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

Good morning, ladies and gentlemen. Welcome to XL Axiata's Earnings Call for the First Half of 2021 Financial Year ended June 30. My name is Ajay, and I will be your coordinator today. [Operator Instructions] As a remainder, 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, Ajay. Good morning, everyone, and welcome to the call today. Firstly, just a small housekeeping matter. We have prepared a backup MS Teams link, which we sent out for this call today. That link is in listen-only mode in addition to the main conference line. If you are using both the lines, please mute the MS Team link to avoid any audio issues. With me on the call today are Ibu Dian, our Chief Executive Officer; Pak Budi, our Chief Financial Officer; Pak David, our Chief Commercial Officer for Consumer; and Pak Abhijit, our Chief Commercial Officer for Enterprise and Home. Now Ibu Dian will share the highlights for the first half of 2021, 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 morning to everyone. We are happy to report a strong set of second quarter numbers despite the ongoing impact of the COVID-19 pandemic and the weak Indonesia economy. This is due to the improving market environment, our right product strategy, the seasonality, strong Lebaran period and also because of our network quality improvement. As a result of the consistent execution and implementation of our operational excellence strategy, we are on track to achieve our vision of becoming the #1 converged operator in Indonesia. This quarter, we are happy to report a strong rebound in revenue growth with our revenue growing 8% quarter-on-quarter in the second quarter, driven coupled with rising EBITDA as well by 8% Q-on-Q due to cost efficiencies. Our net profits continue to rise as well, increasing by 23% Q-on-Q in the second quarter to IDR 395 billion. However, the situation on the ground has worsened drastically in the past month with the latest unprecedented spike in COVID-19 cases, resulting in lockdowns across Java and Bali. As a result, economic activity has been severely affected with unemployment going up, which will result in incomes and consumer spending power being impacted. This current trend means there might be an impact to the industry, which is worse than our initial prediction of a recovery in the second half. On a more positive note, COVID-19 has accelerated our transformation agenda for our long-term goal becoming a full -- a fully digitalized operator. This is through a faster decision of our business processes from the front end through distribution and our internal processes. This will create long-term benefits in the form of business and cost efficiencies. We also continued to execute on our strategy with a strong focus and on giving our customers what they want. Through our customer intimacy strategy, we are focused on giving our customers the best product and customer experience in the market and not just offering them the lowest prices. We also continue to develop our analytics capabilities, which enables us to successfully upsell our customers through better product proposition and always ensuring we deliver the right product for the right customer. Following the success of our Paket Akrab, in being the first offer for families, where you can share quota with your family members. We have further expanded on this with the recent launch of XL Satu Fiber. XL Satu Fiber is the first truly converged offering in the market with a quota on both the mobile and fixed, putting us further along our path of our vision to become a truly converged operator. Although it is still in the early stages, we are seeing good traction from the market for this convergence product indicating strong demand for a product of this type in the market, especially in the current work and school home -- current work and school from home situation. Positively, our investments ex Java continues to do well for us. And growth continues to be well ahead of Java growth rate increasing its contribution to our revenue to 30% in second quarter of 2021. Our investments that we have made, they are delivering returns and payback in line with what we had initially planned. We will continue to invest in ex Java guided by our operational excellence principle and strategy and ensure that we can continue to see growth and deliver returns for our stakeholders. Our network roll out and upgrade continues to be on the track and as we continue to roll out our network on schedule with our BTS count now above 156,000, with 4G present in 458 cities across Indonesia, with more than 65,000 4G BTS. The key now is that infrastructure deployment needs to be modified. What used to be thought as a temporary trend, such as work from home and school from home, is now becoming a more permanent part of living and working. Therefore, there is a need to invest in our network to ensure a high level of service is available for those both in and outside major cities. We have therefore started putting in more investment in these areas in improving the network quality that will support the business growth. This is in addition to modernizing both our active and transport networks as well as revamping and upgrading our IT systems. Our balance sheet remained strong with net debt to EBITDA of below 1x. We have no USD debt, and we have also secured committed facilities with the banks that we can tap any time if we need additional funding. Last Friday, we announced that along with Axiata, we have entered into a non-binding term sheet with the major shareholders of Link Net with a view to acquire a 66.03% stake in the company. At this point, we have not made any binding offer and the transaction is still subject to due diligence and negotiation between the parties. If all goes well, we have -- we hope to enter into a sales and project agreement in around 4 weeks' time. This is the next step in our strategy and vision to become the #1 converged operator in Indonesia, and we are well on track to executing that vision. We will make further announcements on this and when necessary. Finally, we would like to reiterate our guidance for the year. In 2021, we are guiding for revenue growth to be in line with market, EBITDA margins in the low 50% and CapEx to be around IDR 7 trillion for the year. However, we expect our CapEx to be on the higher end of the IDR 7 trillion number due to the network investment we are making. Thank you, and let us proceed to the Q&A session.

[Operator Instructions]

Ajay, do we have the first question?

Yes, sir. The first question comes from the line of Kresna from Mandiri Securities.

Can you guys hear me?

Yes, Kresna, go ahead.

Two questions for me, please. Number one, would you mind giving some update on XL Home and XL Satu Fiber, especially on XL Home? How many homes passed added in the second quarter? And also how many residential fixed for themselves that XL might add in the second quarter 2021? And what will be the targets for 2021 or perhaps for 2022 as well. My second question is actually on mobile product distribution. How is the impact from recent mobility restriction? How different is the impact to XL this time versus the restriction back in second quarter 2020? And what are XL strategies to circumvent these challenges? Maybe just to slip another one. And when we look back at the cellular revenue growth recovery in second quarter 2021, any sense on how much of that growth coming from digital channels versus traditional channels? I guess I'm just trying to get some sense of consumer behavior shift post COVID-19 at XL?

First one, I'll take care of it. Yes. So thank you, Kresna. This is Abhijit. I'll take your first question, guidance on XL Home and Fiber. So our fixed broadband business, it continues to do well in the first half. And as all of us know, this is driven by a strong demand for home Internet services overall. We have now reached more than 580,000 homes passed. And what we are buttressing is a very healthy penetration rate of 30%, which is an average penetration rate across our whole footprint. In particular, what we are witnessing is a strong demand ex Java for this. Our ARPU remains healthy with this penetration rate, and this is north of IDR 250,000. We have recently launched, as our CEO highlighted, our first convergence product, XL Satu, wherein we approach homes with a converged fixed and mobile proposition. And this is the first step in our journey to become a fully converged operator offering bundling of fixed and mobile and driving convergence. I think your second question was on mobile. I'll hand it over to David.

Kresna, so answering your second question around the distribution challenges due to the lockdown, right, to the PSBB. So it's true that there has been -- I mean, it's true that there is a PSBB we all know and that has some impact in the traditional distribution. Some of the retail outlets might be closed, especially in certain areas. So you know that the lockdown has not been homogeneous in whole Indonesia. So it has been more localized in certain areas like Jakarta for example, and that we can see. Now as you were saying, one of the things that we are seeing is that our digital channels are growing very healthily. I can tell you that it's double-digit growth from quarter-on-quarter. But most importantly -- that's the user growth. But most importantly, the revenue that we receive from those digital channels is growing even faster than the adoption of the customers, which means that the customers are coming to our digital channels, but they are moving more of the share of the wallet. So we are getting the better customers and part of the share of the wallet is also moving to digital. So this is the trend that we are seeing. It is accelerated because of these lockdowns, et cetera. Yes, it is. But it is a trend that it is already there, and it's quite consistent in the last few months. I don't know if that answers your question.

Yes. Why would you mind -- would you be able to share how much of the revenues right now coming from digital channels versus traditional channels perhaps in comparison to pre-COVID time?

I cannot give you the exact split as of now. What I can tell you is that the growth in the digital channels, the revenue growth in the digital channels is more than double -- it's double digits quarter-on-quarter.

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

Just a few questions, please. Firstly, on the CapEx side, I know you've maintained it at around IDR 7 trillion. But are you able to split out between fixed and mobile investments? I'm just wondering how that is trending. And just going back to the fixed line comment, I -- sorry if I missed this. You mentioned you have around 580,000 homes passed. What is your target or ambition for this into the next year?

Okay. Let me start by addressing the second question Arthur. Our target is to be the leading #1 converged operator in Indonesia. And to achieve that target, we launched our business a couple of years ago, as you know, the fixed footprint. And we have a healthy footprint of around 580,000 homes passed. Now as you know, we have announced the first step of the Link Net transaction. So we will progress according to that, and then we'll see where we reach and establish an ambition next year onwards.

Yes. Arthur on the first question on get CapEx there. But first of all, I give like a glimpse on why we still call it IDR 7 trillion right now. Right now, we're seeing the traffic pattern in the last 1 year post pandemic, people going for work from home and less mobile right now. So we're seeing that as a new normal. And then we start looking at invest more to strengthening our network, especially on the housing area in Jabodetabek and major sub burbs. And then we're also modernizing our network and also increasing our fiber footprint because, as you know, as the data continue growing, then fiber footprint needs to become more and more strategic investment that needs to be done, right? So with that -- with those situations, we continually looking at our CapEx guidance. So IDR 7 trillion is the number as of now, but we continue looking at this CapEx guidance. So that's the base line, yes. On the fixed how much -- on the mix how much goes to fiber or how much goes to mobile? Currently the majority still goes to mobile because that's where the structure right now because of the demand, right? But again, we're still looking at this CapEx guidance and soon, we will say more. Hope that address your question, Arthur.

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

This is [indiscernible] from [indiscernible] so 2 [indiscernible] from me. On the margin [indiscernible] that [indiscernible] was that [indiscernible] I think...

Foong, Your line is not very clear, Foong. It's a bit choppy. No, we can't hear you? It's cutting in and out phone. Maybe we'll go to the next question first, and then we'll try and address yours. Come back in.

The next question comes from the line of Vida from JPMorgan.

My question is regarding the potential investment in Link. Can you share on how do you plan to fund the acquisition of Link and also the strategic rationale behind the acquisition? And also if you can take some color on the fixed network that XL have?

Vida, thank you. This is Abhijit. Let me address the strategic rationale first, and then I'll hand it over to Budi for the funding question. As we mentioned, our intent is to become the #1 converged operator in Indonesia. We saw this vision about 3 years ago or so. And as a first step of that, we decided to launch our own fiber business, which was an organic deployment because we wanted to test the demand in the market and our ability and capability to scale a business. And as I shared a few minutes ago, we have achieved a significant scale in our own fiber business. I shared the figures as well. And now the second step of this journey is to scale it even more in order to drive convergence and become the #1 converged operator. And as such, Link Net is considered to be a good company to acquire to help us stay and drive the strategy further. So this is a strategic rationale behind acquiring Link Net. I'll pass over to Budi for the funding question.

Yes. Yes. Yes. So Vida, in terms of how we're going to fund the transaction. At this stage, right, we're still evaluating all funding options along with Axiata. We -- as you know, we're always trying to get the most optimum option that we could get in any form. Operational excellence in our DNA, so we always try to squeeze anything possible with optimum option available. So you can name it a IP issue, bank loan, bonds, local, international. So for all we are exploring, we're looking at the most optimum, then soon we'll share more detail on that one. So that's the status as of now Vida.

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

I have 2 questions. Could you share with us the latest fixed broadband penetration in Indonesia, the latest numbers that you have with you? Secondly, if we notice -- the second question is, if we notice in most countries, fixed broadband ARPU is 2 to 3x, whether you see of the mobile ARPU, perhaps including the pay TV components inside it. But in Indonesia the difference is very high 7 to 8x. So we are talking of more than USD 20 kind of ARPU for the fixed broadband side. So could you throw some light? I mean, do you expect this overall fixed broadband ARPUs to come down given that -- the question is why are people willing to pay such a high premium for fixed broadband? Is it that mobile quality bad or the ground band is very good? The difference seems to be simply too huge in Indonesia in terms of the pricing or the ARPU between mobile and fixed broadband. So could you give some color here, what are your views on how the ARPUs are going to behave given that penetration will rise for fixed broadband?

Yes. Thank you, Sachin. This is Abhijit. I'll take both the questions. So yes, Indonesia, unfortunately or fortunately is amongst the emerging markets with a very low fixed broadband penetration. Right now, it is hovering in the low double-digit teen figure, so around 10% to 12%. I'm talking about the overall broadband penetration in Indonesia. Now structurally, if you look at the market, there have been 2 major players in Indonesia. The first is Indihome Telkom Group and the second one is Link Net. The rest of the market is pretty fragmented with a lot of layers having very small market shares. So the first is a low broadband penetration, which means there is a huge pent-up demand, which has been enhanced by the current COVID situation. And secondly, only 2 major players in the market. Now if you also look at the geography of the country, it is extremely complex. So it is not necessary that competitors compete in the same area. As such, the players in the market have not felt the need to have a price-based competition. And hence, what you see is price points are still high and the resulting ARPU of the players are still high. So structurally, we still have the view that this is going to continue. The basis of competition in the market is still predicated upon quality of service, speed, content offerings, providing an overall good customer experience. The market hasn't matured to a level where there is intense competition and the overall penetration has crossed 40%, which is when typically you start seeing the basis of competition shift to price. Hence, we don't see a very high degree of ARPU decline or a price-based competition in the market.

Yes. Abhijit, just a follow-up question because the question is, we're talking of an annual spending of almost USD 300 for the fixed broadband, you're looking at the fixed broadband ARPU, so there's a question of affordability. Let's compare to even Thailand, right? Thailand has highest GDP per capita, but their broadband is almost 60%, 70% lower than fixed broadband. So the question is not about price competition. The question is affordability factor because does the affordability hurt the pent-up demand? That's the question there actually. Yes.

Yes. So when we talk about ARPU, one thing we need to understand is mobile and fixed are inherently and fundamentally 2 different businesses, right? If you look at the fixed business as a nationwide business, then perhaps that's not the right lens to look at it. It is a very localized business and the nature of consumer demand and affordability differs geography to geography. And yes, you are right, an ARPU of $20 approximately a month is still in the higher range. It's almost like similar to some of the mature markets. But at the same time, even in that demographic, there is a lot of pent-up demand. And as I was saying, it's 10% -- roughly 10% to 12% penetration in the market. So I think there's still some way to go before we start going out of that demographic out of that geography and into other geographies where the question of affordability starts coming into play.

We have our next question from the line of Niko from BRI Danareksa Securities.

Yes. Congratulations for the good results in second quarter. My question is on the marketing expenses and overall for the EBITDA margin. EBITDA margin, you suggest there would be low 50s for the year, currently is 50%. So my question is in relation to your comment that marketing expense have increased during Q-on-Q due to expanding distribution footprint. This is -- it appears that it will be -- the marketing cost will remain high, where Q1 and Q2 has been higher. Is the trend going -- moving forward? And do you see other cost -- do you see cost savings made in other OpEx line? Yes. That's question number 1. Number two, I missed in the introduction from Ibu Dian. What is IDR 8 trillion CapEx in 2022? And what is driving the increase in that number?

Okay. Let me start with the first question. So you are right, right? Our marketing and sales cost increased as a percentage of the revenue. So that's a fact. Now there are different factors that have placed in this. As you mentioned, and we have mentioned during this, one of it is that we are expanding our footprint and digitalizing our footprint. So that is part of the increase of the cost. In the second quarter, of course, you always have the Lebaran seasonality that also brings -- bridges up. We have had also in the last few months, a government school program that has also sucked a little bit of the marketing and sales expenses. And even a fourth thing that, as you know, we are now launching new products like the -- and new services like convergence, right, which is also a new line of expense. So I think those are the reasons why the marketing and expenses has increased in this first half. We expect it to remain at the numbers that we are seeing at around 8% to 9%, most certainly in the coming months.

Yes. So Niko, just to add on the whole structure of the OpEx margin -- impact on the margin, right? So David explained about why we spend in marketing and sales in Q2 in the figures. But overall, as you can see the figure, we managed to ensure that our OpEx is still in the right level. Year-on-year, our operating expense lower by 2%. How we do it because we continue pushing our operational excellence strategy where we make sure every single rupee that we spend, giving the most optimum return to the company. So we continue looking at that daily even to make sure that every time we spend something, it gives us more. How are we going to make sure we go with that. There are a couple of costs saving opportunities continue -- we're looking at that are giving us good traction to fund other activity like this market selling Spending that we did because we have a few areas, biggest one, as we explained before, cost saving coming more on the tower lease renewal where we have around 30% sites coming up for renewal over the next 2 years. We're able to secure IDR 10 million rental cost tower per month from all tower providers that give us a big lift, right, to relocate the expense to other areas that give us more faster returns like the marketing and selling expense. So those things that we're doing to ensure that we're still keeping the same margin level that we are aiming, which is low 50% level. Hope that address your questions, Niko. You also have questions on CapEx, right?

Yes.

Yes. The second question is on CapEx 2022. For now, we cannot comment on what we're going to do in 2022 because then probably in near term, then we can talk more, Niko. Your question was on CapEx 2022, right?

Yes. I heard Ibu Dian mentioned about IDR 8 trillion CapEx, is that -- or I misheard?

Yes, I think.

So actually on the earnings of my speech, I -- actually, I was saying that our CapEx for this year will be on the high end of the IDR 7 trillion. And that was because -- as also mentioned previously by Budi, because we see that -- after like now more than 18 months entering the pandemic, we see that the new normal will require us to do some of network investment modification. So the trend that we saw then it was like a temporary like working from home or a school from home, now become more permanent. So -- and we see that the traffic generated from the housing areas is now -- is much higher compared to the for instance business district. So we would need additional investment this year, which will be higher than IDR 7 trillion or probably nearing like IDR 8 trillion because we will enhance the Internet experience in those housing areas. Is that answering your question?

Yes.

Our next question from the line of Choong Chen Foong from CGS-CIMB.

[indiscernible]

No, no Foong your line is still bad. It's very choppy.

Can you hear me now?

It's cutting in and out Foong. Is it possible for you to type the question maybe on MS Teams link?

Still unclear?