Earnings Call: Q2 2018

Jul 13, 2018

To today's conference call. And gentlemen, please begin the call and now please standby for the question and answer session. Hi, good afternoon, everyone. Thank you very much For the introduction. With me today is the management team of DG. Thank you for taking the time and it's late in the evening on Friday, so I appreciate Everyone dialing in. Nakul and I will walk through the CFO and I will walk through a little bit of an overview and then join the rest of the management team in terms of Q and A. Also with us, it's Wini from the Head of IR. Okay. So very quickly, just going into the back that you guys have, but To highlight some key points, for Q2 2018, we started off looking at service revenue here. You see a 2.1% service revenue improvement year on year. Deported mainly coming from postpaid revenue growth of 15.5% trend that's slightly that we see continuing and happy to report that we saw that in Q1 and also now going Q2. On prepaid mobile Internet revenues, also seeing a positive 20.9% increase Besides the growth focus, as always, on the efficiency, the cost The tipping continues as a focus for us. On gross profit, you see a $44,000,000 year on year improvement, 3 percent OpEx, which compares to €478,000,000 on year and an EBITDA margin improvement of 3.6 percent year on year. In the transformation, which includes a little bit of the network but also on the digital front, MyDG continues to interact with customers and now becoming much more of a tool, which does the customers both upsell, cross sell, but also engagement back. We take that now to 2,600,000 users. We also now started to do a lot of data back. Inside our base and also contextual marketing to our base and improving our base management activities. We also introduced in Q2 a new network operating model, which I'll talk about in a while, mainly giving us and building us a robust way of managing our network going forward. So let me then just move on. On the digital transformation side, mainly on the digital network that we have, We have now achieved a 58% population coverage on LTE Advanced. 4JLC, E, slightly shy of 90% of the population And fiber competing around 8,300 kilometers. Internet users went up to 75.1 percent of which back. Close to 7.1000000 of those customers are on 4 gs. What we saw this quarter is also data usage Reaching to 8.2 gig per month per customer. And as you see, the data traffic has improved year on year in the second quarter. On the new network operating model, we have shifted in Q2 to collaborate with an in house managed service provider. And this is to provide The ability over the next couple of years to focus on bringing the best customer experience and optimal network operation. And what this Enteiros is basically looking at rolling out latest technologies, making sure that the partner brings in the competencies, Both local and global and providing new tools and capabilities to better analyze customer trends and customer usage so that we can build a much more better Intranetal going forward. Nakul, can you just walk us through the financial numbers, and then I'll come back at the end of this presentation. Thank you, Alwin. I go to Slide 5. Just to give you an update on our performance. Our strategy this quarter is similar to what has worked with us in the past as we continue to drive Internet adoption with easy entry Freedom to Internet propositions as far as prepaid is concerned. We launched tactical campaigns focusing on the World Cup, introduced or continue to work on the affordable onetime Internet passes. And also with the recurring users, the big bonus plans have worked quite well. We also leveraged on The on ground campaigns in conjunction with the festive demand that was there in this quarter. Going on to postpaid, We focused on high ARPU acquisitions via the borderless rooming and family propositions and also focusing on contract Renewables and Plan upgrade. The affordable 4 gs entry level plans and bundles for prepaid to postpaid conversions also continue to bring good numbers for us. The next slide is just to give you the numbers now. Consequent to the good execution on our strategy, service revenue, as Albert mentioned, grew 2.1% year over year and flat Q on Q. The growth engine continues to be postpaid as well as the prepaid Internet growth. In this quarter, we added 462,000 subscribers On 4 gs, and as a result, the Internet revenue climbed to 26% year on year and 5.8% quarter on quarter, which is 55 54.2 percent of our service revenue. The ARPU was sustained at ringgit supported by higher postpaid subscriber The next slide, getting deeper into the postpaid revenue growth. We continue to add postpaid subscribers this As we have done quite well in the past, we added approximately 84,000 subscribers and reached 2,340,000 subscribers on Postpaid. Internet revenue registered a growth of 32.5% year over year and 8% 8.7% quarter over quarter. And as a result, the postpaid actually showed a 15.5% increase year over year and 4 point 7% Q on Q. As far as prepaid is concerned, which is the next slide, with an increase of Approximately 20.9% year on year and 3.1% Q on Q in Internet revenue, Burk. Offset by slight moderation in the number of subscribers, it's moderated to 9,000,000. The prepaid improved The decline in prepaid actually improved for us this quarter, which is negative 5.7% year on year and 2.9% Q1Q Versus 13.9 percent negative Q1 sorry, year over year in 2017. Now I jump on to speaking about our focus on continued efficiency. If you go to the next slide, Slide number 9. The gross profit increased $44,000,000 this quarter for us or 3.7% year over year to 1.22 billion. This has come on the back of higher Internet revenue contribution as well as improvement in cost of goods sold, which actually reduced Because of volume reduction on legacy voice business and messaging services and also improved traffic cost structure because we stayed away from work. Aggressiveness on ITP pricing. The OpEx increased 3% year on year, but there is a one off impact of a prior year back. Saving that we had in Q2 of 2017. Excluding that one off, the OpEx declined year over year. And on a quarter on quarter basis, it improved by 2.4%. Our efficiencies continue to be well supported by structural OE initiatives, especially in the areas of sales and marketing, Which included commission rationalization, it required digitization capabilities, that which is what Alban spoke about on digitizing our core business and digital for transformation. Slide 10, the EBITDA strengthened sorry, as a flow through from the stronger growth and efficiencies that we So this quarter, our EBITDA has strengthened 3.6% year over year and is relatively flat Q on Q. The profit before tax rose 1 9% year over year and 2.3% quarter on quarter, which stands at $492,000,000 as a result of the stronger EBITDA. After accounting for $40,000,000 coming on account of network operating model transition costs and a relatively modest depreciation of $183,000,000 this quarter. The profit after tax relatively stood steady year on year And 2% improved quarter on quarter at a margin of 23%. The next slide, Slide number 11, is about efficiencies. The operating cash flow strengthens 22% year on 6.4 percent quarter on quarter at a margin of 38%. This is coming at the back of a Stronger EBITDA and relatively low CapEx spend this quarter. The CapEx investments were close to 10% of our service revenue as we continue to efficiently deliver 4 gs LTE and LTE Advanced population coverage 89% 58%, respectively, supported by 8,300 Fiber network that we have in our base. As far as the shareholder return is concerned, Slide 12, the EPS after accounting for the IFRS 15 impact stood healthy at €0.09 And as a result, the Board of Directors declared a second interim dividend of $0.049 per share, equivalent to 3.81,000,000 back. Payable to the shareholders on 28th September 2018. The net debt to EBITDA ratio remains healthy at 0.8 times, While the conventional debt over total assets stood at 21%, Digi continued to demonstrate a solid Financial capability and flexibility to fund immediate as well as future investment needs. Slide number 13, just to reiterate, and I'm sure you're all aware that with the conventional debt as a percentage The total assets standing at 21% and a healthy net debt to EBITDA ratio, which was Declared as a compliance security on a Sharia list, which was declared in May 2018. The last slide which I'm going to cover indicates the impact of MFRS fifteen. The numbers here that you will see are Quite similar to the trend that you saw in the Q1. Namely, we see a reduction in service revenue of 30,000,000 compensated or more than compensated by an increase in device revenue of $62,000,000 And as a result, the improvement in total revenue was $32,000,000 Coupled with an increase in OpEx of $7,000,000 the net effect on EBITDA as well as operating cash flow is 25,000,000 for us this quarter, which is 0 0.03 dollars per share. That's it. I request Alban to take us through to the guiding for 20 All right, Nakul, thank you very much. So as you can see on the first half twenty eighteen performance, we didn't go very far away from our strategy that we started the year Which is a clear focus on ensuring that our customers get connected to the network that we have rolled out in the past. And doing that, we've also been able to take Internet fans out to the market And particularly both on postpaid prepaid, but also based on some of the segments that we were focused on. Going forward, For the rest of 2018 or second half, execution remains our top priority. Looking across postpaid, prepaid, but also making sure that we are taking New capabilities out to the customers, for example, on IDG, making it much more relevant for the post-fifty customers to engage with us And also base management and upselling. Data driven insights and customer segmentation, The focus on this is there's still opportunity for us, both in different parts of geo locations, but also across our current base. Cost agenda, that mindset does not go away. We continue to focus on that looking for efficient ways of running our business and sustainable construction. On digital transformation, as we've heard what I've said before in the past, we really believe that by The way we sell and serve our customers, we will be able to actually improve customer experience and also get much More time on serving the customers that we have today and more way forward. On sustainable growth, we We continue to look at new ways of taking services in bite sizes. What you've seen us doing in the first half of the year was also looking at our customer base and seeing How much data are they using? And you've seen that also translated in the usage. But they're also introducing quota top ups and also one time passes As mentioned earlier by the both of us in terms of making sure that Malaysians are now able to use affordable Internet plan across the connectivity. Just a little bit on guidance before I wrap up. For service revenue growth for 2018, looking at guidance here of flat EBITDA margins looking at 46% to 47% for the year. And And CapEx's revenue ratio at 10% to 12%. With that, I want to thank you for giving us the time to run through The financials and business focus for Q2 2018. And I will pass it back to Frank to manage the questions following the floor. Thank you. And our first question is come from Prem from Macquarie Malaysia. Please go ahead. Thank you for the opportunity and congratulations on numbers. A few questions from me. First of all, we've noticed a number of unlimited plans Coming into the market of late, what are your views on this? And do you think that we're on the brink of another round of The cautionality in the market and your comments around this will be very helpful. Secondly, could you explain this network arrangement that you have? And does it impact costs and depreciation going forward in any material way? And finally, with all this noise around the Broadband market, do you think that there are any opportunities for DG in this space? Or do you think you'll give this a Thank you. Hi, this is Lou. For your first question, yes, our focus is still focusing on the base that we have. We did postpaid and prepaid and we believe that there are different segments in there and they have different needs. So it's still our focus to We continue to offer whatever we think is relevant to the base. Yes. Rem, hi. This is Napul. I'll take the second question, which is on the new operating model on the network side. Actually, early February, we made a decision to operate an in house managed services model. And the intention of that is to help Digi accelerate its ambition to establish a data centric network centered around customer experience. And the way it's going to be done is to fast track adoption of tools That enables use of analytics and machine learning, rollout laser technologies and proven methodologies in addition to having ready access of good pool of And please. Actually, Telenor Group has proven track record and success in collaborating with managed services partner. And this is what we want to leverage on while we embark This journey, which is going to be actually helping us to make that future ready as far as learning the digital capabilities and addressing the digital Yes, Graeme, on the final question, which is on fixed broadband, the opportunities for DG. I think one thing that I've always said is that I don't we don't sort of limit ourselves in looking at the various opportunities in the marketplace. I think it's been us taking digital, for example. IoT is another example of where we've looked at leveraging what we have on the network ability to provide more services on the network that has already rolled out. The second part of that is if you look at customer base and if you look at our customer base, if there is an opportunity To provide services on fixed to them or fixed wireless to them, we will certainly evaluate that position and come back. But for now, we're Waiting to see and get more clarity on that. And then as part of our longer term strategy, we will come back on that question Just to follow-up on that managed network service. So does this mean that you've carved out a part of your IT equipment and stuff for 3rd party, which has Also helped in your depreciation number coming down. And then going forward, you'll have to pay a service fee, which would then come up In terms of operating costs or what exactly has happened here? Yes. Premax, they should have covered when you asked me for the financial impact. Actually, the financial impact for this quarter is approximately $40,000,000 which is the transition cost to move to this new operating model. It basically is rebadging of employees to MSP. And so this is what has been done. And this is not on the IT side. It's on the network side. I just want to make it clear here. And the bank We have in house these people. We have in house receivable to an in house managed service provider. Okay. And it doesn't have an impact on your depreciation, right? No, no. It has no impact on depreciation. Okay, cool. Thank you. Thank you. Thank you. And our next question is come from Wu Wei Xing from BNP Paribas Singapore and please go ahead. Thanks so much. I have few questions regarding the network transition and Apologies if I'm taking some time to understand this properly. But from what I've heard, it sounds like you have basically moved some people from An external party in house and that has resulted in the RMB40 1,000,000 transition costs. Can I just check whether there is Is there going to be any recurring costs in subsequent quarters, whether one off or not? And then related to that, will you what kind of cost savings will you get any cost savings on the network as a result of this move? And What kind of magnitude of cost savings would we be looking at? And then secondly, I wanted to check In terms of the commission rationalization, as part of your digitization efforts, can we get a bit more details As to what exactly you are doing when you say rationalization? And then thirdly, just a simple question on the prepaid side. Who are your target customers in the prepaid segment now? Thank you. Hi, this is Keesevan. When we first walk you through with regards to the managed services partners that we have signed up with, Just to give you a context of it, since we move into a data centric network and we are trying to get into more into the sites of our customers, We felt that the best way to do this is to work with a partner with a global reach with the right competency And the right tools and they'll be able to move us in the right direction in a very expedited way. As we see that the world, the technology world is growing We saw the partner that we are doing. So in order to do that, we had to work with a managed services partner. And in doing so, we had to move Together with the analytics and machine learning that will allow us to personalize and also target our segment of subscribers so that we have better view. In doing so also we have now moved the people that we have today to that organization in house to support the competency Just to give you a flavor on the cost, the $40,000,000 that you see this quarter It's a one off item and we do not expect it to record in the quarters going forward. So you should not see an impact of this in the subsequent As far as the efficiency is concerned, the objective here is to be ready with future proof capabilities. And some efficiency It's obviously expected as we get the benefit of new tools and capabilities from this managed service provider. I cannot quantify the impact of Okay. Then just moving on to the second and third question, Lo, please. Yes, on the commission optimization, It's good. There's 2 parts here. I think as and when we go into digitization, so obviously there's a lot of activities that the channels are now Being kind of like sales force, I think we are opening up some channels for customer to empower customer to do it themselves. So there's one form of optimization. And then the other form of optimization is really more on, I know we did look at all the Activities at the channel and then how do we reward those activities that we generate value to the business. So that's on the commission optimization. On the back to the prepaid, I think the focus here is really the Malaysian segment as well as the Internet There is what covered by Alban and Naku as well. On the prepaid side, we look at the wide range of segment within the prepaid. I think Those commitment users that subtract fixed Internet passes and also those on demand Internet users that subtract And our next question comes from Arthur from Citi, Singapore. Several questions, please. Firstly, on competition. I'm Just wondering how you're seeing this change on the ground. Is the change in guidance on the revenues due to expectations that you're gaining market share? Or is it because you're seeing things as more stable on the ground? 2nd question I had is with regard to spectrum. Any updates with regard to the 700 band spectrum assignment? 3rd question is on this service provider model. If you can just elaborate a little bit more on what you're trying to do here. What exactly are you moving in house? And how does this change your operations and financials? Lastly, on the $40,000,000 expense that you booked, So just to make sure, you will not see any further charges in the succeeding quarter, so you should see some improvements in terms of margins. Is that correct? I think as we say, we are going to continue to focus more on our base. And then, of course, over time as and when we built the capability on digitization So I think our focus is really rising on the digital capabilities and more On the second one, this is Nakul Akar. Your question on the 700 megahertz back. MCMC has yet to announce on the 700 megahertz allocation at this juncture. And unfortunately, we'll not be able to give you any color on the work. Specific point for now. Okay. So maybe on the network, just maybe just highlight examples of areas that we are working on. Yes. So I think just to give some context in terms of the The areas that we are very focused on is predominantly around the site rollout, site deployment and maintenance. That's where we are using the most advanced In terms of the network event in sales, how will we roll out our network to ensure that we're investing in the right place Through a proper and smart planning. And again, this is Nakul. You mentioned about the back. $40,000,000 I reiterate, it's a one off for this quarter. We do not expect similar amounts in the And also as mentioned earlier, we will continue to look at how efficiencies can be obtained from this new ship in the operating model because we will get those tools and capabilities of the MSP, which will be reflecting on our OpEx efficiencies going forward. So just to clarify, and I understand you're no longer booking that $40,000,000 charge. But going forward, should we expect then your OpEx to up. Bumped up because you're now absorbing these people on your books? No. We do not expect OpEx to increase. Rather, we expect to get some efficiencies out of this operating model. Understood. Thank you very much. And our next question is come from Fu Cheng Cheng from CIMP Malaysia. Please go ahead. Three questions from me. Firstly, on the postpaid side, you mentioned in the And from whom are you acquiring these subs from? And you also mentioned contract renewals and Any statistics you can share on the plan upgrade, particularly on the 50 Ringgit plan and how much of how many percent of those subscribers Actually upgrading to your ATU ranges plans and above. Second question on the prepaid revenue side, Just want to understand whether that is now mostly due to migration to Allstate or is that still to do in the market? And if so, which segment is contributing to that decline? And third question, just a bookkeeping question. How much was the reversal of depreciation for fully depreciated assets in the quarter? I think the postpaid business is comprised of 2 parts. 1 is, Of course, acquisition, but there's also another element of we do have upgrades as well. So the upgrade is really from pre to post. And then within the postpaid, if you look at our offering, Which is available in the website. I think there's multiple plans and each of the plans come with the different benefits. Some of the high end plans come with So therefore, I think as and when more people are travel, we do see that there's a lot of potential on the upgrade. I think back to the prepaid, if you look at the prepaid, Yes, overall, I know there will be still consolidation of some shops, but the mobile Internet is growing healthily. And then obviously, there's some cannibalization from voice I mean VoIP to data and also there will be some cannibalization from pre to post. On your question as far as depreciation is concerned, so there are 2 items why the depreciation is at the levels at which back. It is there in this quarter. 1, it's actually lower by approximately $17,000,000 because of substantially Lower amortization of 2,100 megahertz upon its reassignment on 1st April 2018. So the $17,000,000 is actually attributable to that. It is something that you will see on a recurring basis going forward. The second effect which you asked for is It's a reversal of depreciation on fully depreciated assets. That's approximately between $20,000,000 to $25,000,000 Thank you. And our next question is coming from Gokul Kumar from Nomura Good morning. Please go ahead. Hi, thanks. I'm not sure if one of these has introduced your address, but just want to check With your changes within in house managed service model, how do you expect the network cost to trend? Do you expect significant Savings here going forward. Also you said a fair bit of focus on digitization. Any color in terms of how much of the sales is happening through digital channels to understand how much Savings that you can expect from this particular initiative. Lastly, there has been some mention About government lowering the network access prices with mandatory service and SAP regulations. Would that benefit Digi in any way? Thank you. Kumar, this is Nakul. To answer your first question, just to make it clear, this Werk. F1 Werk new operating model is not on the CapEx, it's not on the investment as such, it's more on the services. So and Obviously, it is done for the purposes of getting future ready in terms of maintaining a data centric network with some efficiencies coming along the way as For competitive reasons, we will not be able to quantify the impact of reduction in the network costs going forward. On the digitization, I think it's more than just the hard savings. Really, I think you cut short the transaction time and the steps and the process as well. And this will give us the benefit that So you'll free up the channel, we focus on more productive activities, things like upselling, upgrade So there's no hard number savings from digitization, but It really gives us a wide range of On your third question on the mandatory excess pricing, we are assessing the recent changes on this to understand how this impact Digi in the long term. And I think in the ongoing weeks months, we'll come back with more assessment from our side on this one. Next question is from Piyush Chihari from HSBC Singapore. Please go ahead. Yes. Hi. Good evening. Thanks a lot For the presentation and the opportunity. Most of my questions have been answered. Just one on the kind of macro side. What would drive stability in the prepaid subscriber base? Like what should we watch Going forward, as the kind of metrics which could try to drive stability in this segment? I think one of the big element in the previous segment is still the foreign booker segment. Of course, as I've been, I mean So historically, this segment are the one that use lot more IDD and the voice call. And that's and when they move into Data, obviously, there will be cannibalization of voice to data. So I think that this definitely one of the element will impact the stability of the Yes, but Piyush, as we built Internet and taken Internet to more Malaysians with the bite sized The plans and services that I talked about, they're actually stimulating growth by then using more as their trends change. And I think what we The pivot side is that there's nothing to use more data. I think the more we are able to price For these different segments and their usage patterns, I think that will drive further stability in the previous segment. Sure. And do you kind of disclose like what's the proportion of your customer base, which is on this foreign worker segment? And probably by what time frame you expect stability to kind of achieve in this segment? Like, is it 6 months? Is it 1 year? And the second question was on your service revenue growth guidance. First half has been quite Healthy growth. So what is driving flat guidance for the full year? Piyush, what we think we can do is we can't do we don't probably sort of give you a breakdown of our stuff. As I was sort of alluding to, I think the growth that you see in the Malaysian base for us has been very positive. And we're definitely focused on taking that continuous growth to the Malaysian base and using Internet to We won't be able to give you a breakdown of the different stuff on the prepaid base. Just on the second part of the question on the service revenue guidance. I think what we saw in first half was definitely a positive growth, as you talked about. But I think on in In the second half, there are areas where we want to make sure that we are being prudent in terms of looking at both back. But also just changes that are beyond our control and just making sure that we guide well. And flat, given the current And where we came from 'seventeen, that's actually a very positive direction to head to it. Sure. Thanks a lot. Thank you. And our next question is come from Alex Ko from Penn Bank Malaysia. Please go ahead. Thank you so much for the opportunity. I have a few questions. The first is regarding depreciation. I understand the lower depreciation you mentioned is due to back. Reversal on fleet, I think, are those one offs? And how much was those or what was the quantum of that reversal? And Is this going to recur in the next quarters? And could you explain why was there lower On the 2,100 aircraft spectrum on the reassignment, right? Yes. And that's my first question. And my second question is regarding operating transition cost. I understand that you indicated that it's not going to be clear in the next quarter. But does that mean this $40,000,000 of savings will appear in the next Quarter and subsequent quarters, Lucie, since it's not going to recur, or is there an offsetting item within the Your amortization cost that is causing this to appear. And my First question is regarding your service revenue guidance. I just want to expand on that. Your earlier guidance was flat to low single digit decline, So now you're looking at Slide 12. Are you getting more optimistic? Do you think that the decline is being offset somehow because of your new marketing plans that are coming out? And my final question is regarding the pre MFRS fifteen impact. The last quarter you gave pre the actual Net positive, please, MFRS and post MFRS. All right. I just want to know, is there Is this a good update for your second quarter going forward? Yes. Thanks. Sorry, Alex, can you just repeat the last question? The pre IFRS effect, you've Given the indications between pre and post in your last your Q1 slide, I just want to know, is there going to be any more MFRS business impact in the Next quarter, and is this a good exit because your results actually look very, very strong. If I were to add back to your operating model transition cost. I will take the first three and I'll try to answer it. Your question on depreciation on fully F1 Burkhard. Prepared assets, as I mentioned earlier, the impact is between $20,000,000 to $25,000,000 for us this quarter. We are currently in the process of reviewing our 6 assets registered and this process is actually ongoing right now And there might be some impact in Q3. The amount cannot be quantified as of now. But we don't expect it to go beyond the Q3. On your question on the lower amortization of spectrum, so we acquired the 2,100 megahertz spectrum a few years back from time.com Wacker. At a particular price. And hence the amortization that we had in the books was at a particular rate depending on the period of useful life that was left. After the spectrum assignment that was done for this spectrum, now it's available for €18,000,000 for us for about 15 years sorry, for about 16 years. And if I Just to a difference between the amortization what it was earlier and what it is now, the impact will be a reduction of €17,000,000 per quarter. So if you compare Q2 2018 versus Q2 2017, you will see the delta of the 2017, which will be recurring for us This answers your two questions on the depreciation. On the third one, on the $40,000,000 Savings that you mentioned, actually, I just want to say that it's not a saving. €40,000,000 is a cost that we have incurred as transition to this new operating model. And This cost will not be incurred going forward. So I mean, please do not consider it as a saving for the next This quarter is just a one off element that we had in this quarter as far as shifting to this new model is concerned. Actually, on your last question on pre MFRS, we were still not able to understand it fully. But I mean, we in our presentation, we also do include an impact of pre and post MFRS. And if you look at the numbers, they are Quite consistent from what you saw in the Q1. If your question is how it is expected to carry on going forward, It is actually very difficult to explain because it depends on what kind of customers that we acquire, whether they are on handset plans and so on and so forth. So It's difficult to indicate what this will be going forward, but it is quite obvious. If we go for more acquisition on bundles, then this impact will be higher in the subsequent quarters. But please note, the cash that we get from this transaction doesn't change. So an impact in 1 quarter should ideally be offset as we go forward Because the total revenue from the contract is never going to change. Yes, Alex. And on question number 4, which Just on the strategy of your guidance and on the flat growth. I think it's a couple of combination of things. I think if you go back as far as Q3, Q4 last year, you We started to see that we have previously already made a choice in terms of focus on growth and margin protection And also focused on both our prepaid customers and postpaid customers both from a usage perspective, but also moving, as Lo talked about, more free to post as The customer usage patterns increases. I think all those things have come together and we are looking at both base management and also upselling and cross And that's also taking us to where we are currently. Thank you so much. Thank you. And our next question is coming from of Rene Ria from Deutsche Bank, Singapore. Please go ahead. Hi. Thank you very much, Arvind and Tim for taking the call. I will just go back to the managed services model and apologies for belaboring the point. You have said that you have actually in sourced an X number of employees from I just want to understand the further movement of employees. So has there been you have taken people from outside to inside your company or you have actually Move them out and rebatch them as employees of the managed services holders. That's my first question. 2nd, the transition cost of $40,000,000 is basically the fee paid to the MSSP as a part of the contract? Or Why is there such a large transition cost for, if I may say, moving employees? So that's the second question. 3rd, can you throw some any more light on how the KRAs of the MSSP The SP is structured. Is there a fixed payment by DG over a period of time? Or is it KRL linked to the network KPIs? So again, just some detail as to how it is working. Secondly, I just want to check, I mean, Alburn, you have now taken a slightly more larger role Within the Telenor space, so any light on how you intend to move forward on that would be helpful? I'll stop here and come back if I have more questions. Thank you. Yes. Actually, I thought that it stopped at 4%, but the first question might be, you might have to charge you extra. Back. Congratulations on the role first. No, no, no. Thanks a lot. I think on the just a few of us are going to take some of the But let me just maybe just give you on question number 1 on network arrangement. Just maybe we were a little bit unclear, but Basically, how it works is we have signed up an agreement with a managed service provider, and they have and we have basically moved our employees work. They were providing those services in house for us all these years to the MSPs. And basically, they have been rebatched. So they work still within our premise for the DG network and managing our network capabilities. What they bring is the new capabilities, competencies, tools, global knowledge and then help us build a robust data network for our customers. On the $40,000,000 that was basically the cost of rebadging those employees for the 10 year back. During the transition only. And now I'll just pass off on to Nakul on the fixed payment, but the last one let me just take the last one since I'm on the call. I think the role that you talk about is Just more of a rotational role from a customer perspective, where I'll be supporting DTech For that period. And previously, he was held by the CEO of DTech. And since he has moved on, I was sort of asked to take the role and accept Your third question, Srini, on whether it's a fixed payment or linked to KPIs, I would like to say unfortunately we'll not be able to disclose you the color On how this transaction works. But as we had mentioned, it's done for two purposes. 1 is to build Future approved capabilities and also to run an efficient operations. Thanks, Smedes. I hope you got the answers you were looking for. Yes, yes. Just to clarify, the CapEx is still from an accounting perspective still on your books, right? Yes. So there is no potential for the CapEx to become an OpEx, if I may just clarify. That's one of the issues you're going to check. No, there is There is no, sir. Understood. Okay, thanks. This is helpful. Thank you so much. And next we have follow-up questions from Srini from Deutsche Bank in Singapore. You guided this time your previous guidance was revenue and EBITDA margin at least at the end of 2017 in the In the 4th quarter presentation, EBITDA, this time you have guided for EBITDA margin rather than the absolute EBITDA itself. Looking at your numbers, is it fair to assume that you're looking at a positive outlook on the revenues, But the margin guidance still remains a bit more muted or am I reading it wrong? Welcome. I'll take this question. Just to remind you, you asked the first question, right? Sorry. No, no, no, it's okay. It's okay. Yes, we did guide for a nominal EBITDA number the Last time and now we are indicating a percentage. The way you should read it is that there is a positive color to where we see our performance this time And you should see it in this bit. Okay, understood. This is helpful. Okay. Thank you. And our next question is come from Erik Haase from SEB Sweden. Please go ahead. Question 1, the EBITDA margin, how will it look coming forth in Q3 and Q4? And if we look on investment, the CapEx in also in Q3 and Q4, targeting that. Sorry. And lastly, your competitors, CTE. The first one? My first question was the EBITDA margin. How do you see that coming in Q3 and Q4? And go on to the next question, please. Yes. And then we have the investment How will CapEx turn out in Q3 and Q4? And also your competitors, CTE, About their problems in the U. S. A, how will those affect you? Will you change the distributor? Or will you wait? Or what will you do? I'll take your first two questions. This is Akul. On the EBITDA margin, your question is how do we see it in Q3 and Q4. What you see in this quarter, we have a margin of 20%, 47%. And our guiding for 2018 is between 40 And this is what I can tell you about the EBITDA margin. In terms of our CapEx, Again, your question is on Q3 and Q4. And the guidance that we have is that it's going to be between 10% to 12% of our Service revenue. The year to date CapEx investment is roughly 11.1%. So we are within the guiding that we have And your third question on the ZPE, if I understood it right, back. Your question was how does it impact our competitors because we could not gather it quite well, if you can repeat? No, no, no. How does it impact you? Will you how does it impact the UCT? Of course, works? Yes. You're correct. Yes. So The French distributor. Yes. So I think At this point in time, we have sufficient materials and equipment to sustain the period. So of course, as you know, where the situation is at the moment, so we are also waiting to see if there is any movement. But for now, we are Okay. Thank you. Those are all my questions. Thank you. And the next question is come from Pavel from Citi, Singapore. Please go ahead. Hi. Thank you. Just a follow-up on Srini's earlier question. So going forward, should we thus see staff cost decline and instead you are booking them under O and M expenses as you move to revanch these employees? I recall you earlier mentioned that you're going to see cost efficiencies given this network model. But is it because they're now being paid less under the new in sourced entity? Can you repeat your second one, Arthur, please? The first one, I got it. What was the Yes. No, no. I'm just trying to understand because in my earlier question, you mentioned that you expect to see efficiency cost efficiencies as a result of this network In sourcing model, I'm just wondering how the cost efficiencies are actually materializing. Is it because they're now being paid less Under the new Instructure entity, where is the cost savings coming from? Yes. I think this The staff cost, as you rightly mentioned, will be lower to the extent which will be offset With the O and M, so you're absolutely right on that. And the difference between the two will be the efficiencies, which basically is centered around the tools and the But also worth mentioning, the focus here is to build a data ready or a data centric model. And so we are going with this With 2 objectives in mind. The one is on the capabilities and the other is based on the efficiency. And again, it's difficult to quantify the amount, as I But efficiency is just very clear. The efficiency that we get is not because it's a lower salary On the other side, it's the efficiency that it gets on the capabilities of not having to invest on the tool and the competencies, and better leverage what they already will bring to the table as we go into this new model. So it's based on the output, not on the cost side. Okay. Thank you very much. You're welcome. Thank you. Thank you. And next we have a follow-up question from Alex from Ambank Malaysia. The first thing I noticed on your traffic cost, I noticed it's down quarter on quarter year on year. It's only €199,000,000 when traditionally it was €200,000,000 I'm just wondering Is this what you are expecting to see in terms of the traffic cost going forward? And is this part of the reason why your Cost structure in this second quarter seems to be much low seems to be Relatively low compared to previous quarters. Alex, thanks for your follow-up question. So this is I mean, the reason why this is lower is exactly our Our strategy and the way we are executing it because our focus is as voice is declining and there is impact there, we are focusing on growing Our Internet revenue. And hence, you see the traffic cost going down, which is compensated by the increase in how we are supposed to manage our revenues on the data side. And to manage our revenues on the data side, and that's why the margins are improving for us. Okay. Is this something you're going to expect over the next few quarters and over to the next year as well? See, As the legacy services decline and the data revenues increase, then this is a trend that you should witness. But again, it's difficult to quantify the Okay. Thank you so much. Thank you. That will be the last question that we take, Frank. And I just wanted to say thank you to everybody that has dialed in, Also for a very engaged session and all the questions and clarifications. Just wish all of you a good weekend ahead. Thank you. Thank you for the conference call has been concluded. Thank you for your participation.