Good afternoon, good evening, everyone. Welcome to today's conference call. Gentlemen, please begin the call, and I'll be standing by for the question & answer section.
Hi. Good afternoon, everyone. Frank, thank you very much for the introduction. With me today is the management team of Digi. Thank you for taking the time, and it's late in the evening on Friday, 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&A. Also with us is Veni from the head of IR. Okay. Very quickly, just going into the deck that you guys have, but just 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, reportedly 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 into Q2. On prepaid mobile internet revenues, also seeing a positive 20.9% increase year-on-year. Besides the growth focus, as always, the efficiency, the cost discipline continues as a focus for us. On gross profit, you see a MYR 44 million year-on-year improvement, 3.3% OpEx, which equates to MYR 478 million year-on-year, and an EBITDA margin improvement of 3.6% year-on-year. In the transformation, which includes a little bit of the network, but also on the digital front, MyDigi continues to interact with customers and now becoming much more of a tool, which helps the customers both up-sell, cross-sell, but also engagement through rewards. We take that now to 2.6 million users.
We also now started to do a lot of data insights 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. Let me 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. 4G LTE by in large is 90% of the population, and fiber competing around 8,300 kilometers. Internet users went up to 75.1%, of which close to 7.1 of million of those customers are on 4G. What we saw this quarter is also data usage increasing to 8.2 gigs per month per customer.
As you see, the data traffic has improved both year-on-year and quarter-on-quarter. On the new network operating model, we have shifted in Q2 to collaborate with an in-house managed service provider. This was to provide us the ability over the next couple of years to focus on bringing the best customer experience, and optimal network operations. What this entails 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 internet network going forward. Nakul, can you just walk us through the financial numbers, then I'll come back at the end of this presentation.
Thank you, Albern. I go to slide five. Just to give you an update on our performance. Our strategy this quarter is similar to what has worked with us in the past. 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 continued to work on the affordable one-time internet passes. 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 roaming and family propositions. Also focusing on contract renewals and plan upgrades.
The affordable 4G 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 Albern mentioned, grew 2.1% year-over-year and flat Q1 to Q2. The growth engine continues to be postpaid as well as the prepaid internet growth. In this quarter, we added 462,000 subscribers on 4G. As a result, the internet revenue climbed to 26% year-on-year and 5.8% quarter-on-quarter, which is 54.2% of our service revenue. The ARPU was sustained at MYR 42, supported by higher postpaid subscriber base. The next slide, getting deeper into the postpaid revenue growth. We continue to add postpaid subscribers this quarter as well, as we have done quite well in the past. We added approximately 84,000 subscribers and reached 2.34 million subscribers on postpaid.
The internet revenue registered a growth of 32.5% year-over-year and 8%, 3.7% quarter-over-quarter. As a result, the postpaid actually showed a 15.5% increase year-over-year and 4.7% Q1 to Q2. As far as prepaid is concerned, which is the next slide, with an increase of approximately 20.9% year-on-year and 3.1% Q1 Q in internet revenue, offset by slight moderation in the number of subscribers, which moderated to 9 million. The decline in prepaid actually improved for us this quarter, which is -5.7% year-on-year and 2.9% Q1 Q versus 13.9% negative year-over-year in 2017. Now I jump on to speaking about our focus on continued efficiency. If you go to the next slide number nine, the gross profit increased MYR 44 million this quarter for us or 3.7% year-over-year to MYR 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, also improved traffic cost structure because we stayed away from aggressiveness on IDD pricing. OpEx increased 3% year-on-year, but there is a one-off impact of a prior year saving that we had in Q2 of 2017. Excluding that one-off, 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 aided by digitization capabilities, which is what Albern spoke about on digitizing our core business and digital transformation. Slide 10.
A flow-through from the stronger growth and efficiencies that we saw this quarter, our EBITDA has strengthened 3.6% year-over-year and is relatively flat Q1 Q. Profit before tax rose 1.9% year-over-year and 2.3% quarter-on-quarter, which stands at MYR 492 million as a result of the stronger EBITDA, after accounting for MYR 40 million coming on account of network operating model transition costs and a relatively modest depreciation of MYR 183 million this quarter. Profit after tax relatively stood steady year-on-year and 2% improved quarter-on-quarter at a margin of 23%. The next slide number 11, is about efficiencies. Operating cash flow strengthens 22% year-on-year, 6.4% 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.
CapEx investments were close to 10% of our service revenue as we continue to efficiently deliver 4G LTE and LTE Advanced population coverage 89% and 58% respectively, supported by 8,300 fiber network that we have in our base. Far as the shareholder return is concerned, slide number 12, EPS after accounting for the MFRS 15 impact, stood healthy at MYR 0.049. As a result, the board of directors declared a second interim dividend of MYR 0.049 per share, equivalent to MYR 381 million, payable to the shareholders on 28th September 2018. 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, I'm sure you're all aware that with the conventional debt as a percentage of the total assets standing at 21% and a healthy net debt to EBITDA ratio, Digi was declared as a compliant security on a Shariah list, which was declared in May 2018. Last slide, which I'm going to cover, indicates the impact of MFRS 15. Numbers here that you would see are quite similar to the trend that you saw in the first quarter. Namely, we see a reduction in service revenue of MYR 30 million, more than compensated by an increase in device revenue of MYR 62 million, as a result, the improvement in total revenue was MYR 32 million.
Coupled with an increase in OpEx of MYR 7 million, the net effect on EBITDA as well as operating cash flow is MYR 25 million for us this quarter, which is MYR 0.003 per share. I request Albern to take us through to the guiding for 2018.
All right, Nakul. Thank you very much. As you can see on the first half 2018 performance, we didn't go very far away from our strategy that we started the year with, which is a clear focus on ensuring that our customers get connected to the network that we have rolled out in the past. In doing that, we've also been able to take internet plans out to the market, and specifically 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 IDD, making it much more relevant for the postpaid prepaid customers to engage with us and for also base management and upselling.
Data-driven insights and customer segmentation, we focus on this as there are still opportunities 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 cost structures. On digital transformation, as you've heard what I've said before, in the past, we really believe that by digitizing the way we sell and serve our customers, we'll be able to actually improve customer experience and also get much more time on serving the customers that we have today and more going forward. On sustainable growth, 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 they're using, and you've seen that also translated in the usage. 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 plans across the connectivity. Just a little bit on guidance before I wrap up. For service revenue growth for 2018, we're giving a guidance year of flat year-on-year. On EBITDA margins, looking at 46%-47% for the year, and CapEx to service revenue ratio at 10%-12%. With that, I want to thank you for giving us the time to run through the financials and business focus for Q2 2018.
I'll pass it back to Frank to manage the questions from the floor.
Thank you. The question and answer session now begins. If anyone wishes to ask a question, please press star one on the telephone keypad. Our first question has come from Prem from Macquarie, Malaysia. Please go ahead.
Thank you for the opportunity, and congratulations on the 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 irrationality in the market? Your comments around this would be very helpful. Secondly, could you explain this network arrangement that you have? Does it impact costs and depreciation going forward in any material way? Finally, with all this noise around the fixed broadband market, do you think that there are any opportunities for Digi in this space, or do you think you'll give this a wide berth? Thank you.
Prem, this is Lo. For your first question, our focus is still focusing on the base that we have. We need post-pay and pre-pay, and we believe that there's different segment in there, and they have different needs. It's still our focus to continue to offer whatever we think is relevant to the base. Yep.
Yep. Prem, hi. This is Nakul. I 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. The intention of that is to help Digi accelerate its ambition to establish a data-centric network centered around customer experience. The way it's going to be done is to fast-track adoption of tools that enables use of analytics and machine learning, roll out latest technologies and proven methodologies, in addition to having ready access of a good pool of competencies.
Actually, Telenor Group has proven track record and success in collaborating with managed services partner, this is what we want to leverage on while we embark on this journey, which is going to be actually helping us to make us future-ready as far as running the digital capabilities and addressing the digital needs of the customers.
Yeah, Prem, on the final question, which is on fixed broadband, the opportunities for Digi. I think one thing that I've always said is that we don't limit ourselves in looking at the various opportunities in the marketplace. I think you've seen 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 we've already rolled out.
The second part of that is, 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. For now, we're just waiting to see and get more clarity on them. As part and parcel of our longer-term strategy, we will come back on that question more specifically.
Thanks. Just to follow up on that managed network service. Does this mean that you've carved out a part of your IT equipment and stuff to a third party, which has also helped in your depreciation number coming down? 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?
Yeah. Prem, I should have covered when you asked me for the financial impact. The financial impact for this quarter is approximately MYR 40 million, which is a transition cost to move to this new operating model, which basically is the rebadging of employees to an MSP.
Okay.
On the IT side, it's on the network side. I just want to make it clear here.
Outsource these people.
That's right.
To an in-house managed service provider.
Okay.
Thanks.
It doesn't have an impact on your depreciation, right?
No. It has no impact on depreciation.
Okay, cool. Thank you.
Thank you.
Thank you. Our next question is come from Wu Weijing from BNP Paribas, Singapore. Please go ahead.
Thanks so much. I have a few questions regarding the network transition, and apologies if I'm taking some time to understand this properly. 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 MYR 40 million transition cost. Can I just check whether there's going to be any recurring cost in subsequent quarters, whether one-off or not? Related to that, 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? 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?
Thirdly, just a simple question on the prepaid side. Who are your target customers in the prepaid segment now? Thank you.
Hi, this is Kesavan . Let me 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 moved into a data-centric network and we are trying to get more into the insights 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 competencies 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 technology world is evolving towards data, we felt the partner that we are doing. In order to do that, we had to work with a managed services partner.
In doing so, we had to move them in as our managed services partner who will take over and run the services to bring the best proven methodologies and technologies together with 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 development of the people that we have. Just on the cost now.
Just to give you a flavor on the cost, the MYR 40 million that you see this quarter is a one-off item, and we do not expect it to recur in the quarters going forward. You should not see an impact of this in the subsequent period. As far as the efficiency is concerned, the objective here is to be ready with future-proof capabilities. Some efficiency is obviously expected as we get the benefit of new tools and capabilities from this managed service provider. I cannot quantify the impact of these efficiencies for competitive reasons.
Okay. Just moving on to the second and third question. Lo, please.
On the commission optimization, basically, there's two part 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 self-serve. I think we are opened up some channels for customer to empower customer to do it themselves. There's one form of optimization. The other form of optimization is really more on, we re-look at all the activities at the channels and then, how do we reward those activities that will generate value to the business. That's on the commission optimization. Back to the prepaid, I think the focus here is really the Malaysian segment as well as the internet users. I think that's what covered by Albern and Nakul as well. On the prepaid side, we look at the wide range of segment within the prepaid.
I think there's those commitment users that subscribe to fixed internet passes, and also there's those on-demand internet users that subscribe the daily passes or as and when they need. Yep. That's all.
Yeah. Thank you.
Thank you.
Thank you. Our next question is come from Arthur from Citi Singapore. Arthur, please go ahead.
Hi. Thanks for the opportunity. 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? Second question I had is with regard to spectrum. Any updates with regard to the 700 band spectrum assignment? Third 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 MYR 40 million expense that you've booked. Just to make sure, you will not see any further charges in the succeeding quarters. You should see some improvements in terms of margins. Is that correct? Thank you.
Back to your first questions. I think, as we say, we are going to continue to focus more on our base. Of course, over time, as and when we build the capability on digitization as well as more data insights. I think our focus is really riding on the digital capabilities and the more data-driven type of targeting to optimize the value for the business.
Yeah. On the second one, this is Nakul, Arthur. Your question on the 700 MHz spectrum. MCMC has yet to announce on the 700 MHz allocation at this juncture. Unfortunately, we will not be able to give you any color on this specific point for now.
Kesavan, maybe on the network, just highlight examples of areas that we are working on.
I think just to give some context in terms of the areas that we are very focused on is predominantly around the site rollout, site deployment, and maintenance, where we are using the most advanced processes and tools through machine learning and AI, to help us have more customer insights in terms of, and that will then entail how we roll out our network to ensure that we're investing in the right place through a proper and smart planning mechanism.
Yeah.
Again, this is Nakul. You mentioned about the MYR 40 million. I reiterate, it's a one-off for this quarter. We do not expect similar amounts in the subsequent quarters. Also, as mentioned earlier, we will continue to look at how efficiencies can be obtained from this new shift in the business operating model. Because we will get those tools and capabilities of the MSP, which will be reflecting on our OpEx efficiencies going forward.
Just to clarify, I understand you're no longer booking that MYR 40 million charge. Going forward, should we expect then your OpEx to bump 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. Okay, thank you very much.
Thank you. Our next question is come from Foong Choong Chen from CIMB Malaysia. Please go ahead.
Hi, thanks for the call. Three questions from me. Firstly, on the postpaid side, you mentioned in the presentation that you've stepped up on the high ARPU acquisition. Can you just talk a bit about the success rate there and from whom are you acquiring these subs from? You also mentioned contract renewals and plan upgrades. Any statistics you can share on the plan upgrades, particularly on the MYR 50 plans and how many % of those subscribers are actually upgrading to your MYR 80 plans and above? Second question on the prepaid revenue side. Yeah, still declining. Just want to understand whether that is now mostly due to migration to postpaid, or is that still to do with competition in the market, and if so, which segment is contributing to that decline? Third question, just a bookkeeping question.
How much was the reversal of depreciation for fully depreciated assets in the quarter? Yeah, those are my three questions. Thank you.
I think the postpaid business comprise of two parts. One is, of course, acquisition. There's also another element of, we do have upgrades as well. The upgrade is really from pre to post. 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 a different benefit. Some of the high-end plans come with more than less as well. Therefore, I think as and when more people are traveling, 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, there will be still consolidation of some subs, but the mobile internet is growing healthily.
Obviously there's some cannibalization from voice to data, and also there will be some cannibalization from pre to post.
Yeah. Foong, on your question as far as depreciation is concerned. There are two items why the depreciation is at the level that which it is there in this quarter. One, it's actually lower by approximately MYR 17 million because of substantially lower amortization of 2100 MHz upon its reassignment on 1st of April 2018. The MYR 17 million is actually attributable to that, which is something that you will see on a recurring basis going forward. The second effect which you asked for is the reversal of depreciation on fully depreciated assets. That's approximately between MYR 20 million-MYR 25 million.
Okay, got it. Thank you so much.
Thank you. Our next question is come from Gopal Kumar from Nomura Singapore. Please go ahead.
Yeah. Hi, thanks. I'm not sure if one of you has introduced yet this, 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 your 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, MSAP regulations. Would that benefit Digi in any way? Thank you.
Hi, Kumar. This is Nakul. To answer your first question, just to make it clear, this network new operating model is not on the CapEx. It's not on the investment as such. It's more on the services. 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 we go forward. 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 a hard saving. Really, I think you'll cut short the transaction time and the steps and the process as well. This will give us the benefit that you'll free up the channel resources to focus on more productive activities. Things like upselling, the upgrade, and the pre-approval. There's no hard number savings from the digitization, but it really gives us a wide range of
On your third question on the mandatory access pricing, we are assessing the recent changes on this to understand how this will impact Digi in the long term, I think in the ongoing weeks and months, we'll come back with more assessment from our side on this one.
Okay. Thank you.
Thank you. Our next question is come from Piyush Choudhary from HSBC Singapore and Piyush go ahead.
Yeah, hi. Good evening. Thanks a lot for the presentation and the brainstorming. Most of my questions have been answered. Just one on the macro side. What would drive stability in the prepaid subscriber base? What should we watch going forward as the kind of metrics which could drive stability in this segment?
I think one of the big element in the previous segment is still the foreign worker segment. Of course, as and when, and also historically, this segment are the one that use a lot more IDD and the voice call. As and when they move into data, obviously, there will be a cannibalization of voice to data. I think that is definitely one of the element will impact the stability of the previous segment.
As we built internet and taken internet to more Malaysians with the bite-sized plans and services that I talked about. We're actually stimulating growth by them using more IDD. Their trends change. I think what we see the prepaid side is that they're starting 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 quite the stability in the prepaid segment.
Sure. Do you disclose, what's the proportion of your customer base which is on this foreign worker segment? Probably by what time frame do you expect stability to achieve in this segment? Is it six months? Is it one year? The second question was on your service revenue growth guidance. First half has been quite healthy growth. What is driving flat guidance for the full year then?
To go back to the first questions.
What do we think we can't do is, we don't probably give you a breakdown of our subs, but I think as I was alluding to, I think the growth that you see in the Malaysian base, for us, has been very positive. We have definitely focused on taking that continuous growth to the Malaysian base and using internet to reach those subscribers. We won't be able to give you a breakdown of the different subs 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.
I think, in the second half, there are areas where we want to make sure that we are being prudent in terms of looking at both opportunity, but also just changes that are beyond our control, and just making sure that we guide well and flat given the current situation and where we came from 2017. That's actually a very positive direction to head toward.
Sure. Thanks a lot.
Thank you. Our next question is coming from Alex Lo from AmBank Malaysia. Please go ahead.
Thank you so much for the opportunity. I have a few questions. The first is regarding a depreciation. I understand the lower depreciation you mentioned is due to reversal on fully depreciated assets. Are those one-off, how much was the quantum of that reversal, and is this going to recur in the next quarters? Could you explain why was there a lower amortization cost on the 2100 MHz spectrum on the reassignment? That's my first question. My second question is regarding operating transition cost. I understand that you've indicated that it's not going to recur in the next quarter. Does that mean this MYR 40 million of savings will appear in the next quarter and subsequent quarters, since it's not going to recur, or is there an offsetting item within your amortization cost that is causing this to appear?
My third question is regarding your service revenue guidance. Just now, I just want to expand on that. Your earlier guidance was flat to low single-digit decline. Now you're looking at flat growth. 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? My final question is regarding the pre-MFRS 16 impact. The last quarter you gave the actual net profit pre-MFRS and post-MFRS. All right? I just want to know, is this a good escape for your second quarter going forward? Yeah, thanks.
Sorry, Alex, can you just repeat the last question?
The pre-MFRS impact. You've given an indication between pre and post in your first quarter slide. I just want to know if there are going to be any more MFRS 16 impact in your next quarter. Is this good escape? Your results actually look very strong if I were to add back to your operating model transition cost.
Alex, thanks for your questions. I will take the first three. I'll try to answer it. On your question on depreciation on fully depreciated assets, as I mentioned earlier, the impact is between MYR 20 million to MYR 25 million for us this quarter. We are currently in the process of reviewing our fixed assets register, and this process is actually ongoing right now, and there might be some impact in Q3. The amount cannot be quantified as of now. We don't expect it to go beyond the third quarter. On your question on the lower amortization of spectrum, we acquired the 2100 MHz spectrum a few years back from TIME dotCom at a particular price. 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 MYR 118 million for us for about 16 years. If I just do a difference between the amortization, what it was earlier and what it is now, the impact will be a reduction of MYR 17 million per quarter. If you compare Q2 2018 versus Q2 2017, you will see the delta of the MYR 17 million, which will be recurring for us going forward. This answers your two questions on the depreciation. On the third one, on the MYR 40 million savings that you mentioned, actually, I just want to say that it's not a saving. MYR 40 million is a cost that we have incurred as transition to this new operating model. This cost will not be incurred going forward. Please do not consider it as a saving for the next quarter.
It was 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. In our presentation, we also do include an impact of pre and post-MFRS. If you look at the numbers, they are quite consistent from what you saw in the first quarter. 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. 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.
Please note, the cash that we get from this transaction doesn't change. An impact in one quarter should ideally be offset as we go forward because the total revenue from the contract is never going to change.
Alex, on question number four, which was on service revenue 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 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 pre-paid customers and post-paid customers, both from a usage perspective, but also moving, as Loh talked about, more pre 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-selling to our base. That's also taking us to where we are currently.
Okay, thank you so much.
Thank you. Our next question is come from Srinivas Rao from Deutsche Bank Singapore. Please go ahead.
Hi, thank you very much, Albern, and team 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 insourced, an X number of employees from outside. I just want to understand the first movement of employees. Have you taken people from outside to inside your company, or you have actually moved them out and rebadged them as employees of the managed services provider? That's my first question. Second, the transition cost of MYR 40 million 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? That's the second question. Third, can you throw some any more light on how the KRAs of the MSSP is structured?
Is there a fixed payment by Digi over a period of time, or is it KRA linked to the network KPIs? Again, just some detail as to how it is working. Secondly, just want to check. I mean, Albern, you have now taken a slightly larger role within the Telenor space. 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.
Yeah, Srini, it's good that you stopped at four questions, because the fifth question, we might have to charge you extra.
Congratulations. Congratulations also on the role first, before I come to the fourth question.
No, no. Thanks a lot. I think just a few of us are going to take some of these questions. Let me just maybe just give you on question number one on network arrangement. Maybe we were a little bit unclear. Basically, how it works is we have signed up an agreement with a managed service provider, and we have basically moved our employees that were providing those services in-house for us all these years to the MSP. Basically, they have been rebadged. They work still within our premise for the Digi 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 MYR 40 million, that was basically the cost of rebadging those employees for the tenure, during the transition only.
Now, I'll just pass off to Nakul on the fixed payment. The last one, let me just take the last one since I'm on the call. I think the role that we talk about is just more of a rotational role, from a cluster perspective, where I'll be supporting Dtac for that period. Previously it was held by the CEO of Dtac, and since he has moved on, I was sort of asked to take the role, and I've accepted to just help both companies during that period. My core function is still CEO of Digi.
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. As we had mentioned, it's done for two purposes. One is to build future-proof capabilities and also to run an efficient operations.
Thanks for the question, Srini. I hope you got the answers you were looking for.
Yes. Just to clarify, the CapEx is, from an accounting perspective, still on your books, right?
Yes.
There is no potential for the CapEx to become an OpEx. I mean, just clarify. That's one of the issues which I wanted to check.
No, there is no such.
Understood. Okay, thanks. This is helpful. Thank you so much. Yeah.
Thank you. Just a reminder, everyone, if you wish to ask a question, please press star one on the telephone keypad. Next, we have follow-up questions from Srini from Deutsche Bank Singapore. Please go ahead.
Just one more on the guidance. You guided this time, your previous guidance was revenue and EBITDA margin, at least at the end of 2017 in the fourth 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? Am I reading it wrong?
I'll take this question, just to remind you asked the fifth question, right?
Sorry.
No, it's okay. We did guide for a nominal EBITDA number last time, 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, you should see it in this space.
Okay. Understood. This is helpful. Okay. Thanks.
Thank you, Sri.
Thank you. Our next question is come from Erik Hassel from SEB Sweden. Please go ahead.
Yes, hello. Question one, the EBITDA margin, how will it look coming forth here in Q3 and Q4? If we look on investment, the CapEx also in Q3 and Q4, how do you see that?
Sorry.
Lastly.
Sorry.
Your competitors, ZTE.
Sorry, but can you just repeat the question?
The first one.
We can't hear you very clearly. There's a lot of echo.
Okay.
Please come on.
No, my first question was the EBITDA margin. How do you see that coming in Q3 and Q4?
Go on to your next question, please.
Yes, then we have the investment and the CapEx. How will CapEx turn out in Q3 and Q4? Also, your competitors, ZTE, about their problems in the U.S.A., how will those affect you? Will you change distributor or will you wait, or what will you do? Those are all my questions. Thanks.
I'll take your first two questions. This is Nakul. On the EBITDA margin, your question is how do we see it in Q3 and Q4? What you see in this quarter-
Yes
We have a margin of approximately 47%, our guiding for 2018 is between 46 and 47. This is what I can tell you about the EBITDA margin. In terms of our CapEx, again, your question is on Q3 and Q4, the guidance that we have is that it's going to be between 10 to 12% of our service revenue. The year-to-date, the CapEx investment is roughly 11.1%, so we are within the guiding that we have given. Your third question on the ZTE, if I understood it right, your question was how does it impact our competitors? Because we could not gather it quite well. If you can repeat.
No, how does it impact you? How it will impact you with ZTE, of course. Yeah, you are correct.
Yeah.
Will they change distributor?
I think if I understand, if I hear you correctly, you're asking us with reference to the ZTE embargo, how will that impact us? At this point in time, we have sufficient materials and equipment to sustain the period. Of course, as you know, where the situation is at the moment, so we are also waiting to see if there's any movement. For now, we are okay.
Okay. Thank you. Those are all my questions.
Thank you. Our next question is come from Arthur from Citi Singapore. Please go ahead.
Hi. Thank you. Just to follow up on Srinivas's earlier question. Going forward, should we thus see staff cost decline, and instead you're booking them under O&M expenses as you move to rebadge these employees? You earlier mentioned that you're going to see cost efficiencies given this network model. 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 second one?
Yes. No, I'm just trying to understand, because in my earlier question, you mentioned that you expect to see 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 in-sourced entity? Where is the cost savings coming from?
I think the staff cost, as you rightly mentioned, will be lower to the extent which will be offset with the O&M. You're absolutely right on that. The difference between the two will be the efficiencies, which basically is centered around the tools and the capabilities that we're going to get. Also worth mentioning, the focus here is to build a data-ready or a data-centric model. We are going with this with two objectives in mind. One is on the capabilities and the other is on the efficiency side. Again, it's difficult to quantify the amount, as I mentioned earlier.
Efficiency, just to be very clear, the efficiency that we'll get is not because it's a lower salary on the other side. It's the efficiency that you get from the capabilities of not having to invest on the tools and the competencies, but rather leverage what they already will bring to the table, as we go into this new model.
It's on the output, not on the cost side. Okay. Thank you very much.
You're welcome. Thank you.
Thank you. Just a reminder again, if you wish to ask a question, please press star one on the telephone keypad. Next we have a follow-up question from Alex from AmBank, Malaysia. Alex, please go ahead.
Yeah. There is one thing I noticed on your traffic cost. I noticed it is down quarter-on-quarter and year-on-year. It is only MYR 199 million when traditionally it is over MYR 200 million. I am just wondering, is this what you are expecting to see in terms of your traffic cost going forward? Is this part of the reason why your cost structure in this second quarter seems to be relatively low compared to previous quarters?
Yeah. Alex, thanks for your follow-up question. The reason why this is lower is exactly 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. 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. That is why the margins are improving for us.
Okay. Is this something you are going to expect over the next few quarters and over the next year as well?
As the legacy services decline and the data revenues increase, this is a trend that you should witness. Again, it's difficult to quantify the impact because it is also dependent on the extent of decline in the voice minutes and traffic.
Thank you so much.
Thank you. That will be the last question that we take, Frank, and I just want to say thank you to everybody that has dialed in, also for a very engaged session and all the questions and clarifications. Wish all of you a good weekend ahead. Thank you.
Thank you. The conference call has been concluded. Thank you for your participation.