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

Good afternoon, ladies and gentlemen. Welcome to XL Axiata's First Quarter 2023 Earnings Conference Call. I am Christopher, Investor Relations for XL Axiata, and I will be your coordinator today. [Operator Instructions] As a reminder, this session is being recorded for replay purposes. With me today -- with me today are Ibu Dian, our Chief Executive Officer; Pak Feiruz, our Chief Financial Officer; Pak David, our Chief Commercial Officer -- Consumer; Pak Abhijit, our Chief Commercial Officer, Home and Convergence. Now, Ibu Dian. We will share the highlights for first quarter 2023 which will then be followed by a Q&A session. I will now hand over the call to Ibu Dian.

Thank you, Chris. Good afternoon to everyone. Thank you for attending today's earnings call. I'm pleased with our business performance in this first quarter, which illustrates how we are meeting our commitment to deliver our official as the leading converge operator in Indonesia. We started 2023 on a strong note, whereby XL has successfully outperformed the industry, building on the strong momentum powered by both revenue and subscriber growth. Let's move to the next slide that is showing the first Q '23 key highlights. Our revenue grew by double digits at 12% year-on-year due to continued product traction supported by our network excellence. Data and Digital revenue grew 11% year-on-year outperforming the industry. Top line growth in addition to efforts on operational excellence, get positive impact to our EBITDA, which grew even faster at 13% year-on-year, with margin recorded at 47%. XL Axiata also recorded a jump in PAT as it grew 47% year-on-year with showing our ability to be more profitable. We continue to make progress on our convergence vision today in line with our commitment to deliver complete converge proposition. XL Axiata continues its strong upside trajectory with 44% of our FTTH subscriber base ARPU [ compared ] to converge subscribers. This represents 7 percentage point increase compared to 37% in fourth quarter 2022. On the digital transformation front, we now recorded more than 26 million monthly active subscribers for our MyXL and AXISNet application. This replaces 45% of our mobile subscriber base. More and more users transaction and spend are being captured via this channel, in line with efforts to drive the channel to be the major customers touchpoint. Our focus in providing the best in class customer experience powered by personalization and dynamic offering is a firm holder as our subscriber base grew to 57.9 million loyal subscribers. This replaces 400,000 subscribers growth Q-on-Q compared to end of 2022. Now we move to the next slide for first quarter 2023 industry updates. In the first quarter of 2023, Indonesia telco industry remains rational, with more opportunities for further price reparation. XL is very supportive for this move, which will benefit the industry as a whole. Riding on the strong market momentum, we have made the decision to increase prices across our XL and AXIS offerings. Price increase was done across our traditional and digital channels towards the end of the quarter. We also observed that most of operators have now launched their convergence proposition, their new growth driver. The industry is heading towards more efficiency as telco operators are now transforming themselves into Techos, focusing on execution and better asset utilization. Our investment in network infrastructure, digitalization and optimization of spectrum have increased our customer experience immensely, strong network infrastructure has created a foundation for our fixed mobile convergence proposition. As I have mentioned previously, the opportunity for digital transformation is rising as most of the population has access to smart phones. We will leverage on this opportunity with our data-focused customers by further enhancing the digital experience via MyXL and also AXISNet apps. This effort has enabled us to optimize sales and marketing costs. Furthermore, our internal business processes are also being digitalized and automated which allow XL to be more agile in responding to market needs. Huge opportunity arising from the low penetration of fixed broadband across households in Indonesia. The low penetration rate will provide gross potential for fixed broadband providers and fixed mobile convergence. On the risk side, potential global economic slowdown due to high interest rate environments remains while risk on competition may move beyond mobile. Now let's move on the performance in first quarter 2023. So this slide elaborates further our financial operational performance. We delivered a strong set of financials in first quarter 2023, outperforming the industry is shown in this slide. Double-digit growth in revenue and EBITDA, with subscribers growing to 57.9 million, happy customer that supported us, thus enabling XL to retain the ARPU of IDR 40,000. This solid [indiscernible] our strategic focus on providing best-in-class customer experience for high value subscriber amidst competition and inflation. Now we will see how those performance was achieved. Smart investment is focus of growth and the investment on digitalization has increased the number of active users and their usage. Our digital driven operations through granular data analytics has enabled us to invest our network in high-value areas and buildings to meet demand from both residential and nonresidential areas. This intelligent data analytics also allowed us to accelerate KPIs across customer engagement, campaigns and customer loyalty. So we can request the right strategies to address the challenges and opportunities at the right time. Our network investment was still focused on 4G deployment, especially in ex-Java that increased our 3G BTS count close to 95,000, with -- with 12% growth year-on-year. We continue to deliver excellent network experience with higher usage as data traffic grew 19% year-on-year in the first quarter. As mentioned earlier during the presentation, our Own Apps now have more than 26 million subs on the platform. More and more revenues and transaction are being recorded on the Apps. Our fiberized sites as of March 2023 is at 55%, an increase of 13 percentage points year-on-year, pairing this with our spectrum refining and new technology adoption has put XL Axiata ahead of the curve. Now we move to the next slide. We saw the structural transformation that we just announced. So earlier today, we have issued joint press release together with Link Net and Axiata on the structural transformation that is aimed to capture the underpenetrated fixed broadband and FMC market in Indonesia. XL report a stronger partnership with Link Net to accelerate rollout and supply of around 8 million new Home Passes over the next 5 years. In order to capture market opportunity, speed of execution is key with partnership with Link Net to accelerate rollout and deliver compasses -- that will strongly fuel XL's growth strategy in fixed broadband and also fixed mobile convergence. The exercise has commenced and is expected to ramp up immediately. Next slide. The structural transformation of delayering Link Net into Fiber Co and XL as a Serve Co for fixed broadband will allow for greater focus to capture market growth by leveraging on XL's go-to-market capabilities. This will allow accelerated scalability as XL will now access to larger scale of fiber footprint with minimal investments. The creation of 2 strong assets will drive synergy and help fuel XL efficient to become the leading converge mobile, fixed and content service profile. This exercise will be subject to compliance from the prevailing laws and regulations and applicable shareholders approval with intention to complete by end of the year. I will conclude the speech with our full year guidance. In line with our strong first quarter performance, we continue to reiterate the full year guidance, whereby our revenue will grow in line with the industry at mid- to high single digit or even faster. EBITDA margin guidance remains at approximately 49%. And our CapEx guidance this year will be at IDR 8 trillion with 70% of CapEx to be allocated to strengthen network quality and improve digitalization. With that, I conclude the presentation. Thank you, and back to you, Chris.

Thank you, Ibu Dian, for the excellent walk-through on the XL Axiata performance and strategy. Ladies and gentlemen, we will now proceed to the Q&A session. [Operator Instructions]

The first question comes from Sachin Mittal. Question is, can you please disclose normalized profit for the quarter excluding ForEx? And second question, Link Net has started to make losses despite it being highly profitable in the past, why is so and what is required to change it. For this one, I would like to ask Feiruz to answer the first question. And later on we'll have Abhijit to answer the second one.

Sachin, thank you for the question. If I recall, the question was, can you please disclose right, the normalized profit for the quarter excluding ForEx? In the first quarter of this year, we actually recorded a gain of about IDR 25 billion related to ForEx. So that's the amount that you can actually normalize from our profits. And that number I'm quoting essentially before tax.

Sachin, this is Abhijit. So in disposed to your second question, so yes, we as 20% shareholders of Link Net, we recognize that they have been facing some headwinds but there are 2 components to this. And the reasons can be multifold like increased competition in their footprint and other factors as well. But more importantly, there are 2 things. One is Link Net itself is doing a transformation at its aim to rectify these headwinds. But more importantly, in Ibu Dian's presentation, you saw the structural transformation. So this is fundamentally going to change the business model where Link Net would convert itself into a full-fledged Fiber Co. And XL will take over the responsibility of being the Serve Co. I hope that addresses the point you've raised.

I will let now to open the mic for Sachin, if you have further questions.

Just to understand that now you're expanding your fixed broadband also. So -- and it's still not very -- this is a very insignificant part of your business. Could you explain -- it's not a CapEx-based business. I think you are increasing OpEx for extension of line. First of all, is there a proportion of CapEx which is incurred for your fixed broadband business? Number one. Number two, first few years, we will expect it to have some losses. I don't know because there is some -- I think there is some OpEx component to it, there's no CapEx to it. Just some light on that will be very useful.

Thanks for the follow-up to that question. Yes, you are right. But fundamentally, if you look at structural solutions across markets, there are a number of business models. But on the Serve Co side for XL, it is essentially -- I just call it a zero CapEx model because some partner comes in and deploys the fiber network for us. So it will be definitely a zero CapEx model. What was the second part of your question?

It's more on the -- if it's a zero CapEx in all OpEx model, could we expect losses for a few years? And how will it go on? Because I think you have to pay some minimum at least for the OpEx also, right?

Correct. Correct. The short answer to it is no. Because typically, in this business, if you look at the upfront costs, they are in the range of commissions you pay so on and so forth. But this is not -- definitely not a model that will incur losses for -- in the beginning or a long period of time.

So you're expecting it will be either very minimal losses or not sizable losses at all to start this business?

Correct.

Thank you, Sachin. Let's move on to the next question. The second question comes from Foong from CIMB. Question is what was the average increase in prices carried out in the end of the first quarter 2023? And now XL is in the 40,000 club for ARPU, where do you see this heading to considering the affordability factor? For this question, I will -- I shall let for David to answer the question.

So the average price increase that we did the 10th of March was in the high single digits, more or less its 7.5%. It was in both portfolios Axiata and XL, but I have to say that in the short while these are low price synergies. We did even higher than that. So we did even double-digit increase in the prices. So I think that's regarding the price increases. To your second question, yes, we are happy to be in their 40K club, these price increases so far have played well for us. So what we have seen in the traffic after the price increases, it's been very positive. So we remain confident in our strategy of optimizing the prices and moving in this direction. And hopefully, we'll also see ARPU improvement in the future. I hope that, that answers the question.

Thank you, Pak David. Now I shall let Foong to check if there is any question.

Just a follow-up question on -- on the price increase. After you did that, the traffic, as you mentioned, was still quite good. But on the competitor side, did you see any sort of -- any of your competitors following as well your move to increase prices?

So unfortunately not, we'll see our competitors moving. But I have to say, as I was mentioning, still our traffic grew very healthily. So even if the competition didn't follow. I think -- I think, I know that for us, the price movement was still very positive. That keeps us with the confidence on going in the correct direction and our strategy and our willingness is still to -- to move and do additional price -- price increases in the rest of the year. Of course, we will keep an eye to the competitive environment. So -- did -- you were also mentioning from about the affordability of the customer, right?

Yes, yes, that's right.

Correct. So from what we see, the share of wallet that we are getting from our customers it is still far from other countries in the world, from any other country in the world. So we believe that there is still room to grow. And again, this last price change also supports our thoughts and yes bringing [indiscernible] a little bit in that area.

Okay. But maybe, I mean, given the tone from the other players, which all seems to be quite positive, right, and all thinking about further optimizing prices. So the competition, the dynamics still look very positive at this point. And as you said, the spending, right, as a part of wallet is still quite low. But over the next 1 or 2 years, do you think this 40,000 ARPU could go to 45,000 or 50,000. I mean any thoughts there?

Yes. So again, we are positive on the ARPUs going to increase. Yes, we are positive on that. And we are positive Foong market is going to [ refer ] further. So when we keep with our plan of doing additional price increases during this year. Correct.

All right. Thank you, Foong. Okay. Let's move on to the next question. Next question comes from Henry Tedja from Mandiri Sekuritas. There are 2 questions. The first one is could you elaborate more on the higher infrastructure expenses related to rental expenses and repair maintenance will drive to higher costs and will it normalize in the coming quarters? Second question is, what are the key drivers of stronger revenue growth in first quarter 2023? Is it more on the price increase impact? Or is there any other factors? For the first question, I'll select Feiruz to answer and then second question for Pak David. Right, go ahead Feiruz.

Henry, thank you for the question. Certainly, if you look on a quarter-to-quarter basis, you will see a lot of movement, right on the network cost in particular. Allow me to recap back from XL's disclosure in fourth quarter because of the renegotiation of the operating and maintenance contract with the tower providers, there is actually an impact on the network cost. If you normalize that, you would have to add back IDR 400 billion to the network costs, right? And if you look at the first quarter of 2023, we have taken an initiative to actually find out some of the costs to capture the momentum right for the [ balance ] because we've seen some also are very healthy growth in subscribers and pick up in traffic. Coupled that with the digitization efforts that we continue doing. To the question, we're moving ahead. I think network cost as a percentage of revenue will be around circa 14% to 15%. I hope that answers the question. And allow me to pass the next question to David, on what drove stronger revenue in first quarter 2023.

Yes. So the revenue growth in first quarter hardly came from the price increases because as I was mentioning before, we increased our prices at the end of March. So by the time it hits the retail outlets and our customers, et cetera, only in a small part of that price increase could be already filled in the first quarter. So the revenues are a little bit different. Well, let me say that, of course, the price increases that we did during last year and everything effects, right? But if you remember, it was like in March and during June, et cetera. So -- but there are other -- other drivers. And mainly it's 2 things, right? So number one, we'll have more customers than what we do. So we see our daily active users in our network has increased significantly in the last year and even in quarter-on-quarter. So I think that's number one reason. We have more customers. We have a higher market share. Number two, each of these customers is increasing their usage. So we see that the gigabytes per subscriber users keeps increasing very healthy. Very, very healthy. And the third factor is that the price per gigabyte because of these price increases that we did in the past, not so much because of the quarter 1 because it came very late. We would have been able to manage. We have been able to manage the price per gigabyte or the gig. Hence, more subscribers using more data and the data prices be much more stable, that brought the additional revenue. I didn't mention in the previous question, but not only we increased prices at the end of March, but we did also something else that is a -- we reduced a lot additional bonuses and et cetera, that we do in the CVM activity. So that's another way of increasing prices, that is by reducing the benefits that we are giving to our customers, right? So that also helps a little bit in quarter 1. But again, that in -- mainly at the end of quarter 1. So the other 2 factors are the ones that helped more.

Right. Thank you, Pak David, for the explanation. Now do you have any more questions, [ Henry ] any follow-up?

Yes. Okay. Perhaps just 1 or 2 follow-up questions on that. First [indiscernible], you mentioned that the network costs in the following quarters will be around like 14% to 15% of the total revenue. But could you elaborate more on share per, what will be the total amount that you promoted in the first quarter of operating network costs?

Yes, I think you can look at right. So on a steady state, it's about 14% to 15%, the uplift rate in the network cost as a percentage of revenue is the amount we've [ unloaded ] in the first quarter of 2023.

Okay. Sure. Sorry. Perhaps one more follow-up question, but it's perhaps not related to network cost, but perhaps on the structural transformation that Budi has also mentioned. Would you mind to elaborate more about this structural transformation between XL and [indiscernible] net?

Yes. Yes. Okay. Thanks, [ Henry ]. I think I'll tie it to the next question, which has been sent in by Hussaini as well, right? Both of you are asking about more details. So the structural transformation entails the following. First of all, Link Net will convert itself into what we call as a Fiber Co. They will build home passes. The plan is not only to build home passes for XL, but eventually for the whole industry. So they will follow a multi-tenant model. XL will focus on what we call as a Serve Co where we actually run the retail business and offer fixed mobile conversions to our customers. So these are the fundamental principles underpinning the structural transformation. Hussaini has also asked, will XL paid to Link Net to acquire the [ OpCo ]. The answer is no, we are not acquiring any [ OpCo ]. But 2 things are happening. The customer base of Link Net will move into XL, and XL is also looking at carving out its fiber asset and moving into Link Net. Now both these things will, of course invite some financial consideration to both the parties. The process is still ongoing. Nevertheless, we will be doing -- we are doing this at an arm's length and following all the regulations that govern the Indonesian telco market, right? Hussaini has another question, what will be the wholesale pricing, which XL will pay to Link Net? This is a confidential data, right? So obviously, I cannot disclose it. But nevertheless, again, this transaction is at an arm's length and follows the regulation that governs the industry between related parties.

Sorry, can I just ask one more final question. But you mentioned that there will be some kind of exchange that the customer offering that will go to the XL and some assets of XL will also go to the Link Net. So can I reconfirm that there will be like cash payment of cash transaction from Link Net to XL and vice versa for this potential transaction?

So all I can confirm is there will be a transaction, okay? But it will be done at an arm's length, given that we are related parties and follow the governance process in Indonesia and the telco industry and of course, shareholder approvals.

Thank you Henry, thank you Abhijit for answering questions. Now let's move on to the next question. The next question comes from Foong on the digitalization initiative, 45% of the subs are on app. They are also reloading digitally. And second question, how much sales distribution channels has been digitalized versus the target? This question will be better answered by Pak David.

Yes. So out of the -- yes, more or less half of our customers are already using our digital applications. Yes, most of them are doing the digital [ load ]. But most importantly, they are generating -- I mean it's a user that is generating revenue in the application, right? Independent whether you reload directly from the app or in an e-commerce channel or recreational channel, most of them are already generating the revenue there. So that's one of our main goals, right, to may move people from providing other channels to expanding creating the revenue in our own applications. And I think that's happening and we are seeing also a very, very healthy growth of the revenue that we get from those applications. And answering your question, yes, in order to buy that or to spend that revenue, a lot of that reload is also coming from digital sources. So I think that's number one. Regarding the utilization of the traditional channel, I cannot give a number, but I think we are moving in a very good trajectory. We already have a large amount of the retail outlets that are using our digital application, which is allowing us to have a more direct relationship with the customer. It's allowing us to decrease the stock outs, et cetera. And it's also allowing us to have a more direct distribution channels. So I think that's going in the correct direction. And you can see, right there, in the marketing and sales cost, I think we are also starting to feel that the cost of the credit is going down. I guess that the question came from [indiscernible] as well.

Thank you, Pak David. Now I'd like to ask if there are -- Foong has follow-up questions to Pak David?

Yes. David, just wanted to ask, right, since 45% of your subs are on the app and you said they are also reloading digitally, right? I guess for me, the interest release on the savings on the dealer comps, are you seeing as much dealer comp savings as for what the percentage of subs on the app is? Or is it going to take time for the dealer commission savings to come through?

So the dealer commissions, to be honest, the dealer commissions currently are not that much coming from the reload amount, but from other KPIs that they have, right? The reload was something strong a few years back, but not -- not so much now. Now having said that, we are seeing an improvement in the dealer commissions due to the digitalization project that we are doing, not as much of moving the pools, et cetera, but on getting direct to retail outlet relationship with our digital application. That is what is helping us on reducing the dealer or the intermediation cost of the distribution channel. We are -- we have been working on it and preparing it. We already have -- have moved in a few clusters in a few areas in Indonesia and it's looking good. And we will keep moving during this year, and we'll accelerate that.

Okay. Pak David, if I can also just add in a question for Pak Abhijit since I'm already on the line. With regards to the deal with Link Net, right, I note what you mentioned just now about the operating model and all that. But as the anchor tenant, right, on the Fiber Co, do you see sort of flexibility being baked in, in terms of the wholesale cost given that we are seeing some ARPU pressures in the broadband market because of competition now? Flexibility being embedded into those agreements so that XL could yield some earnings accretion from this deal? Even in the event of more competition.

How did you end your question, XL could?

Yes, whether XL could have a bit more flexibility right or embedding flexibility into the wholesale agreement with Link Net such that even if we see broadband competition continue to be fairly intense and there's ARPU pressure, right, that this deal would be earnings accretive for XL.

There's no flexibility. We are approaching this at an arm's length kind of an arrangement given that we are related party transactions. So this is going to be an outcome of negotiations as XL would do with any other fiber provider, to be honest.

Right. Okay. I'm just wondering because as an anchor tenant, do you like have to sign a very long term -- or at least you envision signing a very long-term wholesale agreement and whether there's flexibility to the whole rates, yes?

Yes. Got it. Got it. Yes, obviously, as an anchor tenant, we will seek to have certain benefits for ourselves. Those benefits could be in the form of, let's say, exclusivity or longer-term arrangements or even pricing as well, right? So obviously, as an anchor tenant, we will definitely seek to have those benefits. But let me reemphasize. This is the approach we take to any other partner, right? If we are partnering with any other providers, these are exactly the kind of benefits we would be seeking as well.

Okay. And just to reclarify here again, that it will be net profit accretive from year 1, you think this new?

I think I'm pretty -- that's the beauty of these kind of deals, right? Given that there is no CapEx required from our side, we are fairly confident about profitability. And in the event that -- yes, we are very confident about achieving profitability quickly.

Thank you, Pak Abhijit. Let's move on to the next question. It comes from Hussaini Saifee from UBS. The question. I think this is almost for Pak Abhijit. Are the rate in home passes on top of the infrastructure being [ used by ] tower which is Sarana Menara.

I didn't understand the question. So let me -- so the question is, are the 8 million home passes on top of...

[ Used by ] company called Sarana Menara, I think this is.

No, I still don't understand the question. But let me.

This is by Link Net.

I think this is just a clarity that I think the build will be by Link Net.

So let me clarify the 8 million that was presented. So these are new home passes that will be built by Link Net over the next 5 years. I hope that answers your question, Hussaini.

Let me just open the line for Hussaini to check if he has any other questions.