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

Good afternoon, ladies and gentlemen. Welcome to XL Axiata Earnings Conference Call for the First Nine Months of 2020. My name is Don and I'll be a coordinator today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. Now I would like to hand the conference over to our host, Mr. Indar. Please proceed.

Thank you, Don. 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 this afternoon, we have Ibu Dian, our Chief Executive Officer; Pak David, our Chief Commercial Officer; and Pak Budi, our Chief Financial Officer. Now Ibu Dian will share the highlights for the first 9 months of 2020, 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 happy to report a good set of numbers in the first 9 months of the year. Despite tough competition and the challenging economic environment to the COVID-19, both of our revenue and EBITDA have increased, and we continue to remain in a net profit position this year. In the first 9 months of 2020, service revenue grew 8% year-on-year, driven by strong demand for data as many Indonesians continue to work and school from home. EBITDA rose by 34% year-on-year. As a result, revenue increase and cost efficiencies, with EBITDA margin now above 50%. We continue to be profitable, reflecting our focus on executing our operational excellence strategy with an emphasis on profitability and returns. However, competition remains tough with all players now having some form of unlimited products in the market. Aggressive pricing is also seen across the smaller sachet data bucket, as operators strive to win share of customer wallet, driving data yield down. This aggressive competition is expected to continue into the end of the year. The mass low-end segment continues to see weak demand. As a result of COVID-19 impact with many businesses struggling, job cuts and rising unemployment taking its store on consumer. As Indonesian economy is expected to contract in second half of 2020, and this may prolong into first half of 2021. The industry will likely be negatively impacted as well. Despite this tough environment, the growth we have recorded this year is due to the structural demand for data but also a result of the measures we have put in place to ensure our business continues to grow in the light of COVID-19 and its impact to the business environment. The main benefits are from cost optimization and increased productivity as a result of digitization and simplifying our operations. These measures will benefit us beyond the short term. On the commercial side, the shift to digital continues rapidly with more customers buying data through online channels. We have ensured that customers are able to get the best deals on these channels and have started introducing personalized offers as well. This will have benefits in the longer run as we can control the products and pricing that we want to deliver to customers. On the traditional channel side, we continue to support these channels by ensuring enough stock availability while also be designing our processes to allow for virtual visits and remote audits. On the network side, we have continued to invest to handle the unprecedented increase in data traffic, upgrading thousands of sites to ensure we have the adequate capacity while ensuring our quality of service remains high. Due to COVID-19 pandemic and the rapid digitalization of daily life, we have seen a faster shift and migration to 4G, with now almost 80% of our subscribers and 80% of our traffic on 4G and increasing rapidly. As a result, we are allocating more capacity and resources of our network to 4G and continue to reduce capacity on other services, especially on 3G. We have also launched several new initiatives in the second half so far, including the implementing of SAP HANA cloud enterprise management system. We are the first telco in Southeast Asia to implement this, and it will generate huge benefits by streamlining our internal data and processes and increase our productivity. We have also refreshed our myXL app, simplifying the user experience thereby making it easy to use. Finally, as we mentioned last quarter, our fully digital brand Live.On has been launched, and this will help us tap into a growing customer segment, which are the sophisticated data users. Positively, ex Java continues to do extremely well for us, and is growing well ahead of the Java growth rate, increasing its contribution to our revenue. [Technical Difficulty] our operational excellence principles and strategy and ensure that we can continue to see growth and deliver returns for our stakeholder. Our network growth app and upgrade continues to be on track, as our early planning and procurement process has helped us secure all the materials needed to meet our network rollout plan in 2020. Thus, we continue to roll out our network on schedule with our BTS count now above 142,000, with 4G present in 45 cities across Indonesia, with more than 53,000 4G BTS. We also continue to fiberize our network to manage the accelerated growth of data traffic and ensure our customers would continue to enjoy good network experience. Our balance sheet is strong with net debt-to-EBITDA of below 1x. We have no U.S. dollar debt, and we have also secured committed facilities with the banks that we can tap at any time if we need additional funding. This is very important today given the uncertainties in the coming quarters as a result of the ongoing pandemic. The Omnibus Law has been passed in Indonesia in October 2020. And this landmark piece of legislation, in line with the nation aspiration to increase investment by simplify regulation and reduce rent. The telco sector will see many new opportunities as a result of this and will benefit massively from this regulation. The main benefits are through spectrum were spectrum selling and spectrum leasing are now allowed, allowing for B2B arrangements between operators. Further benefits will come from digital dividend or the shift from analog to digital, freeing up more spectrum for the operators. Finally, the regulation will make it easier to facilitate M&A as the rules regarding spectrum retention post mergers are clearer. Also, our results are positive so far. The situation in the market remains tough, with the impact from COVID-19 on raising unemployment and lower income for mainly Indonesians, coupled with intense price competition. This creates an unprecedented situation, and as a result, it is difficult to predict what the end of the year will look like. Therefore, we are not able to provide any guidance until we have better clarity on the situation. Finally, as per the results of our AGM at last week, I would like to formally introduce Pak Budi, as our new Chief Financial Officer on this call. He has a wealth of financial experience and will help drive our business forward. I'm sure he will do a great job in the next phase of our growth journey. Thank you, and let us proceed to the Q&A session.

[Operator Instructions] The first questions come from Sachin Mittal from DBS Bank.

2 questions I have or rather 3. Firstly, can you talk -- we saw XL gain 1 million subscribers in the quarter versus Indosat gaining 3.2 million. So my question is, does it indicate that you need to change your plans so that you can gain more subscribers compared to your competitors, some kind of an immediate plan? That's question number one. Secondly, were there any one-offs in this quarter because while network costs decreased substantially. We also saw -- it was partially offset by rising the staff cost and the marketing cost sequentially. So could you explain the drivers behind these cost increase? And lastly, of course, you want to know impact on the data margins, it is sustainable? And you also disclosed 25% revenue contribution from ex Java last quarter. Where are we now?

David here. So I'll take your first question regarding the acquisition. So you were mentioning that we increased our subs in 1 million versus competition, in this case, Indosat that got 3 million, whether we are thinking on changing our strategy, right? As you may know, how to count acquisition in this market is a little bit complex, I would say, right? Depending on how you measure the number of subs, who do you consider whether it's a SIM card that it's active or whether it's a existing sub, it can change a little bit. So what we are seeing in our own data is that our share of acquisition stays healthy. Competition has increased, that's true, especially from the incumbent. But we believe that our acquisition strategy is still holding. And we are acquiring in those places where we should be acquiring. So we will continue with our regional pricing and regional acquisition strategy as we have been doing until now because we believe that the numbers for us are still okay. For the second and the third questions, I will let Pak Budi.

Yes. On the second question you're asking about, is there any onetime off in this quarter regarding the labor costs and network costs. For labor costs, yes, there is. There's accruals on our LTI program. As you know, the LTI, with this high competition, the talent is a key. So we try to do what is necessary for the -- that's why we do this accrual for LTI. And in terms of network costs, why the cost is lower, yes, we have significant number of towers that come in due this quarter, in third quarter and also some in Q4. So those new contracts under -- I mean, the rental under the new contract is significantly lower compared to what we used to see. I think we already indicated this in the few calls before that we're going to enjoy some cost coming from this contract that are due in second half of the year. Hope that answers your question? Yes. The third one, the question is about EBITDA. EBITDA is it really sustainable? If you're looking at the 34%, the EBITDA that's getting better, you have to take out the portion of IFRS 16 impact first. As you know, IFRS 16, we have to count the book -- the rental as capitalist. So with that, our EBITDA actually increasing by 16% instead of 34%. So that 16% growth with the rate of -- our current EBITDA is going to be sustainable because going forward, we continue implementing this IFRS 16.

Okay. And the last question. Yes, just last on the ex Java contribution, how has it changed compared to the last quarter?

We're seeing -- continue seeing the same growth. Ex Java continues to be the right decision for us. The traction is still there. The growth compared to Java, actually, the growth is quite significantly higher. It's almost tenfolds of Java's growth. So we believe that's going to be continue in near future.

Your next question is coming from Ranjan Sharma from JPMorgan.

2 questions from my side. Firstly, I believe Ibu Dian mentioned that the Omnibus Law facilitates M&A by giving clearer rules on spectrum retention. Can you elaborate on this, like what do you see? And also any insights on when do you expect the implementing regulations? The second question is, if I can clarify that the decline in infrastructure costs quarter-on-quarter is all driven by revisions in tower leases, and there's not the one-off. So does that become the run rate for the following quarters as well?

Okay. So I will take the first question on the Omnibus Law. So as I mentioned, we are very positive on the recently passed Omnibus Law because this allow the opportunities, both XL and also for Industry. Especially, the biggest benefit is on spectrum sharing and leasing. And also the shift from analog to digital that further will freeing up the second-hand spectrum from Industry to use. In terms of the M&A, yes, of course, it will be easier for M&A to happen as the confirmation that we do not have to return the spectrum after the consolidation. The industry today is not sustainable for long-term health of the industry. So we believe that for the consideration is really needed and after it's ready to play in this part. However, we understand that this Omnibus Law will require government decree to be operationalized. So this government decree will need to be constructed by the leading sector with the cooperation with other sectors. So usually, this process will take around 3 to 6 months. So we believe that we need to wait until those time frame to enjoy the benefit of this Omnibus Law.

Yes. On the EBITDA, the onetime of adjustment of IFRS 16 is not going to happen again. So there's a 1.3 trillion adjustment there related to IFRS. What if you do compare year-on-year, you have to normalize the number first. So the figures, 50% EBITDA that you can have because we only do the adjustment 1 time, it's going to be the figure that we're looking at. But however, this structure will continue to be above depending on how fast we do the rollout or how big the revenue increase, et cetera. So -- but now, this is how we can commence on it.

Okay. Maybe just 1 clarification from Ibu Dian. So Ibu Dian, you're saying that the Omnibus Law specifically mentions that operators will be allowed to retain spectrum after M&A?

Yes. Yes. Correct.

Your next question is coming from Choong Chen Foong from CIMB.

This is Foong from CIMB. 2 questions from me. Firstly, I wanted to ask a bit more color on competition. I know what you mentioned about the incumbent having been more competitive. But can you give us a bit more color as to what you see on the ground maybe in the last 1 to 2 months? Has there been further moves to be more aggressive by the incumbent as well as the other operators in the market? And any business in terms of the intensity of competition in the different geographies, if that applies? That's my first question. And then my second question on the cost. I just want to go back to what Budi mentioned about the labor cost, one-off from the LTI program the accrual. Will we see more of that being booked in the fourth quarter of this year? And also on the tower rental cost reduction, you mentioned renewals in the third quarter and also more to come in the fourth quarter. But my question is, into 2021, will there also be a very sizable number of towers that will come up for the renewal? Maybe just sort of quantify for us a bit and over the next 1, 2, 3 years, the amount of towers that will be up or renewals, that would be helpful.

Okay. Thank you. So I will take the first one. I am David. So regarding competition, what we have seen in the last couple of months as I was saying, is that the incumbent has become much more competitive. What do I mean by this very specifically is they have launched unlimited portfolio in many cities, not in the whole Indonesia, but in most of the big cities. So that's number one. And number two, they have also jumped into something that is fairly new for them, that it's all the low denominations and short validities. In both cases, both in the unlimited and in the short validities or the low denominations, they have taken a price leader position. So they are like the cheapest from all the offers out there, right? So we are now in a situation where the incumbent, it's the price leader, right, which is not -- it's not usual to see this in the market. But I guess that because of the COVID and the current situation, the incumbent in this market has gone into that direction. On top of that, we, of course, have the rest of the players, the smaller players are not so small, who always have been very aggressive and are continuing also with that aggressivity. So that's a little bit, the competitive dynamics that we are finding in the -- on the ground in the last few months, especially in the last couple of months with these incumbent changes.

Yes. On the second question, related to the labor costs, the catch-up is the one that we do in third quarter. Fourth quarter, we set back to the normal run rate in terms of labor costs. For network costs, the rental that we're talking about, the biggest churn actually happening in third quarter. So fourth quarter, going to -- that number going to be the new normal. And then more coming up to the end of the year, 30% up to until the end of the year, will be tower is coming due. So that's the figure I can share for now.

Okay. And if I can just draw in 1 follow-up question. In terms of the ex Java contribution to your total mobile revenue, what is the percentage as of the third quarter? And am I right to say that because your service revenue was flat Q-on-Q, you saw your ex Java revenue growing, but Java revenue is actually declining in the quarter?

Yes. So both revenues have been positive for us. As we were saying before, the growth in both year-on-year are positive. Ex Java is growing at 10x higher than the Java one. Now regarding the split between Java and new Java, currently, we are around one -- 25-75.

Okay. And Q-on-Q, going from second to third quarter, did Java revenue decline?

The service revenue is positive in both Java and ex Java.

[Operator Instructions] Your next question is coming from Piyush Choudhary from HSBC.

This is Piyush from HSBC. The question is for Ibu Dian. But can I clarify again on the Omnibus Law? In case of M&A, is it clear that both the parties -- the participating parties can retain their entire spectrum? Or is there a formula which is now clear how much of spectrum can be retained? That is the first one. Secondly, what kind of spectrum leasing arrangements can be -- is allowed under the new regulations?

Sir, can you repeat number up 2 question?

In your opening speech, you mentioned spectrum leasing is also allowed B2B. So can you elaborate? Like what kind of arrangements are allowed over there?

Okay. So number one, yes, it is for M&A, that it is mentioned that for 2 parties that is doing M&A, there is confirmation that we do not have to return the spectrum for consolidation. However, as I mentioned, this to be operationalized needs to be explained further in government decree, which is the presidential decree or ministerial decree, yes? That's something that we have to wait for a few months from now. So for the second one, what you mentioned about the leasing, our understanding in the Omnibus Law that the leasing can be done to operator that has already licensed, telco license. So it cannot be done for any parties, but it has to be done between telco operators.

Right. So basically, this can give us opportunities to acquire large block of same band of spectrum and enhanced capacity then?

Yes, yes, yes. Correct. But if we refer to countries that have done this kind of scheme before, usually, the government actually asked for kind of like fees from this transaction. That's something that will be clarified in the government decree.

Your next question comes from Kresna Hutabarat from Mandiri Sekuritas.

Congratulations on the strong profit growth and also the -- congratulations to Pak Budi on the appointment as the CFO. 2 questions for me, please. Question number one is on the quarterly D&A run rate. So the quarterly D&A has been on a decline in the past 2 consecutive quarters. Can you give us some sense if the latest D&A run rate would be the new D&A run rate going forward, especially after your tower sale deal has completed? That's my first question. My second question is on the other telecommunication revenues. The growth in IMS 20 is only 5.6% year-on-year. But I recall that within this revenue line, the revenue from handset bundling activities has dropped quite materially. So the other component of the other telecommunication revenues must be growing way faster. So can we confirm what are these other components? And does this include XL fiber to the home business? And if yes, would you mind sharing some color on the development and the performance of that business line?

Yes. So the question regarding the depreciation. The number that you're looking at -- yes, sorry let me look at the number, here. Yes. So the Q3 number, depreciation that you're looking at, there's a bit some adjustment there, but the running rate will be around 2.4 trillion Kresna, in terms of depreciation for the quarter.

Okay. That's fair part. On the second question, on the other telecommunication revenues?

Oh, yes. On the other revenue, the one that you think is coming from the tower lease as you know, significant number of tower at the beginning of the year. So that's the main impact from the other segments, than none of the others.

But I think there's another revenue items there, right? I believe, just the other non cellular items in the past years is to show that you disclosed the bundling revenues, but I think actually stopped disclosing that as of first quarter '20. And I think the bundling activities has slowed down quite a lot. So there's another revenue line called others, it's just growing, I think, growing quite fast. So I just want to get some color on what's driving that part?

Yes. The biggest chunk of our other revenue coming from this tower. And the best week at lease line, we also got some roaming. So roaming the other one that's also coming down. But the bundling, we don't really do it anymore since last year. So I mean, it's very limited amount since last year till now. It's not really one of the -- for the bundling the biggest churn coming from dollar mix segments.