PT XLSMART Telecom Sejahtera Tbk (EXCL) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to XL Axiata's Earnings Conference Call for 2019 Financial Year. My name is Revathi, and I'll be your coordinator today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. Now I would like to turn the conference over to your host, Mr. Indar. Please proceed.

Thank you, Revathi. Good afternoon, everyone, and welcome to the call. On behalf of the XL management team, I would like to thank all of you for taking the time to join us today. With us on the call today, we have Ibu Dian, our Chief Executive Officer; Pak Adlan, our Chief Financial Officer; Pak Allan, our Chief Commercial Officer; and Pak [ Budi ], our Deputy CFO. Now Ibu Dian will share the highlights of 2019, which will then be followed by the Q&A session. I will now hand the call over to Ibu Dian.

Thank you, Indar, and good afternoon, everyone. We are incredibly proud of our performance in 2019, which was a record year for the company. Through hard work and consistent implementation and execution of our strategy, we posted our highest-ever revenue of IDR 25.1 trillion and highest-ever EBITDA of IDR 10 trillion as well as return to profitability of IDR 713 billion. Our strategy of continuing to invest in 4G, especially in ex Java, as well as consistent execution of our dual-brand strategy with an increased focus on operational excellence, has enabled us to outperform the market both on revenue as well as EBITDA this year. In 2019, our service revenue grew 15% year-on-year, driven by growth in data revenue, which increased 28% year-on-year. As a result, data revenue in the fourth quarter now accounts for 91% of service revenue and continues to be higher than our peers. Data growth continues to be driven by increased customer data usage through our product- and analytics-driven upselling initiatives. The customer value management initiative that we continue to employ has been a key factor in our success in attracting and upselling customers. Our analytical engine that we developed using a unique omnichannel approach to create, among others, personalized offers encouraging our customers to upsize to bigger data package, delivered solid results in 2019. Evidence of this is our blended ARPU which rose 9% year-on-year to IDR 35,000 as our customer base increased 3% to 56.7 million. We intend to do more and make our system smarter to enrich our portfolio and become the new standard in our channel management in 2020. Our focus on operational excellence meant that EBITDA rose faster than revenue, growing 17% year-on-year with margins increasing 3% year-on-year to 40%. This strong growth in EBITDA is driving our return to profit this year with full year net profit of IDR 713 billion. Indonesia's data-savvy customers have continued to respond well to our data network as we are increasingly being recognized as the brand of choice for smartphone users. As of the fourth quarter of 2019, our smartphone subscribers stand at 48.8 million, an 11% growth compared to same period last year. This makes up 86% of our subscriber base, which is significantly higher than the industry average, and we also continue to see a faster rate of migration of subs to 4G. At the end of 2019, 4G customers make up 73% of our total subscriber base. Both our XL and AXIS brands were successful in addressing their target segments with unique and differentiated product offered in 2019 as part of dual-brand strategy. The Xtra Combo VIP that the XL brand launched in early 2019 has been a key example of our success in upselling. For AXIS, the focus has been addressing the youth segment with sachet-based products as well as customization of offers through partnerships with content providers, mainly social media and gaming. Our postpaid brand, XL Prioritas, also continue to grow with a focus on smartphone bundling with the latest handset. In 2019, XL and AXIS grew their respective Net Promoter Scores, strengthening their position within their target segment. In parallel, we continue to ensure a high-quality data experience to our customers through the ongoing rollout and upgrade of our network. Our total BTS count is now above 130,000 BTS with our 4G LTE service covering 425 cities and areas across Indonesia with more than 40,000 4G BTS. We also continue to invest in fiberizing our network, building on our efforts from last year, as this will help in handling the increase in data traffic we are seeing. At the same time, we continue to increase fiberization of our tower sites. And in the next 2 years, the majority of our sites will be fiberized. In 2019, our network investment continues not only within Java, but with a focus also on ex Java, following on the efforts from previous years. These have translated to better coverage and network performance in these areas, and we are increasingly known as a nationwide brand. This has also translated to a stronger revenue performance outside Java, which continues to grow as an export generally faster rate than Java and increase overall contribution to revenue. Despite our record performance in 2019, we are seeing increased competition come into the market from the second half and especially towards the end of the year. We are seeing that even smaller operators are becoming aggressive in product offering. As a result, we had tactically made selective packet adjustments in several areas to remain competitive, which impacted our revenues this quarter. We hope that competition eases in 2020 as the industry needs data price prepared to continue to improve returns and profitability. Today, we have also announced the successful completion of our third tower sale and leaseback transaction where we sold 2,782 towers to Protelindo and Centratama for total proceeds of IDR 4.05 trillion. The objective of this transaction is not maximize upfront cash collections, but to monetize our assets and lock in tower lease rates for the next 10 years as well as to make our operations more efficient. This deal is accretive to us at the EV-to-EBITDA transaction multiple is more than 10x, which is higher than our company's trading multiple. The profits from this sale will go towards strengthening our balance sheet with additional capital to be used for capital expenditure and working capital for 4G. Due to our strong performance in 2019 and in line with our dividend policy, we are declaring a dividend equivalent to 30% of our normalized net income, subject to approval at our upcoming AGM. Finally, our guidance for 2020 is as follows. For revenue, we are guiding for revenue to grow in line with market. Our EBITDA margin guidance is low 40% on pre-IFRS existing basis. And our CapEx spend guidance is around IDR 7.5 trillion, which will remain focused on data network investment in 4G and continuous network improvement and modernization in and outside Java. Thank you, and let us now proceed to the Q&A session.

[Operator Instructions] We have our first question from the line of Mr. Ranjan Sharma from JPMorgan.

Two questions from my side. Firstly, following Axiata's Investor Day last year, how does that change your CapEx strategy for 2020 and beyond? I see that you have maintained your CapEx. Do you see much through the level of IDR 7.5 trillion? Is that going to be more spent within Java? Or are you still maintaining a 50-50 split between Java and ex Java? The second question is on the competitive environment. Now that over 85% of your revenues are coming from data, that leaves you most exposed to data price competition, especially what you've seen in markets like Indonesia, there's a lot of free data that's given. How do you mitigate that risk going forward? And what is your pricing strategy?

Okay. Ranjan, I'll take the first question. Yes, I think if you look at our CapEx guidance for 2020, we've kept it at around the same as last year, around IDR 7.5 trillion. I think as we shared during the Axiata Analyst Day, our -- in line with the OE, I think what we have actually done is we are tightening up a little bit in terms of our criteria for investment. Yes, hence, I think the whole objective is probably to get a shorter payback period from our investment. This is especially true for our investment outside Java. Having said that, I think we also see that looking at the momentum that we have done in 2019, there's still quite fair bit of opportunity coming from outside Java. And hence, I think looking at this year in terms of investment split between Java, outside Java, it's probably still going to be at around 50-50 between Java and outside Java. So I think no change in strategy, but we would have probably a tighter investment criteria when we go into new areas or investing in capacity, be it Java or outside Java.

Second question was mainly regarding the highly -- and it is regarding our revenue coming from data, and you're asking what's the risk that we see there. We are following our strategy. We're going to be a data service company, meaning that we're going to focus only on data now and going forward. And we have never seen this as a disadvantage as we strongly believe that one of the reasons why we are competing or, I should say, ignore some revenue share in the market for the last couple of years is mainly because of the high data revenue that we're getting. So we don't have to think about legacy product. We don't have to think about voice or SMS when we do new product, when we do new price planning. We basically only focus on data. So we don't see it as a risk. On the opposite side, we're able to see the risk for the guys who have more legacy products than we have.

We have our next question from the line of Colin McCallum from Credit Suisse.

And well done on the 2019 numbers. A couple of questions for me. The first one, actually, is also on CapEx. Just in terms of the overall amount, I see you have, as you said, Adlan, decided to spend IDR 7.5 trillion again for 2020. That's still quite a punchy, almost 30% CapEx-to-sales ratio. That might have made sense in 2019 when you were growing kind of double digit. But from what you said in the MD&A and the tone of competition, it sounds like maybe the revenue opportunity will be more constrained this year. And therefore, was it considered to maybe invest less given how low the profitability is? That's the first question. And then the second question, related point, really, on the revenue side. Obviously, you won't want to be kind of tied into this, but for the industry as a whole, do you think current competition is such that mid-single-digit revenue is possible for the industry in 2020? Or given the intensity that you guys are seeing at the moment, do you think low single digit is a more likely outcome?

Okay. Colin, I will take the questions. So if you talk about CapEx, right, so I think what we see in 2019, right, I mean we're seeing both Java and outside Java, we are growing, right? And obviously, I think if you look at ex Java, we're growing -- our rate of growth are growing much faster than what -- by bigger multiples as compared to Java. So as we speak, we see that there's still a lot of areas of opportunity for growth coming outside Java, right? So hence, I think if you look at that, we believe that outside Java, we can still grow at a double digit. No doubt about that. At the same time, I think we also are putting a little bit of capacity investment within Java to address some of the network congestions that we are actually seeing. So I think all in all, I think if you look at the momentum, whether we should cut the investment at this point in time when we're seeing good momentum in the market, we believe not. We still see a huge opportunity for growth. Maybe competition will probably be a lot more tougher this year. However, I think given our strategy and the momentum and plan that we have in the market, we are still optimistic especially in our position outside of Java, right? So -- and hence, I think we are probably going to continue in terms of rolling out the network outside Java, which at this point in time, I think we are seeing positive momentum and positive results. Second question on the industry outlook. We -- our view on the industry outlook is we are looking at around low to mid-single digits. I think, primarily, I think it's driven by the growth of the incumbent, right, because I think, as you know, in this market, the incumbent has close to 60% market share. Whatever revenue growth that comes from the market leader would probably drive the overall industry growth, right? And looking at the fact that the composition of revenue, there's still quite a big chunk coming from legacy, we feel that -- I think that growth would not be as fast as one might expect coming from, for example, data, right? So our view is, yes, there will probably be a bit more intense competition in 2020. However, I think we believe that there's still opportunity coming in some other growth areas outside of Java. And hence, I think looking at the overall position, low and mid- -- to mid-single-digit is probably our estimate for the industry in 2020.

Got it. If I could just come back quickly on one. So it sounds like the tone of what you're seeing and the, as you say, the proportion of revenues from legacy and non, it sounds like you would hope that your revenue growth exceeds what the industry will do, although I see that you've chosen in your guidance to say that you'll grow in line with the industry and not better than. So is that just a difference between what you hope will happen and what you want to commit to? Is that a bit of a conservative guidance?

I think we probably need to see how the competition works out, right? I think as the same as last year, I think we -- initially, I think we are probably a bit conservative on our guidance. But towards the second half of the year, when we have a bit more clarity on the competitive environment, we adjusted up our guidance. I think we are probably taking the same approach here today. Given that we see that intense competition are actually increasing at this point in time, we probably want to be a bit more conservative.

We have our next question from the line of Arthur Pineda from Citi.

Two questions. Firstly, how should we view dividends going forward? I think it's good to see a dividends return with a 30% payout. But that seems low considering the free cash flow that you actually generate. How should we view this going forward? Second question is a housekeeping question on the finance cost, that's up around 27%, but your debt position is relatively flat year-on-year. What's driving this change? Is this due to accounting?

So Arthur, yes, I think on dividend this year, yes, I think it's probably a small token amount that we are giving out this year, but it's in line with our dividend policy, right? It's not significant, but it is probably a good gesture. Given that we have done well this year, we probably want to start indicating to the market that we're probably going to start declaring dividend, right? So I think it's also an indication that we are probably a bit more optimistic in terms of the profitability level moving forward. Yes? So -- and hence, I think that 30% dividend policy payout that we set ourselves will probably continue. And I think maybe over time, right, if things going on well, that ratio will probably go up over a period of time. But for now, I think it seems a bit small, but I think it's just probably a good token of appreciation to the shareholders for this year. And probably, we could probably see that number increasing over a period of time moving forward. Yes. So second is on interest costs. I think what we have probably seen is, yes, you are right, if you look at interest, actually, it's -- or loan is actually coming down. But there's 2 parts there, right? So if you look at our total interest overall, actually, pretty flattish. Yes, we are -- rate are coming down -- sorry, total is coming down. However, you remember that we also moved from a USD debt in 2018 to IDR debt in 2019. And that actually orders a higher cost of debt in 2019. Having said that, I think if you look at the total interest went up is because of the financial lease interest that's probably coming from the -- our fiberization project, which in the balance sheet is treated as finance lease, right? So -- and that has been the primary driver of the increase in our overall interest cost. So total interest, real finance cost, actually, are still flat. But the interest on finance lease are probably driving the increase in our total interest cost.

And that should grow going forward as well? Or...

Yes. I think things will change in 2020, yes. So with the adoption of IFRS 16, that number is going to grow quite substantial because all your operating lease will probably be treated as finance lease in 2020. Yes. So effective from January 2020, we are going to adopt IFRS 16. And what the impact of that, the impact is probably going to have a significant impact to your EBITDA and your EBITDA margin in 2020. So I think you would expect that your EBITDA and EBITDA margin would probably increase up to between mid to high 40. At the same time, I think your profit after tax would actually be slightly lower in 2020. However, over a period of 10 years, I think the total PAT will actually equalize, right? So we will probably give you more color when we announce Q1 numbers in April this year because that would already be already IFRS 16 compliant.

We have our next question from the line of Choong Chen Foong from CIMB.

Two questions from me. The first question, on competition. In the last conference call, you mentioned that the competition has somewhat cooled down. So it seems like it has picked up again in the last 2 months of 2019. Is that coming in -- is that happening in Java or ex Java? And can you provide some color to some of these aggressive offers that you are seeing on the ground? That's the first question. And then second question, on the tower sale you've just announced. What is the rental rate on the leaseback? And does it come with or without inflation escalator? And what would be the tower lease revenue that we would lose on the towers sold? And in terms of the net profit impact, what would be the net -- what would be the impact? Would it be positive or negative?

Yes. Let me first give a little bit of flavor of the competitive situation, especially here at the end of the year, end of 2019. So I think as you all have been aware of that, other is getting much more competitive in Q4, especially at the end of Q4, right? So both Telkomsel and Indosat were very active in the lower-end segment of the market, whereas Hutch's products, it came -- actually, they introduced many of -- to many of the customers. Hutch's is the low price and the [ sharp ability ]. At the same time, we also saw Smartfren. They are now kind of becoming a significant player in the market because they have up and running for more than 1.5 years with the unlimited offer in the market. And we also saw Hutch 3 at the end of the year introducing unlimited products as well, which was a very -- surprise for us. Now just to give you one example is, let's say, Indosat, right? So Indosat, they started the beginning of the year with unlimited. They took it out again in Q3, the unlimited, took it out, meaning that a new customer could not buy unlimited anymore. But if you were an existing customer, you can still buy the voucher. And surprisingly, Tuesday, the 4th of February, they again introduced unlimited in the market for both new and old customers. So suddenly, you have 3 players in the market. This is Indosat, it's Smartfren and it's Hutch who are playing the unlimited game, and you only have Telkomsel and you have XL who is not playing the game. So that's the market situation at the moment. We have made a few adjustments, especially for the AXIS brand to be more competitive in the lower market and for the young people of Indonesia. But at the same time, we also kept the XL prices very stable. At the moment, we are monitoring the market very closely almost every day, looking into east of the cluster, east to the cities to see what's actually going on. We are not doing any foolish thing at the moment as we are monitoring, and we will not be the first mover in the market when it comes to pricing. So right now, we are moving, but to be honest, it looks a little bit disturbing what's happening as the 3 players now have fully unlimited in the market.

Yes. On your question on towers sold, maybe before -- let's say, let me give you a little bit of exactly prime driver in terms of doing our tranche of towers sale, right? I think, again, I think the drive for this is not so much of a cash collection upfront. But it's more of monetization of assets, right? I think if you see from this tower transaction, we are realizing an EV/EBITDA of more than 10x, 10.2x here as compared to probably XL that's trading today at probably 4.5x, right? So it's essentially -- it's a value-accretive deal for us, yes, and a positive impact to cash, positive impact to probably net profit as well. Second is, I think, one of the key objectives here is also we actually want to lock in a low lease rate over the next 10 years, right? So our lease rate is 8 plus 2 over the 10 years, right? So that's the second objective. And thirdly is I think if you look at where we are today, we have close to about 4,000-plus towers. I think this is probably our final tranche of sales, right? So -- and I think if you look at where we are, we think we do not have scale in terms of to run this business efficiently. And we think that given that permits -- getting permits and handling committee are actually becoming more and more challenging these days, we think that from a productivity and realization, we are probably better off selling these towers. And that's probably reflected in the value that we have actually realized. In terms of the real impact to profits and all that, I think given that this has got to be in line, compliant with IFRS 16, I think we are probably going to give a bit more clarity in detail when the transaction is eventually closed in quarter 1, right? So we'll probably give you a little bit more color in terms of what this is at the end of Q1. But essentially, I would say that this batch of towers are probably not as good as the previous towers that we have because this is the last tranche -- last set of towers that we will be selling, right? So...

Adlan, if I can follow up. Just now you mentioned you wanted to lock in a low lease rate, right, and you mentioned 8 plus 2. Is that IDR 8 million plus IDR 2 million on the O&M portion? Or -- yes, you can clarify that.

Yes. Yes, it is. It's 8 plus 2, IDR 8 million basic and IDR 2 million O&M.

O&M. Okay. So the IDR 2 million has got an inflation escalator on that portion?

Yes. I think not immediately, but after the effect.

We have our next question from the line of Prem Jearajasingam from Macquarie.

And congratulations on your numbers. Two questions from me, please. So first of all, we've talked about consolidation in the Indonesian mobile market for quite some time. And now we have competition appearing to step up quite a bit. What do you think the end game is for the smaller operators? And does consolidation look like it's ever going to happen anytime soon? And do you think the new government may have changed its views around facilitating consolidation in the marketplace? And secondly, I appreciate your data analytics in trying to drive efficiency of CapEx. But could you remind me again how quickly can you turn on and/or turn off the CapEx spend given the current structure where you own less and less of those sites?

I'll take the first question on consolidation. So actually, consolidation is good for the industry because the consolidation will make the industry structure healthier. And we've been hearing about this plan for U.S. for 5 years. However, currently, everyone is still waiting for the clarity in terms of regulation for the spectrum because currently, in terms of policy, there is no clarity yet whether we can retain the spectrum that we get post merger or post acquisition. So we hope that the new minister, the new government actually will give us that clarity so then the shareholders can have a better view on how will be the business case after the merger or acquisition.

Prem, on your second question, I think on CapEx, how quickly we can ramp up and ramp down our CapEx here. So essentially, I think if you look at -- let's say, there's 2 types, right? If you talk about colocation on existing towers, I think typically, with that between 1 to 3 months, I think we should be able to get the site up and running, yes? So that's on a colocation. But for, let's say, example of new sites that you require to build a new tower, so that typically takes around -- it can be generally 3 to 6 months, but it can also be extended to 9 to 12 months or so, right? And I think the key driver there would probably be getting -- finding that location and getting the permits for those sites, right? So -- but in most cases, what we see even going to new areas, there are quite ample, I mean, colocation around that other tower providers have probably built with probably a single tenancy on those towers, right? So I think we would say that it's probably skewed a lot more to colocation than probably build-to-suit. But on -- and in addition, I think even if we, let's say, we go to a certain site and all that, and assuming we don't pick the right sites and, for example, the revenue coming from those sites are not as good, we have managed to negotiate with all our tower providers today that we do have colocation right, meaning that within those periods, for example, we are able to relocate certain amount of towers from one to the other sites, right? So -- and that gives us a little bit of flexibility assuming that we don't hit the right sites for whatever reason, even though our -- based on our analytics today, our hit rates are actually quite high, pretty high and pretty good. We actually have that flexibility to relocate those sites to a new -- to other areas or to other locations. Yes. So with that, we do have flexibility, for example, to move around those towers to other locations.

We have our next question from the line of David Smith from Smith Tan Asset Management.