Earnings Call: Q2 2019

Jul 12, 2019

Good morning, good afternoon, good evening, ladies and gentlemen. Welcome to the conference call. We may be speaking your call and I'll be standing by for the Q and A. Thank you. Hi. Welcome everyone to this Q2 earnings call for digit.com. Thank you so much for joining us. Today, we have Alban, our CEO and also Inger, our CFO, who will take us through We have the management team around the table today. Inge and I will go through some of the key highlights. If I forget the quick agenda, I can highlight before I can Hi, Lobo. About priorities for 2019. If I look at the first area, we have been able to drive sustainable business Given the market conditions, we said our service revenue improvement of 0.7 Thank you on Q, which translates to a minus 2.2% year over year. EBITDA holding at 49%. Also happy to close $0.05 dividend per share. The chart below just shows a little bit of Coming out of Q1 from an industry perspective versus reaching Q1 and some and the improvements that we've Just some quick highlights here. Because of the investment network, also you can see within the CapEx that the investments are going in We have 8,500,000 On 90 gs, we continue to track our 3,300,000 active users, Now we just And then from Zane, taking postpaid revenue to 12.6% growth and on Subscribed as well, we've been able to add R71,000. Prepaid, as you recall, in Q1, we had a little bit of Just a quick highlight for you. On the next slide, you'll see a summary of some of those My name is Jupy, over 2% year over year and a plus 2% over quarter. In that subscriber, which It's important as part of our strategy of growing our data in our base, growing at 539,000 year over year. B2B, something that we spoke about, for those of you who are joining on the call in Q1, we talked about B2B growth and here we Yes, 5% improvement year on year. OpEx, happen to report that we've been keeping it flat year over year and also quarter over quarter. And a strong quarter for EBITDA and P and T. Additional transformation, Thank you, Jagadish. That has been enabled. We also have now voiceover WiFi for Android devices launch. And Coming out of our 5 gs showcase, we are now back as what we've mentioned before on our 5 gs trial Thank you, Albert. Good evening, everyone. So let me walk you through some of our performance. On Internet growth, we have continued our investments Network, as Albert mentioned. So we're now at 90% 4 gs LTE coverage, and we have improved our LTE advanced From 8,500 kilometers last quarter. On 4 gs and Internet subscriber, we've seen a very good growth quarter over And 20% on 4 gs. On our data traffic growth, we have a 49% year over year growth and if you And 12% quarter over quarter. And if you look at our monthly data usage, it has improved 40% year over year, to 11.4 gigabytes per sub per month. And this is, in our view, sustainable And we are able to capture monetization on this data in a good way. On Internet revenue, we have quarter over quarter growth of 2% and year over year growth of 9%. This is mainly driven by wholesale, Well, you see a growth of 80.8% year over year. And it is a challenging market. So as you can see, the prepaid revenue on And that is back year over year, but we are searching this quarter over quarter in the plus 0.7 In a very challenging market, but we are seeing a positive from our initiatives in the market where we are activating our channels and really driving Internet subscription. If I move on to the next slide, we see a better growth momentum in this quarter. If you first look in We have set up our growth mainly driven with continued volumes on And also a very good take up on RFPG post examalizan. We also see, as Alvin mentioned, growth in So this has resulted in a 70 ks net debt for the quarter. And we See that our ARPU is marginally lower, and this is mainly driven by our conscious strategy of doing Convergence of our customers where we do get the lower entry cost to customers into our postpaid base. Moving on to prepaid. We have focused on really driving data adoption this quarter. So we have 231 1,000 netback on data usage, increasing our Internet usage here of 79%. We have stabilized our operations. So both ARPU and The acquisition momentum has improved compared to Q1. If you remember last quarter, I was talking about The strategy of driving sustainable growth in prepaid, and we see that we are improving the tenure of our customers in prepaid as a result Going over to infinite subscribers in Cocoa, looking at This is part of our total base. You will see that on the unmet blended view, we have 1.8% of our subscribers being Internet users, and this is a good distraction. 40 subscribers have increased by 467,000 to 8,500,000. So and we have also improved our subscriber base from Last quarter, I also mentioned this last quarter, we had a cleanup of the SIMs that we did not Yes, long tenure was, and we're focusing on rewarding those with long tenure. And ARPU has then returned back to So total sales are strengthened quarter on quarter, and we have a stronger If you look at the mobile service revenue event in total, we have a better quarter on quarter and also improving our year over year So in total, our postpaid revenue has grown 12.6% year over year. This is without contract asset amortization as And 3.9% quarter over quarter. So we are seeing traction from our initiatives that I mentioned earlier. And on prepaid Internet revenue mix, it has climbed to 64%. So we do see a The newest challenge coming from the reduction of traditional voice and interconnect revenues, mainly driven from The expected rate reduction. Overall, our Internet revenue has increased 9.2% year over year and 2% quarter over And our service revenue has risen 0.7% quarter quarter again without the asset contract asset amortization. And it has the decline has narrowed 60.2%. It was 2 point Present last quarter. Okay. I will move to the next slide on the cost. So we have continued efficient operations in DD. I want to highlight that our cost of goods sold have improved 14.8 This is accounting for the lower regulated interconnect rate. But also we have Nonrecurring cost benefit of $34,000,000 coming from traffic cost reversals this quarter. We also have higher device sales from the phone premium 365 program that is contributing to 2.3% Quarter over quarter higher comps for us. Our OpEx has remained flat, as Alvin mentioned, both year over year and quarter over quarter. This is including non recurring cost benefit of JPY 28,000,000 mainly coming from the new Negotiation from efficiency work that we are doing. So our OpEx and service revenue That's 34.7%, which is a healthy ratio. We are continuing to work on our efficiency initiatives, and we believe that we have a very robust cost structure relative to the industry. Moving on to EBITDA. Our margin is Underpinned by a continued positive growth that I mentioned earlier. So it's trickling down and a stronger prepaid Internet Thanks. Also the efficient cost management that we have touched upon. So our EBITDA decline has narrowed now 50.1% year over year, but also Quarter over quarter by 4%. We now have an absolute EBITDA of BRL 752,000,000 Our margin of 49%. So our profit before tax has strengthened 6.8% quarter over quarter. And our profit after tax have surged to 7.8% year over year and 13.1 Quarter over quarter. For 27% margin after accounting for the uplift And accounting for over purchase of deferred tax prior year, totaling RMB 16,000,000. Moving to the CapEx. What you will see is that we have front loaded our CapEx in order to Roll out this network to our customers and improve our customer experience of our network. So we have invested at the JPY 251,000,000 CapEx this quarter or actually 18.6% of our service revenue Through the strategy of upgrading our network and fiber as well as deployment on the network function Our operational cash flow then fell 20.9%, mainly driven by the higher CapEx Moving to the shareholders' return. We are now Having a declaration from our Board today that we will give an interim dividend of $0.05 per share, which is Equivalent to RMB 389,000,000 payable to shareholders in September. Our net debt to EBITDA ratio is still remaining very healthy We at 0.8x our financial debt over total assets. And our financial debt over total assets Yes, yes, 71%. And this is well within our share threshold. Postamacallit 2016 is 1.5x net debt to EBITDA And our commercial debt over total assets is at 16%, again, well within the 3rd threshold. So moving then to final slide on the effect of IFRS 16. So We are still fine tuning our numbers here because we are entering into new contracts and we are also Excluding me some time. So this quarter, we have a reduction in our FX of BRL 94,000,000 We are moving down to our balance sheet. And this is also an increase in our Depreciation and amortization of BRL 95,000,000 and an increase in our finance cost of BRL 29,000,000. And with that comes also a tax Benefit, both in total, the delta between the with or without IFRS 16 is minus EUR 22,000,000. Then I leave it to you again, Albert, to comment on Albert or give an outlook. All right. Thanks. So it's the first 6 months is And the efforts that we look at for the rest of the year is focused around continuing our efforts on base management, capturing growth Olin, execution is, as I've mentioned before, it's just the way we work and our culture in terms of ensuring that the efficient and lean retention of how we Thank you. Ladies and gentlemen, we will now open for questions. Thank you. Our first question comes from Prem with Macquarie in Malaysia. Please go ahead. Hi, thank you for the opportunity. A couple of questions from me, please. First of all, with regards to industry growth, I mean, we've had this issue where I think migrant workers have caused the service revenue growth to go stay very, very soft Into the first half of the year, are there any signs that this is turning around coming into the Q3? Or do you think I presume your updated guidance is essentially saying things are going to be tough for the rest of the year. Now Then coming to your costs, for 2 quarters in a row, we've had a bunch of reversals, which has helped the EBITDA number. Do we expect more of these nonrecurring items to come for the rest of the year? Or do you think we've largely done with that? And finally, I know you can't comment too much on the merger, but has that Affected or has that changed the philosophies or the direction of the company And the operations per se, are people working towards that merger? Or do you think it's business as usual until such It's actually cemented. Thank you. Hi, Sam. This is Inge. I'll take the second question and I'll leave question 1 at 3 to 11. So on the second question on reversal, I don't know if you will expect that going forward as well. So You rightfully point out that we have had a few of these in the past quarters. And as a result of our balance sheet work, Gina, we've had a great effort into that work is constituted, I would say, Well done, but that major part is done. Going forward, I expect some, but it's not in the same magnitude. And we will also continue to do these negotiations that could result in reversal as I think that is for prepaid, it's combination of many different initiatives, right? I think on prepaid it is that we have moved away from price sensitive segments. And that's not only just on the foreign workers, it's also So what we are focused on is developing prepaid and data customers, usage pattern, So in summary, Dave, if the announcement on the potential merger affecting All right. Perfect. Thank you very much. Thank you. Our next question comes Okay. We just checked the line. And the next question is from Songshan Chen with CIMB in Malaysia. Please go ahead. Hi, thanks for the call. A couple of questions from me. Firstly, if you could give us some update on the Competition in the market, that will be quite useful. You mentioned challenging market conditions. So has Competition sort of deteriorated Q on Q or has it been relatively stable? Secondly, on the channel transformation that you did in March, you mentioned improved acquisition momentum post that exercise. Are you now happy with the results Or whether there's still more tweaks that you need to make in the coming quarters on that front. Certainly, on the fiber network, I noted that the kilometer has Increased quite a fair bit, a bit of a jump from before. Is there any changes in investment plans there? And terms of the CapEx, I know you've maintained your guidance for CapEx. But going into future years, do you see A direction where the CapEx would be sort of increasing more significantly because of maybe increased fiber investment. And lastly, on the home fiber pilot that you're doing in the Clang Valley, Can I just sort of try to understand what the aim of the pilot is? Is it to assess the commercial viability of this business? Or is it more on the technical front? And when should we expect full commercial launch? And would it be area by area? Or would it be on a nationwide basis when it's fully launched? Yes, those are my 4 questions. Thank you. Tom, thank you for the question. Let me take the first 2 and then And I think we should expect that competition will remain as per hence why I'd rather focus on our strategy a little bit more than competition. And our strategy on prepaid and cost base is highly different. As we talked about prior, just on the existing base of customers, we have an opportunity to build on And all these students from the first part of it, it's much better improvement and traction in the channel. And it's really driving the things I just mentioned on both the share and postpaid, where we're trying to move the channel to much more transactional. And So you asked about the increase in fiber network kilometers. So basically, this is in line with our CapEx projections of the year and also our deferred worldwide plan. We have front loaded, as I mentioned earlier, a little bit with half compared to what we normally would do. But going forward, we don't have any decision yet on whether we will enter heavily into the fiber Bill for last mile or to the home fiber business. So this is mainly still in the backhaul And strengthening backhaul to our network. On number 4, so the home fiber pilot that we've had in I'm glad that we still have it. You are correct. It is the test out. It is commercially viable and also technically viable for And we will accept the results and bring that into our strategy going forward. And in terms of the commercial launch of Hoof Fiber, based on what you see from your pilot, You think we could want something by near end? We will come back on that. When we have done the assessment, we'll come back on the timing on that. Okay, got it. Okay, thanks a lot. Thank you. Our next question comes from Alice Guo with Zanten in Singapore. Please go ahead. Thank you for the opportunity. I have three questions. The first is regarding your guidance for your service revenue and I noticed compared to the Q1, your guidance now is lower. In the Q1, your guidance was for service revenue would have been flat And EBITDA would have been low single digit growth, but in this second quarter, you are looking you are guiding for low single digit decline for both service revenue and EBITDA. Can you guide us through what are the parameters that have changed in your assumptions that you start bringing that down? That's my first question. My second question is regarding our CapEx to revenue guidance as well. You are still guiding for 11% To 12%, but the first half is already 15% and the second quarter was 19%. I just like to know whether in the second half of the year you're looking Lower CapEx intensity, so that your guidance will still remain intact. And my third question is regarding The 700 megahertz spectrum, which the MCFC has opened up for public inquiry. I just want to know, it looks like the rollout of the 700 has been delayed, right, probably into Q3 of 2020. So I'm just wondering, Are these new developments, is it going to be positive for the sector and for DG as a whole? Thank you for your question. So I'll take the 2 first. When it comes to the revised guidance on EBITDA and service revenue, This is Jiren from the service revenue decline that we saw in Q1 mainly. The reason we didn't We liked the guidance in Q1. We wanted to see the effects of our initiatives in Q2. We see that it It continues to be a challenging market, and that's why we felt that it was prudent to now guide down with a single digit decline in service revenue. That It goes down to the same guidance on EBITDA. So we don't see any major changes to our OpEx trajectory. On the CapEx guidance, as mentioned earlier, we are front loading or have front loaded our CapEx then in this first half, in order to provide a better network for our customers, we will remain The 11% to 12% CapEx to sales ratio for the full year as of the plan. I'll take the last question. This is Joaquin from Corporate Care on 700 Okay. Thank you. Thank you. Our next question comes from Danny Chan with Credit Suisse. Please go ahead. Hey, guys. Good evening. I just had one quick question regarding the B2B segment. I picked that up during the beginning of the call. Could you just share What's happening in that space at the DG level? And can you share any targets that you have for that business segment? Hi, Rene. Thank you. Good evening, as well. So I think if I just And we have much better portfolio of product offerings for customers and mainly to consumer side. We felt that it was time for us to go in there and look at opportunities within at any date that we And in 2019, we felt that there's a lot more potential at SME and B2B Malaysian operations. I'll expand Also beyond Malaysian borders, it's not going to the Southeast Asia region, products such as anti roaming Okay. Thanks, Alvin. Maybe just a follow-up to that as well. That means that I mean, obviously serving the SME segment, probably need a little bit more expertise. So does that mean that you'll be hiring more people to help you grow this business as well? And are any CapEx involved for the segment as well? Yes. So I'm looking at around the table, I think you have the right confidence. But I think one of the things that we started a few years ago was actually VGX, for example. And we also now have an organization around our Chief Business Officer that was established last year as well. And both these functions actually drive together in terms of introducing new practice services, but also addressing the needs of SMEs when it comes to both the channels on the outside, but also The people that we have are just repurposing them and showing that we have a product portfolio, which is not Okay. Okay. All right. Great. Thanks and best of luck guys. Have a good weekend. Thank you, Danny. Thank you. Our next question comes from Piyush Chaudhry with HSBC in Singapore. Please go ahead. Hi, good evening. Sorry if this question was answered earlier because we joined in later. Just want to check what Market factors or industry factors have changed in the last 3 to 4 months, which has influenced The change in the guidance on both revenue and total EBITDA. Thank you. Hi, Srini. This is Inge. So as I mentioned earlier, when we got this question was that it's post Q1 results where we saw that the whole industry And what's the Q on Q reduction of 3% and also year over year reduction was significant? We did see recovery this quarter. So we are reporting growth quarter over quarter of service revenue of 0.7%. However, given the reduction so far this half, we believe that it's prudent I think there are no major structural Changes compared to the Q1 that we already changes in Q2 compared to Q1 in that sense. Got it. Thanks. Have a good weekend. Thank you. Thanks for your time, Mr. Murphy. There seems to be no further questions at this point in time. Thank you. Hey, Matilda, thank you very much Thank you. Thank you. Thank you for participation. This concludes the conference.