Good morning, good afternoon, and good evening, ladies and gentlemen. Welcome to the conference call. We need to your call, and we'll be standing by for the Q&A. Thank you.
Hi. Welcome everyone to this second quarter earnings call for Digi.com. Thank you so much for joining us. Today we have Albern, our CEO, and also Inger, our CFO, who will take us through this presentation, and thereafter we will open up for Q&A. Without further ado, I'll invite Albern to start off with the presentation.
Hi, everyone. Good afternoon and good evening to everybody. Thank you for taking the call with us on a Friday evening. We have the management team around the table today. Inger and I will go through some of the key highlights. If I look at just a quick agenda, key highlights, we go through a performance review, some updates, and then the rest of the presentation outlook before we go into Q&A. Let me just take the first two slides. It gives you a quick high level of our priorities for 2019. If I look at the first area, we've been able to drive sustainable business given the market condition. We've had a service revenue improvement of 0.7% Q and Q, which translates to a minus 2.2% year-over-year. EBITDA holding at 49%. Also happy to close 5% dividend per share.
The chart below just shows a little bit of coming out of Q1 from an industry perspective versus Digi in Q1, and the improvements that we've been able to achieve going into Q2. On the network, we'll go a little bit more in a couple of slides. Inger will walk you through some, but just some quick highlight here. We continue to invest in the network. Also you can see linked in the CapEx that the investments are going in to further improve customer experience and the network of 4G and 4G Advanced or LTE Advanced. We have 3.5 million 4G subscribers, and 52.7% of service revenue is coming from data. On MyDigi, we continue to attract 3.3 million active users, which is a good part of our story on monetization, also personalization, as we move into both base management that we've spoken about before.
Pre to post conversion continue to help both postpaid growth but also gross add from postpaid has been promising, taking postpaid revenue to 12.6% growth. On subscribers as well, we've been able to add 71,000 there. Prepaid, as you recall, in Q1, we had a little bit of a slower start on prepaid. We've seen now we've been able to grow internet subscribers on prepaid, 6.7 million with a net add of 271,000. Just a quick highlight for you on the next slide, you'll see a summary of some of those things that we mentioned, but really giving you a quick look into somewhat the business. Our revenue at -2.2% year-over-year and a +2.7% quarter-on-quarter. Internet subscribers, which is 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, here we see a 5% improvement year-on-year. OPEX, happy to report that we've been keeping it flat year-over-year quarter-over-quarter, and a stronger quarter-on-quarter for both EBITDA and PAT. Digital transformation. By digital, we're not talking about MAU on MyDigi here. Here we're talking a little bit about new things that we're doing, specifically around eSIM capability that has been enabled. We also have now Voice over Wi-Fi for Android devices launched. Coming out of our 5G showcase, we are now on track as per what we've mentioned before on our 5G trials later on this year. Inger, just over to you.
Thank you, Albern . Good evening, everyone. Let me walk you through some of our performance. On internet growth, we have continued our investment in our network, as Albern mentioned. We're now at 90% 4GLTE coverage, and we have improved our LTE Advanced coverage to 70% from 67% the past quarter. We continue to build out our fiber. We're currently at 9,100 kilometers from 8,500 kilometers last quarter. On 4G and internet subscriber, we've seen a very good growth quarter-over-quarter as well as of 6% compared to last year, of 6% on internet and 20% on 4G. On our data traffic growth, we have a 49% year-over-year growth and a 12% quarter-over-quarter. If you look at our monthly data usage, it has improved 40% year-over-year or increased to 11.4 gigabytes per sub per month.
This is, in our view, a sustainable growth, and we're able to capture it on citation on this data in a good way. On internet revenue, we have a quarter-over-quarter growth of 8.2% and year-over-year growth of 9%. This is mainly driven by postpaid, where you see a growth of 8.8% year-over-year. It is a challenging market. As you can see, the prepaid revenue on Internet is flat year-over-year, we are surging this quarter-over-quarter in the +0.7 in a very challenging market. We are seeing a positive traction from our initiatives in the market where we are activating our channels and really driving Internet subscriptions. If I move on to the next slide, we see a better growth momentum in this quarter.
We first look into postpaid, we have stepped up our growth, mainly driven with continued volumes on PhoneFreedom 365 program, and also a very big take-up on our Digi Postpaid family plans. We also see, as Albern mentioned, growth in B2B. This has resulted in a 30,000 net add for the quarter. We see that our ARPU is marginally lower, and this is mainly driven by our conscious strategy of doing a prepaid-postpaid conversion of our customers, where we do get the lower entry class customers into our postpaid base. Moving on to prepaid. We have focused on really driving data adoption this quarter. We have 221,000 net add from data usage, increasing our Internet user sphere of 79%. We have stabilized our operations, both the ARPU and the acquisition momentum has improved compared to Q1.
If you remember last quarter, I was talking about a conscious strategy of driving sustainable growth in prepaid, and we see that we are improving the tenure of our customers in prepaid as a result of this strategy. Going over to Internet subscribers in total, looking at this as part of our total base, you will see that on a blended view, we have 81.8% of our subscribers being Internet users. This is a good traction. 4G subscribers have increased by 467,000 to 8.5 million. 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 see as long tenure ones, and we're focusing on rewarding those with long tenure. ARPU has then returned back to MYR 40 in the blended.
Total subs has strengthened quarter-on-quarter, and we have a stronger mix of Internet base. If you look at the mobile service revenue then in total, we have better quarter-on-quarter and also in improving our year-over-year trajectory. In total, our postpaid revenue has grown 12.6% year-over-year. This is without the contract asset amortization as a result of MFRS 15 , and 3.9% quarter-over-quarter. We are seeing traction from our initiatives that I mentioned earlier. On prepaid Internet revenue mix, it has climbed to 64%. We do see a continued challenge coming from the reduction of traditional voice and interconnect revenues, mainly driven from the expected rate reduction. Overall, our Internet revenue have increased 9.2% year-over-year and 2% quarter-over-quarter.
Our service revenue have grown 0.7% quarter-over-quarter, again, without the contract asset amortization, and the decline has narrowed to 2.2%. It was 2.8% last quarter. Okay. I will move to the next slide on the cost. We have continued efficient operations in Digi. I want to highlight that our cost of goods sold have improved 14.8% year-over-year. This is accounting for the lower regulated interconnect rate. Also we have acknowledged a non-recurring cost benefit of MYR 34 million coming from traffic cost reversal this quarter. We also have higher device sales from the PhoneFreedom 365 program that is contributing to 2.3% quarter-over-quarter higher costs for us. Our OPEX has remained flat, as Albern mentioned, both year-over-year and quarter-over-quarter. This is including a non-recurring cost benefit of MYR 28 million, mainly coming from vendor negotiations from efficiency work that we are doing.
Our OPEX to service revenue stood at 34.7%, which is a healthy ratio. We are continuing to work on our operational 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 continuous posted growth that I mentioned earlier. It's check holding down, and a stronger prepaid Internet space. Also the efficient cost management that we have touched upon. EBITDA decline has now announced a 2.1% year-over-year, but also strengthened quarter-over-quarter by 4%. We now have an absolute EBITDA of MYR 752 million, or a margin of 49%. Our profit before tax has strengthened 6.8% quarter-over-quarter, and our profit after tax has surged to 7.8% year-over-year and 13.1% quarter-over-quarter, for a 27% margin after accounting for the uplift from an accounting for over-provision of deferred tax values totaling MYR 16 million.
Moving to the CapEx, what you will see is that we have front-loaded our CapEx in order to roll out a good network to our customers and improve our customer experience of our network. We have invested MYR 251 million CapEx this quarter or actually 18.6% of our service revenue through a strategy of upgrading our network and fiber, as well as deployment on the Network Function Virtualization. Our operational cash flow fell 20.9%, mainly driven by the higher CapEx investments. It's a good 32% margin. Moving to the shareholders return. We are now having a declaration from our board today that we will give an interim dividend of MYR 0.05 per share, which is equivalent to MYR 389 million payable to shareholders in September. Our net debt-to-EBITDA ratio is still remaining very healthy at 0.8 times our conventional debt over total assets.
Our conventional debt over total assets is steady at 71%, and this is well within our Shariah threshold. MFRS 16 is one and a half times net debt-to-EBITDA, and our conventional debt over total assets is at 16%, and again, well within Shariah threshold. Moving to final slide on the effects of MFRS 16. We are still fine-tuning our numbers here because we are entering into new contracts, and we are also exiting some terms. This quarter, we have a reduction in our OPEX of MYR 94 million, that we are moving down to our balance sheet. This gives also an increase in our depreciation and amortization of MYR 95 million and an increase in our finance cost of MYR 29. With that comes also a tax benefit. In total, the delta between the with or without MFRS 16 is -MYR 22 million.
I leave it to you again, Albern, to comment on the third quarter outlook.
All right, good. Thanks. The first six months is over for the year, just a quick highlight on the first six months. It's been a resilient performance from Digi, mainly contributed by a prepaid area where it's been a little bit of a decline year-over-year. However, strong postpaid revenue growth at 15.1%. EBITDA revenue contributes to a double digit at 7.2%. Very good cost management, also management of overall FL to take 48% EBITDA margin. The efforts that we look at for the rest of the year, is focused around continuing our efforts on base management, capturing growth from existing customers, and that's very visible over some of the postpaid and on the data activities that we have taken out to market in later part of Q1, but certainly into Q2 for the start of the year.
You will see that continuing on for the rest of the year. Postpaid growth, both consumer and SME enterprise business, we continue to focus on those opportunities, converting traditional users to digital, especially the SME space. On the network side, we have a bigger CapEx investment in the first half of the year. We will continue investing in the network, reach our guidance on CapEx. OE execution is, as I've mentioned before, it's just the way we work and our culture in terms of ensuring that we are efficient and lean in terms of how we drive the business. All of which should contribute to a better customer experience given the latest product and services to the market. A little bit of an updated guidance for you. To do that is our service revenue and EBITDA. We are now looking at a low single-digit decline.
CapEx service revenue is the same. That sort of wraps up the key highlights that I wanted to share with you this afternoon. I'm going to hand it back to Regina, to sort of open up for Q&A to everyone. Thank you.
Thank you. Ladies and gentlemen, we will now open for questions. If you'd like to register for a question, please press star one on your telephone. 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, we've had this issue where I think migrant workers have caused the service revenue growth to stay very soft into the first half of the year. Are there any signs that this is turning around coming into the third quarter, or do you think I presume your updated guidance is essentially saying things are going to be tough for the rest of the year. Coming to your costs. For two quarters in a row, we've had a bunch of reversals which has helped the EBITDA number. Do we expect more of these non-recurring items to come for the rest of the year, or do you think we're largely done with that?
Finally, I know we can't comment too much on the merger. 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 time that it's actually cemented? Thank you.
Hi, Prem. This is Inger. I'll take the second question and I'll leave question one and three to Albern. On the second question on reversal, if you will expect that going forward as well. You rightly point out that we have had a few of these in the past quarters. As a result of a balance sheet work or clean up, we've had a great effort into. That work is considered, I would say, done. The major part is done. Going forward, you might expect some. It's not to the same magnitude. We will also continue to do these vendor negotiations that could result in reversals as we both negotiate on forward-looking, that ultimately result in backward-looking efficiencies. I'll leave it to Albern for the next question.
Hey, Prem. Hi.
Hi.
Responding to your two questions. Just on the first one, I think, if I understood correctly, you sort of said migrant workers or foreign workers in the country sort of took down the stuff there. For prepaid, it's a combination of many different things. 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 on price sensitive across the different segments in the country as well. What we have focused on is developing prepaid and data customers, usage pattern with the current base management on a prepaid base in terms of looking at whether we can actually increase usage of these customers.
For example, we've now introduced some different stuff, but also in the data stream one, we've introduced quota top-up, we've introduced one-time passes, and we've introduced slightly richer monthly plans for those that are increasing their usage. For the rest of the year, we will continue to do that. That together with the channel changes we've done, we see at least this quarter, stabilization of prepaid ARPU that were in the quarter up to earlier and some positive growth on the data usage. On the second question, to summarize it is, if the announcement on the potential merger affecting the way we look at operator business. The response to that is absolutely not.
Business is as usual for us and we have a clear mindset and clear deliverables that we are going after and that can be also seen in the way we guide for Q2 and also the rest of the year. Business as usual for us, Prem, until and when we hear more about the potential merger.
All right. Perfect. Thank you very much.
Thank you. Our next question comes from Alex Goh with AmBank in Singapore. Thank you. Excuse me, Alex Goh, please begin your question. Okay. We just checked the line and the next question is from Foong Choong 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 would be quite useful. You mentioned challenging market conditions. 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 and, or whether there's few more tweaks that you need to make in the coming quarters on that front? Thirdly, 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?
In terms of the CapEx, I know you've maintained your guidance for CapEx, but going into future years, do you see direction where the CapEx would be increasing more significantly because of maybe increased fiber investments. Lastly, on the home fiber pilot that you're doing in the Klang Valley, can I just try and 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? When should we expect full commercial launch, and will it be area by area or would it be on a nationwide basis when it's fully launched? Yep, those are my four questions. Thank you.
Foong, thank you for those questions. Let me take the first two and then Inger with the others. On competition, your question was whether Q on Q, whether we see competition or not. Competition is still the same in my view as we started the year. 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. Our strategy on prepaid and post-paid is slightly different. As we talked about prior, just on the existing base of customers, we have an opportunity to build on base management, increasing their usage, moving them to higher plans.
We believe that customers who are on our network get a better experience, first of all, have a better way of paying and interacting with us through the app and digitization, and are willing to move onto plans which are either in bundle or device financing or many different options based on their own user patterns and behavior. On the prepaid side, it is really working with customers that are moving more and more into valuing the quality of experience that they get from their data bundles. This can be, again, the small sachets that are available in the channels, the chains, and also the bigger plans on the different sides. We will continue focusing on these customers because we believe that most of the customers will want to have a balance between affordability and quality of service.
On the channel acquisition, actually, we are quite happy with the current level where we have achieved. With our mobile experience, from the first part of it is much better improvement and attraction in the channels. It is really driving the things I just mentioned on both prepaid and postpaid, where we are trying to move the channel to be much more transactional, and driving the items that we want them to focus on, which mainly on data and stay around. Also, quality acquisition. Inger, do you want to?
Yes. You asked about the increase in fiber network kilometers. Basically, this is in line with our CapEx projections of the year and also our network rollout plan. We have front-loaded, as I mentioned earlier, a little bit with half compared to what we normally would do. Going forward, we do not have any decisions yet on whether we will enter heavily into the fiber build for last mile or to the home fiber business. This is mainly building the backhaul and strengthening backhaul for our network. On number 4, the home fiber pilot that we have had in Klang Valley that we still have, you are correct. It is to test out if it is commercially viable and also technically viable for Digi, and we will assess the results and bring that into our strategy going forward.
Okay. In terms of the commercial launch of full fiber, based on what you see from your pilot, do you think we could launch something by year-end?
We will come back on that. When we have done the assessment, we'll come back on the timing of that.
Okay, got it. Okay. Thanks a lot.
Thank you. Our next question comes from Alice Goh with AmBank 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 EBITDA. I noticed, compared to the first quarter, your guidance now is lower. In the first quarter, your guidance was that service revenue would have been flat and EBITDA would have been low single-digit growth. In this second quarter, 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 is bringing that down? That's my first question. My second question is regarding on CapEx to revenue guidance as well. If you are still guiding for 11%-12%, but the first half is already 15% and the second quarter was 19%.
I'd just like to know whether in the second half of the year, you are looking at lower CapEx intensity so that your guidance will still remain intact. My third question is regarding the 700 MHz spectrum, which the MCMC 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 third quarter of 2020. I'm just wondering, are these new developments, is it going to be a positive for the sector and for Digi as a whole?
Thank you for the question. I'll take the two first. When it comes to the revised guidance on EBITDA and service revenue, actually this is driven from the service revenue decline that we saw in Q1 mainly. The reason we didn't revise the guidance in Q1 was that we wanted to see the effects of our initiatives in Q2. We see that 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 on service revenue. That should spill down to the same guidance on EBITDA. We don't see any major changes to our OpEx trajectory. On the CapEx guidance, as mentioned earlier, we are front-loading, or we have front-loaded our CapEx spend in this first half in order to provide a better network for our customers.
We will remain the 11%-12% CapEx to sales ratio for the full year as planned.
I'll take the last question. This is Joachim from Digi on 700 MHz, and the public inquiry process that has been announced. This, as you know, is the first time that MCMC is conducting this program. I think for ourselves, we view this quite positively. We support the vision because it is also interconnected to optimize spectrum usage. We look forward to the start of the process, as you know, we have now asked for comments from the public and from interested parties to come in by 30th August. We will also be participating in that process. We encourage that there is a timeline that is now committed to, we're just waiting for more updates next year.
Okay, thank you.
Thank you. Once again, ladies and gentlemen, to register for question, please press star one on your telephone. Thank you. Once again, ladies and gentlemen, to register for question, please press star one on your telephone. Thank you. Our next question comes from Danny Chang with Credit Suisse. Please go ahead.
Hey, guys. Good evening. I just have 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 a business level, and can you share any targets that you have for that business segment?
Hi, Danny. Thank you. Good evening as well. I think if I just maybe start with a little bit of what we mentioned in Q1, is that we see an opportunity now that we have a much better network coming out of 2017, 2018. We have a much better portfolio of product offerings for customers and mainly the consumer side. We felt that it was time for us to go in there and look at opportunities within SME base that we've acquired, and along with that, to actually move them up into the data space. In terms of data base management, we've been able to do that successfully in 2018. In 2019, we felt that there is a lot more potential at SME and B2B Malaysian operations. Now expand also beyond Malaysian borders. In fact, we go into the Southeast Asia region.
Products such as inter-roaming and mobile roaming plans become much more critical for the business model. We see growth in those areas, and we actually see now that we're able to address both the SME and larger businesses' needs. We've also gone into new areas as IoT and B2B, which we mentioned before. Also looking at things that we've launched in the market on IT, areas that we're going to expand the solutions also for the business data as well, not just traditional mobile lines with data and roaming and also new business models.
Okay. Thanks, Albern. Maybe just a follow-up to that as well. Does that mean that, obviously, serving the SME segment, you probably need a little bit more expertise? 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?
Yeah. From looking around the table, I think we have the right competence. I think one of the things that we started a few years ago was actually a Digi-X, for example. We also now have an organization around a chief business officer that was established last year as well. Both these functions actually drive together in terms of introducing new products and services, but also addressing the needs of SMEs when it comes to both the channels on the outside, but also internally, our teams now reaching out to potential customers. It is more of an investment into people, and people that we have, but just repurposing them and ensuring that we have a product portfolio which is not really too solution intensive, but leverages on the assets and the network that we've already rolled out for consumer business.
Not just focused on servicing a different group of customers.
Okay. All right, great. Thanks, best of luck, guys. Have a good weekend.
Thank you, Danny.
Thank you. Our next question comes from Piyush Choudhary with HSBC in Singapore. Please go ahead.
Hi. Good evening. Sorry if this question was answered earlier because I joined a little later. Just want to check what market factors or industry factors have changed in the last three to four months, which has influenced the change in the guidance on both revenue and EBITDA. Thank you.
Hi, Piyush. Inger here. As I mentioned earlier, when we got this question, was that it's post Q1 results where we saw that the whole industry had lots of Q-on-Q reduction of 3% and also year-over-year reduction was pretty significant. We did see recovery this quarter, so we are reporting a growth quarter-over-quarter of 30 revenue, 0.7%. Given the reduction so far this half, we believe that it's prudent to guide the single-digit decline for the full year. I think there are no major structural changes compared to the Q1. Changes in Q2 compared to Q1 in that sense, no.
Got it. Thanks. Have a good weekend.
Thank you. Once again, ladies and gentlemen, to register for question, please press star one on your telephone. Thank you. Once again, ladies and gentlemen, that is now open for questions. Once again, ladies and gentlemen, that is now open for questions. Excuse me, Mr. Murty. There seems to be no further question at this point in time. Thank you.
Hey, Regina. Thank you very much for managing a very good call. Everyone on the call, thank you very much for the questions, the engagement, and wish all of you a pleasant weekend. Thank you very much.
Thank you.
Thank you. Thank you for participation. This concludes the conference.