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

Good afternoon, ladies and gentlemen, and welcome to XL Axiata's earnings conference call for the 2020 financial year ended 31st December. My name is Rohit, and I'll be your coordinator today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. Now we would like to turn the conference over to our host, Mr. Indar. Please proceed, sir.

Thank you, Rohit. Apologies, everyone, for a bit of the late start. Good afternoon and welcome to the call today. 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, we have Ibu Dian, our Chief Executive Officer; Pak Budi, our Chief Financial Officer; Pak David, our Chief Commercial Officer for Mobile; and Pak Abhijit, our Chief Commercial Officer for Enterprise and Home. Now Ibu Dian will share the highlights 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 results in 2020 despite challenges from both the COVID-19 pandemic as well as the aggressive price competition in the market. This is due to our focus in executing our strategy to position ourselves as the premier digital telco in Indonesia. Our service revenue grew 6% year-on-year in 2020 driven by strong demand for data due to the increase in digitalization of daily life and as many Indonesians continue to work and live both from home. EBITDA rose by 31% year-on-year also on the same period due to the revenue increase and cost efficiencies as well as IFRS 16 adoption. The EBITDA margin is now above 50%. We continue to be net profit positive, which is in line with our focus on profitability and returns to create value for our stakeholders. However, competition continues to be a major issue for the industry with all players now having some form of unlimited offering in the market, especially with the market leader increasing the ability of its unlimited plans across Indonesia. Competitive pricing is also seen across the smaller sachet data packet. As operators try to win share of customer wallet, we are seeing data yields down. This is compounded by the still weak Indonesian economy, which is expected to continue to see slow growth in the first half of 2021, and this year also has a negative impact on industry. Mass low-end segment continues to see weak demand because of the COVID-19 impact with many businesses struggling, job cuts and unemployment rising, taking its toll on consumer spending. Despite this tough environment, the growth we have recorded this year is due to the structural demand for data but also the result of the measures we have put in place to ensure our business continues to perform well in light of COVID-19 and its impact to the business environment. We expect this will benefit us beyond the short term. These steps are focused on the increased digitalization of our business as well as continued development of our analytics capabilities to ensure that we can meet the challenges that the industry faces today. This year, our distribution has seen a shift to digital with more products being sold online and through our own channel. This comes as both our revamped apps, which is MyXL and Axisnet, both having good perception from our customers, reached 11 million active users and increased revenue contribution from this channel, which we see going forward is allowing us to offer customized products, and we plan an increased customer care interaction as well as touch points while further increasing the revenue we generate from this channel. On the analytics side, we have further improved our capabilities in full year 2020 by establishing a cross-functional team to drive analytics-driven decision-making across the key functions. This allows us to improve our dynamic pricing model and customer value management in our modern channel as well as our omnichannel offerings and sales interaction with our customers and remain competitive in a challenging market. Positively, ex Java continues to do extremely well for us. It is growing well ahead of the Java in terms of growth, increasing its contribution to our revenue to around 25% in 2020. Our investments that we have made are delivering returns as they get in line with what we had seen in terms of trend. In 2021, we will continue to improve in ex Java guided by our operational excellence principles and strategies and ensure that we can continue to grow and deliver returns for our stakeholders. Our network rollout and upgrade continues to be on track, and thus, we continue to roll out network on schedule. Our BTS count now is above 144,000 with 4G presence in 458 cities across Indonesia, with more than 54,000 4G BTSes. We also continue to fiberize our network to manage the accelerated growth of data traffic to ensure our customer will 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 any time if we need additional funding. It is important today given the uncertainties in the coming quarters because of the ongoing pandemic. Although our results are positive so far, the situation in the market remains tough with the impact from COVID-19 on rising unemployment and lower income for many Indonesians, coupled with intense price competition in the short term, which is likely to impact the long term industry growth. As well, we see opportunities in the medium to long term as demand for data continues to grow with the increased digital way of living and working. Industry consolidation will also be a positive if it happens. It will reduce the competitive intensity and improve the price and value mix with less players in the market. The omnibus law, which was passed at the end of last year, should also be long-term positive for the market. As we are seeing a decreasing amount of 3G traffic this year, with 3G traffic already less than 10% of total traffic, we have been reducing 3G capacity in several areas and allocating that capacity to 4G. As a result, in this past quarter, we have reduced the useful life of our 3G assets, taking a one-off depreciation charge to reflect that. This makes our asset base more reflective of the underlying usage, and this will reduce our depreciation charges going forward and further improve our profitability. In line with our operational excellence strategy of monetizing our noncore assets and further strengthening our balance sheet, we have also started doing a sale and leaseback of our 300 sites this past quarter. We have thus completed the sale of 143 sites this past quarter and are looking to sell around 500 in total sites in total through 2021. Anyway, we would like to introduce our guidance for the year. In 2021, we are guiding for revenue growth to be in line with market, EBITDA margin in the low 50% and CapEx to be around IDR 7 trillion for the year. Thank you. And let us proceed to the Q&A session.

Rohit, can we have the Q&A?

[Operator Instructions] We have the first question coming from the line of Piyush Choudhary from HSBC.

Two questions, please. Firstly, could you comment on the growth outlook for the ex Java region and whether ex Java regions are EBIT positive? If not, then what is the level of EBIT losses right now in ex Java? Secondly, what is the expected time line for 3G shutdown? And are there any more write-downs, asset write-downs left?

Okay. So David here. I will take your first question regarding the growth in ex Java, so Java versus ex Java. 2020, we have grown both in Java and ex Java in the full year. The ex Java growth has been one order of magnitude higher and several times higher, as you can imagine. Now the fourth quarter has been negative, has been decline for both areas because the competitive aggressiveness and the market distribution has been all over Indonesia. But again, the ex Java has, as we say, much better performance. In fact, even a better performance than the other one.

I will answer the second. Relative to the ex Java of whether this is making loss or making profit. We don't really disclose the figures.

I'm sorry. There is a lot of echo and noise. I can't understand properly. Sorry, the line is not very clear.

Yes. Is it more clear now? Can you hear it better? Not really?

A little better, but there's a lot of echo in the background.

Okay. So I don't think I can do anything regarding that, regarding the echo. So shall we try, I will answer again. Let's try whether this can work. Otherwise, I will find someone from technical in order to see whether we can do something. Does that work? Shall we try one more time?

Yes. Sure.

Okay. Anyway, so I was talking about the Java, ex Java. So for 2020, we have grown both areas having positive growth. Ex Java has grown one order of magnitude higher and several multiples, as you can imagine, rather than Java. So the revenue growth has been in both areas but with ex Java one order of magnitude bigger. Now quarter 4 has been decline also for both areas, although ex Java has performed almost flat, so has been in a slight decline, and Java has been the one who has declined a little bit further. So overall, growth in quarter 4 and in 2020, the ex Java performance has been significantly better, and yes, it's been much better than the Java one. Now regarding the profitability, I'm going to let Pak Budi, our CFO, to answer it.

Piyush, could you hear us?

Yes. It's better than before.

Okay. Okay. Yes. Okay. I would like to answer that question related to ex Java profitability. We don't really disclose the detail, but just to give a flavor. Ex Java is so far not yet in the positive position, but there are a variety of investment that we did since 2017 which are profitable. Not yet in the positive numbers because we will continue investing in ex Java. As we disclosed before that we continue with our early approach, continue looking at the payback and return. In ex Java, we've been aiming for a return between 3 to 4 years from 3 years in our early approach in ex Java. I hope that answered your question. And the second question related to 3G shutdown time line. There are 2 things in this 3G shutdown, the adoption of the market and also our ongoing cost. So these 2 things will determine how fast we're going to do the shutdown. But to give guidelines, we're looking at 1 to 2 years horizon, maximum to 2.5 years, with the guidelines that we are looking at. Again, the reality when we're going to shut down, depending on area by area, whether the adoption in the market on the 4G is there or whether the opportunity is there. So it's a combination of both. Does that answer your question, Piyush?

Sure.

We have the next question. This is coming from the line of Arthur Pineda from Citigroup.

Two questions. First on the revenue side, what's driving the drop in revenues Q-on-Q in the fourth quarter? It seems like ARPUs have contracted as well. Is this more macro-driven or are you seeing escalated competition as impacting you in this sense? Second question I had is with regard to the dividend policy. If you could remind us what the policy is, please. The free cash flow is quite high and the balance sheet is under-geared. What are the expectations on the dividend?

So I will answer the first question regarding the revenue drop in the fourth quarter, so on the revenue and the ARPU you were asking. So I think there have been a couple of factors, 2, 3 factors that have affected this. One, as you mentioned, is the macroeconomic situation. So I think the pandemic is having an impact and the economy is choppy. So I think that's a given for everybody. Now on top of that, I think there have been another 2 additional factors that have impacted our performance. The first one is the competition aggressivity. So as we have told, we have the incumbent who has changed their commercial strategy quite radically, entering all the unlimited and the low denomination packages with very, very aggressive prices. So I think that was one of the things that happened. There was another thing was the government school program, which we had a subsidy. We also lost some of the ARPU of our own customers. Plus, it has impact on some of the customers that we have that now are dual SIMs and the ARPU also decreased. So I think those 2 factors, the competition aggressiveness and the school program subsidized by the government on top of the pandemic or the macro factor are the main reasons of our decline in quarter 4. I think that was for the first question. I will let Pak Budi answer the dividend policy.

Okay. On the dividend, we still are doing the same thing like before. Our dividend policy basically is 30% of our normalized net income of prior year. For 2020, our profit was IDR 372 billion.

Hello. Sorry, we lost the line.

Yes. Can you hear me now?

Yes. Yes. Sorry, could you start from the beginning, please? Sorry, the line was pretty bad.

Yes. Yes. Our dividend policy is still the same like last time. It's 30% of normalized net income of prior year. So our 2020 net income...

3-0?

3-0, correct. 3-0 percent of normalized net income.

Understood.

Can you hear me?

Yes. Yes. So even with the free cash flow being relatively high and the balance sheet at just 0.5x net debt to EBITDA, there is no initiative to revise the outlook on this?

Yes. I guess as a listed company, follow the company policy. Any changes, we need to go to the AGM. So right now, that's the policy. And looking at the current situation, we're still looking at the final decision on that dividend distribution.

The next one comes from the line of Sachin Mittal from DBS.

Two questions. We saw data yield decline almost 11% quarter-on-quarter to almost IDR 3.9 per MB. So question is, which are the plans which you had launched which actually kind of brought the data yield so low? And again, the question is, are we seeing a bottoming out or are we seeing that your plans have full impact in the quarter or no? Those new plans, which you have launched, will continue to impact -- full quarter contribution will be in the upcoming quarters? That's question number one. Secondly, assuming that the competition stay at the current levels, what are your expectations of the industry growth for revenue for FY '21 and for yourself? Anything, any color would be good.

So David here. I will answer the 2 questions. So regarding the first one, you were talking about the ARPU and the data yield decrease. So again, here, I think there have been a couple of factors that have affected this, right? So again, one is the macro math, especially the competition and the school program subsidized by the government. The school program, as you know, is a program where the data package is high, is big and the yield is very low, which has driven down our data yield. So the government package, the school government package has an impact in declining our yield. It also has an impact in the ARPU. Why? Because you will see that many of the operators, I am sure that during this quarter 4 will announce increase of number of subs. That means that the number of dual SIMs has increased, mainly according to our analysis because of this school program. This also has an impact in the ARPU going down. So those are, we believe, the 2 main drivers of the impact in both the ARPU and the data yield. In any case, we have already internalized them, and we have also learned from the first school program. So we believe that the impact moving forward for us is going to be more or less neutral. So that's regarding the first question. Regarding the second question, it's a tough one, right? So competition in 2021 has started aggressive. It's not our willingness or plan to enter in a price war and start decreasing prices. We are going to move in a direction that is going to be, number one, granularity. So we will analyze city per city what is the best strategy to follow. Number two, we will focus a lot in our own CDN capabilities, so our own customer optimization, ARPU optimization engine in order to focus on that. Now given the current context, what is our perspective on the market, we believe that the first half will be flat. So we expect that there will be a slight, a mild growth during the first half because of 2 reasons again. One will be the pandemic, but still the impact is big and the competition that is still also under high pressure. We believe that during the second half, probably, this can release a little bit, both because economic situation can improve and also because of some external factors as potentially industry consolidation or competition rationalization in data business. I hope that I answered the both of the questions.

We have our next question, which is coming from the line of Choong Chen Foong from CIMB.

This is Foong here. Two questions from me. Firstly, I wanted to ask about the EBITDA margin guidance of low 50%, which suggests that you're expecting some further improvement against last year's margin. Is that largely due to some growth in revenue and stable absolute cost or are you also expecting some decline in the absolute cost itself? And secondly, on CapEx, I'm glad to see that it's staying at around the IDR 7 trillion mark, but I wanted to understand what were some of the considerations around setting this CapEx budget. Have we rolled out fairly extensive 4G coverage ex Java already? Are we fairly comfortable with our network quality, even though Indosat and Hutch are catching up, and potentially, the combined network could improve once the merger goes through? So I just want to get your thinking around why you're keeping the CapEx around IDR 7 trillion, although I'm happy to see that number. Yes.

Foong, thanks for the questions. Let me try to answer this. So the first one, we were pleased to our EBITDA margin decline, right, the low 50%. So we're confident we will hit those figures because we still have a few areas on cost savings of mainly on, for example, like our big region, we have around 30% of our power will be due in the next few years. Also expect some savings on other area like sales and marketing because we do more digital, as we have mentioned. There's also some cost upside, unfortunately, mainly on the frequency fee. As you know, we just extend another 10 years of our spectrum. And the fee has been increased quite significantly, around 10%. So this impact our overall EBITDA margin. Okay. On the second question relative to our CapEx guideline, IDR 7 trillion. Whether it's enough or not, I think that's your question. For us, we still believe the IDR 7 trillion would be still enough. That we will be assessing to the letter our CapEx intensity that we've been trying to quote as a guideline. So the CapEx will be focusing on network and as well as other businesses that we have. I hope that answer your question, Foong. And also, another point on that IDR 7 trillion, we will continue with our strategy on ex Java. So we continue to put our investment there because we believe that's going to continue our growth engine. We cannot continue to rely on Java, therefore, we start hitting plateau in terms of growth. That's why we're going to continue with our ex Java strategy.

Okay. And a quick follow-up for Pak Budi. Just wanted to ask for your EBITDA margin guidance of low 50s. What are you assuming in terms of the revenue growth?

Can you repeat again?

Yes. For your EBITDA margin guidance of low 50%, I wanted to find out what are you assuming in terms of the revenue growth?

Yes. I think we've been saying that we will grow as per the market. So I think that's the guideline that we have given. So I think roughly you can kind of like guessing it, what would be the figure that we're looking at. As you know, the industry is growing based on the GDP growth of the country. So there's a lot of assumptions right now floating around regarding that growth in 2021. So we'll pick up the most growth in most recent assumption on the growth.