enterprises seeking to implement more advanced solutions to run their businesses and outsourcing part of the network, and smaller customers seeking to digitize their businesses and their communication needs. We saw that in the second quarter, sequentially, the revenue grew by 2.2%, and year on year, by 17.4%. We see that the growth in this segment is going a little bit up and down, and that is due to very different sales cycles in B2B, where, first of all, the sales cycles are longer, and then the growth depends on where we onboard customers, in particular the larger customers, then can have an effect on the quarterly growth.
On a year-on-year basis, we are consistently now growing between, as you can see, 8%-17% in the last quarter. This is positive. Next, please. This slide sums up the service revenue development over the last quarter. As you can see on the top line, the growth for the quarter, we are back to service revenue growth with 1.3%.
We are still - 1.1% year-on-year, and that is mainly due to the effort we have done to focus the market strategy on prepaid, where we still had some decline during 2021 on the migrant segment, but this has now flattened out, so we are well placed now to also see growth on a total basis quarter-on-quarter going forward. Also, what's very pleasing is to see that all segments this quarter contributed to the growth. We can see from the bottom postpaid and the yellow one prepaid both had growth. Then you can see also we introduced here you can see also the growth of the Fibre segment.
Although it's still small, it also contributes nicely to the growth. An additional benefit of the Fibre is, like I said, that it also is deepening our customer relationship and reducing churn in the Postpaid segment. The black line on top we can also see that the digital revenue, which mainly consists of gaming revenue generated from our own platform, is back on growth again. Next, please. On the cost side, I'm very pleased to see that the continued effort we have on continuous improvement continue to give positive effects as well as our disciplined spending. This is, we see a slight increase in cost this quarter, but our efforts on modernization and cost saving is offsetting most of these effect.
If I go a little bit behind the reasons behind the cost increase, and if I start with the yellow box, which is the cost of sales. The increase of those sales are mostly due to higher digital and Fibre sales, which have higher cost of sales. If I go to the OpEx costs, which are the blue box in the graph, we see some increase in this quarter, and this is primarily due to the effect of network expansion and higher traffic, which is increasing cost. Also we do see some effects of higher inflation, for example, such as fuel costs for the gensets.
In general, our largest sourcing categories are not the most hit by inflation pressure. We have a clear strategy to mitigate that impact. Definitely, as a CFO, I'm carefully following that area. Next, please. Supported by a positive top-line development and the effect of disciplined spending and modernization offsetting most of the cost pressure, I'm pleased to see that we maintain a stable EBITDA both quarter-over-quarter and year-over-year of MYR 742 million and an industry-leading margin of 48.2%. Next, please. If we go down to the profit after tax, we see a slight decline of 6.8% to MYR 220 million for the quarter. This is still a solid margin of 14.3%.
The decline in this quarter versus last quarter is mainly due to some non-cash effects of an adjustment of the value of an interest rate swap and some deferred tax impacts. With regard to the CapEx investments for the quarter amounted to MYR 175 million, and this is in line with our plan to invest approximately MYR 800 million for the year, which is the same level as last year. Most of those investments go into further expanding and upgrading our network. But we also this year are investing increasingly in upgrading and expanding our digital platform and IT platform. In particular, we are this year started the work to replace a billing platform. This is typically something you do every tenth year or so.
This will allow us to have a state-of-the-art billing platform able to take us into the next decade. We are very excited about that. The cash flow is a flow-through effect of the strong EBITDA and CapEx. It fluctuates a little bit according to CapEx every quarter, but we see that we are maintaining a very strong operating cash flow margin at above 30%. Next, please. On the shareholder return, we see based on the profit this quarter, we are declaring a dividend of 2.8% and distributing MYR 218 million back to our valued shareholders. This is supported both by strong earnings, but also by a very strong balance sheet with low debt.
Let me add to that with our low debt level is also providing us a good hedge against rising interest costs. Next, please. Back to, let me sum up with the guidance. Comforted by a good, very good second quarter, we are maintaining our guidance for the service revenue with an addition to return to growth. This outlook is based on a gradual recovery of the economy as we now see the signs. There, the growth rate in Malaysia is above many other countries, and also a gradual removal of the COVID restrictions. There are some downside risks to this guidance. In particular, we see that the inflation trend globally is also hitting Malaysia.
It's a little bit difficult to foresee how that will hit the Malaysian economy and spending patterns. There is some risk that will also hit the telco sector. However, the telco sector, as you know, is very resilient against such market economic factors. Another area that could have some impact on our top line is increased traveling and the removal of restrictions to traveling and tourism. For the time being, we don't see a big change in tourism and roaming income. I would say that that is rather an upside going forward, if tourism would really resume and international travel would go towards pre-COVID levels.
With regard to the EBITDA, we are changing our guiding from around 2021 levels to a low single-digit decline. Let me explain this a little bit further. In the second half of this year, we will have some non-recurring or one-off effects related to the merger. We will take in some costs relating to the merger, and those are costs up until the closing. We don't know exactly when the closing will be. We are, as Praveen said, very hopeful and optimistic it will be in the second half of this year. There will obviously now with that, we go into the final phase of the merger. There will be some additional costs. That is included now in this forecast, guiding.
We will also have some additional cost relating to the billing project. Like I said, these are projects that we do every tenth year, and we think it's wise to invest some good money into that to secure progress and completion. There could be also some further impact from the inflation area, such as on energy and other areas. So that we have included some of those effects in this EBITDA guiding. On the CapEx level, we maintain our guiding to stay around the 2021 level at MYR 800 million. With regard to perhaps I can give one additional information.
With regard to the size of the cost drivers that are contributing to increased cost, it's difficult to value, obviously, those elements. If I could give you some idea, I would say that it could be in total mid- to high double-digit figure in ringgit million. Approximately half of that would be one-off cost, and the other half is recurring costs related to inflation. For example, inflation and other elements such as modernization and increased network. About from mid-digit to a high double-digit increase in cost. That concludes my part of the presentation.
Thank you, Otto, for the detailed walkthrough and the facts that were presented. In summary, we are happy to see good growth across all segments. We continue to drive our operational efficiency mindset and remain disciplined in our spending in order to sustain our profitability margins. With the easing of many restrictions and the reopening of international borders. We are also hopeful that the increase in retail and tourism activities will spur demand for Digi services. On the network front, we are honored with our number one network leadership position, and we'll continue to prioritize efforts to meet the expectations of all our customers. Lastly, on our focus in raising responsible business standards, it's anchored on our purpose to empower society.
We are putting serious effort into strengthening our responsible business commitments as we continue to build a brand that our customers can trust for what matters most to them. Thank you, and I hand it back to Christine.
Thank you so much, Praveen and Otto, for the very detailed and well walkthrough of our earnings highlights. Now, let us open for Q&A sessions. We have our analysts from CIMB, CGS-CIMB . Foong, over to you, please.
Yeah. Hi, good afternoon. Thank you everyone for the call. Three questions from me. Firstly, I wanted to find out a bit more on the digital revenue, which contracted sequentially for the last five quarters, and then this quarter it seems to have risen a fair bit into the second quarter. So can you provide us with a bit more color on the story there? And over the longer run, say the next 2-3 years, right, is this going to be a substantial revenue line for Digi, or do you think it will just be somewhere around the current levels? And what is the EBITDA margin for this business? And then my second question. In the first quarter, there was some costs incurred for billing system upgrade.
Was there also costs for this upgrade in the second quarter? I note there was a mention about merger related costs in the second quarter as well. All in, how much of these were one-off costs in the first half? If you could quantify that that won't recur next year. My third question on the MCMC's recent call to telcos to improve the service quality or face fines. Do you think that there has been a fundamental change here where there will be stricter monitoring and enforcement going forward? Is there a risk you think that we may need to spend more CapEx to ensure that we keep to the QOS targets set by MCMC? Yeah. Those are my three questions. Thank you.
Hi, Foong. Thank you for your questions. Let me take the first question on the digital revenue. The digital revenue here refers to the mobile gaming business that we provide. We provide a platform. You're right that in the last five quarters it was contracted a little bit. We've also indicated that we have changed the operating model where we have now insourced this platform and run it entirely within Digi. The premise of this business is it's also seasonal. It's dependent on the types of games that are out there and it's driven by the publishers really. It is driven by the publishers and whether customers also want to buy the mobile game credits. Very little of it is recurring. Most of it is on demand.
On the point related to the margins, I'll hand this part to Otto.
Yes. On the margin on the digital revenue, I can't give you an exact figure, but it is lower than typical mobile margin, but it's still contributing nicely, I would say to the profitability. It also creating loyalty to us. The users of this platform, they like the convenience of the platform we are offering them and we have very many long-term customers using it. It has effect both on profitability, not as high as mobile, and also some positive loyalty effects. I can perhaps answer your question on the cost relating to billing system and also for merger cost. No, there were not a lot of those costs in the second quarter. There were some, but we talk about lower single digit figures.
Most of these costs will come now in the second half of the year.
And a Foong, I will take the last question on the QOS. Specifically, I think this is not new to the industry. Yes, there may have been some publicity in recent weeks or months, but there is constant monitoring on the quality of service. We are part of an industry that constantly follows up on these things. It is also followed up as part of industry steering committees. This is always there. I would say the vigilance and attention has always been there. We continue to work very closely with MCMC across the states to address the issues. The point is, when the issues are raised, we move very fast to address all these issues.
It is part and parcel of what we are planning for throughout the year.
I can perhaps also add a little bit on the billing system upgrade that despite this investment, we will maintain our CapEx frame from this year around MYR 800 million. It will not lead to an increase in CapEx this year. This project is also continuing next year. We will finalize the project next year.
Okay. If I can just throw in one follow-up question to Otto, right on the margins for the digital business. As you mentioned, it's lower than mobile, but then I would imagine that for the digital services, the revenue, right, there would be very little depreciation involved. At the net level, would you say, you know, margin-wise it's as good as any of your other businesses?
That's a very good way to comment, Foong. Yes, we have a very, very low investment to run this business. This is in terms of return on investment. It's a very good product.
Okay, understood. Okay, thank you so much, Otto and Praveen.
Thank you.
Thanks, Foong. Now, Isaac from Affin Hwang. Over to you, Isaac.
Hi. Good afternoon, everyone. I have three questions that's actually all related to the accounting. First is, can you just help us understand the tax rate? I think effective tax rate is about 39% in the current quarter, and it's much higher than 33% that implied under the Prosperity Tax. What's happened here? That's question number one. Question number two is on the fair value loss on the interest rate swap. In the environment where our interest rate is rising, should we expect more losses in the quarters ahead? That's question number two. Question number three is also accounting. I saw that there are some asset impairment in the second quarter, and it was also there during the first quarter.
What are these, and should we expect more of such, asset written off in the coming quarters? Thank you.
Yes. I can respond to the tax rate. There are two main reasons why the effective tax rate is 39% and not 33% as you said. The first is that if you take the what kind of cost you can deduct for tax purposes. Some of the costs that we're having are not deductible. You typically see always that the effective tax rate compared to the result we present here are a little bit higher than the statutory tax rate of 33%. That's one reason. The second reason is that if you recall at the end of 2021, we had a small gain on deferred taxes related to the introduction of the Prosperity Tax.
This is purely deferred. That gain in at the end of 2021 is then coming back during 2022. As you know, this tax is only for one year, so this is just moving some from an accounting point of view from 2021 to 2022. This doesn't have any cash impact, by the way. It's purely accounting. On the impairments, I think it's in general impairments, they go a little bit up and down depending on technology development and when we phase out old technologies and when we bring in new. It's no major things. We don't expect any major changes in that going forward, but it can vary a little bit quarter by quarter.
Sorry, I just, I'd like to just quickly follow on the taxation. I understand, on the non-deductible. To the extent, should we expect second half effective tax rate to be probably higher than 33%?
Yes. Yes, you should. It will remain higher for those reasons in the second half. In 2023, well, we will not have this effect that we had on the deferred tax, the gain that we had in 2021 that we are now distributing on 2022. You will not have that. The effective tax rate will come down in 2023. Yes.
All right. Thank you.
We also hope, by the way, that obviously we're also very hopeful that the Prosperity Tax will be removed, that we go back to a 24% tax rate in 2023 as promised by the government.
All right. Thanks. Any comments on my questions on the fair value losses on interest rate swap in the environment of rising global interest rate?
Yeah. Good question. We don't foresee any further accounting impacts for that going forward. For the time being, we don't foresee changes on that.
Thank you. Thank you, Otto. That's all for me. Thank you.
Thank you, Isaac. I don't see any more questions from the audience. I would just like to open to the floor. Anyone would have any more questions? Okay. Looks like it was well covered in the management presentation. Okay. I think that is all for today. Now, thank you so much for participating in our earnings call, and I wish you a great weekend ahead. Thanks, Otto and Praveen.
Thank you, everyone.
Yeah. Thank you, everyone. Thank you, Christine.
Bye.