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

Good morning, ladies and gentlemen, and welcome to XL Axiata's Second Quarter of 2023 Earnings Conference Call. I am Maya, Investor Relations for XL Axiata, and I will be coordinating the call today. Before we begin, I'll need to convey the format and structure of the call. [Operator Instructions] As a reminder, this session is being recorded for replay services. On behalf of the management team, we are pleased to have on our earnings call today, Ibu Dian, our Chief Executive Officer; Pak Feiruz, our Chief Financial Officer; Pak David, our Chief Commercial Officer for Consumer; and Pak Abhijit, our Chief Commercial Officer for Home & Convergence. Without further ado, I would like to kindly hand over to Ibu Dian to start the session with the key highlights for the second quarter of 2023. Ibu Dian, the time is yours.

Thank you, Maya, and a very good morning to everyone. Thank you for attending today's earnings call. I'm pleased to share that from the last call, we have progressed through the second quarter of 2023, with strong financial and operational performance continuing our strong growth and momentum from the first quarter. In line with our proposition to be the leading corporate operator in Indonesia, we have seen timely positive traction in capturing the fixed broadband market while strengthening the mobile business, building on our conference organization, which I will elaborate more throughout this presentation. Let's start with the second quarter 2023 key highlights. In the second quarter of 2023, we continue to deliver solid fundamentals. Our revenue grew by 12% year-on-year, followed by a faster growth in EBITDA or pacing revenue by 14% year-on-year. This supported a strong normalized profit after tax growth by 12% year-on-year. These results show that we are on track to build sustainable revenue streams with improved efficiency. In line with our commitment to deliver the complete comfort proposition, our convergence penetration in quarter 2 of 2023 saw an immense uptick by 12 percentage points, much faster than the previous quarter, with penetration now reaching 56%. Our peak in Home Connect was also encouraging. Our pickup in Home Connect was also encouraging bringing the count to 154,000 XL Home users, growing by about 50% on a year-on-year basis. Our strategy remains factoring the under penetrated fixed broadband through granular data analytics, which enables us to invest our network in the RF, that will be most favorable to XL. A strong performance also continued to be seen from our core business as subscribers strive to 58 million, followed by an increase of ARPU quarter-on-quarter by a hefty 5% from IDR 40,000 to IDR 42,000, which by no means in the [indiscernible] That was the result of both our ability to expand to more quality subscribers and also maximize the momentum of price reparation. Furthermore, our digital transformation strategy also progressed well with 27 million customers now using the MyXL and AXISNet apps, which provides a solid base for engagement with our customers. Let's move now to our convergence journey. As I briefly mentioned earlier, we are building our business with the strong support of rigorous data analytics to pinpoint the strongest bucket of growth that will enable us to strive in our convergence play and explain to you potential business lines. Our convergence journey has saw a timely progress that began with our establishment of decision to become the leading converged operator in Indonesia. With this aim, we plan to fully converge all lines of operations within the company, not only in converged products, but also organization, IT network and distribution channels which we have progressed from the onset of the strategy direction. This will share with a solid foundation to move forward effectively and efficiently as speed is key for us to lead the converge movement and grab onto the foundation of market. We introduced the first one-point service Indonesia through the launch of XL Satu, a product that combines fixed broadband and mobile services with 1 simplified billing. Along the way, we also built a strong mobile customer base by supporting quality subscribers with more focus on the family segment, so we can build on this base deliver penetrate our convergent services going forward. When the focus on growing our fixed broadband product, XL HOME to quickly save success on working the underpenetrated equity market. Customer acquisition was also limited by deceration of value product, in line -- to entice customers into XL [indiscernible] of service. To expedite the capture of the underpenetrated fixed broadband and fixed mobile concentrated market in Indonesia, we initiated the structural transformation where XL will forge a stronger partnership with Link Net with the ultimate objective to ramp up home [ finance. ] Finally, our expansion of business lines does not stop at fixed broadband and fixed mobile convergence for the Home & Family segment. With the continuous development of new technologies, we aim to expand our revenue streams towards new integrated services that will cater to further communicate on this going beyond connectivity. Overall, our journey going forward remains solid with strong strategies that will deliver sustainable revenue streams to strengthen shareholder value for all our investors and stakeholders. Let's move to the next slide. We would like to highlight that we aim to accelerate our convergence strategy in line with our goal to become the leading converge operator in Indonesia. This is being done through creating converge organization network as well as IT architectures. In the beginning of 2023, we have already transformed the whole organization towards convergence with customer-facing units to now be able to serve multiple business lines and having faster go-to-market. Secondly, we have also initiated to optimize investment and build a network towards convergence with focus on transforming transfer network which is the key role that enables the converge network. Finally, we have also the IT architecture for a converge digital telco aimed to address our business aspiration for personalized digital experience, segment synergies and healthy omnichannel sales and distribution. Let's move to the next slide. On this slide, I would like to elaborate on our progress on the structural transformation that we introduced in the first quarter 2023 announcement. The first step of the transformation is the faster rollout of compasses, they will pave way for faster penetration of fixed broadband. Our partnership with Link Net progressed as planned with the signing of FTTH network development and operation agreement to roll out 1 million new home bases in the next 1 year to ramp up the distribution of XL Satu Fiber in more than 10 cities and regencies across Indonesia. I'm pleased to share that XL Satu Fiber can now be accessed in 63 cities with many more to come this year as the structural transformation and focus will lead to only net having 8 million home passes and in turn, access for us to deliver connectivity to meet an underpenetrated demand. Regarding the second step of our transformation, we are still on track on the creation of Serve Co and Fiber Co through the delayering of assets, that will allow for greater focus to capture the market and promote synergy to immediately ramp up the penetration of fixed broadband in Indonesia. Next slide, please. So ladies and gentlemen, accelerating from our positive performance in the first quarter, we were able to further strengthening our financial metrics through a solid rise in revenues with improved margins achieving double-digit growth in total revenue, EBITDA and also normalized net profit. Next, on the operational indicators. Our strong finance service chart was accompanied by the continuous upturn in operational indicators, showing a strong traction for convergence penetration, which has now reached a mark of remarkable 56%. Even during price reparation, our subscribers still grew to 58 million, driven by prepaid subscribers, followed by a substantial increase in ARPU to IDR 42,000. Our investment to deliver excellent network experience has proven successful in driving up data usage, as traffic grew 21% year-on-year as of first half 2023. Next slide. On the OpEx. Operating expense growth remained controlled at 11% year-on-year, amid the higher net revenue growth of 12%. The growth of OpEx as of first half 2023 was driven by network expansion to capture the Lebaran momentum and ultimately improve customer experience throughout the first half of 2023. On the other hand, we saw lower sales and marketing expenses year-on-year as our digitalization initiatives proved fruitful to promote efficiency in our distribution channels. Next slide. On our investment. We continue to carry out smart investments to keep improving our network quality for our subscribers. Our 4G BTS have expanded beyond 97,000 with 59% now already fiberized to ensure stronger connectivity. The 27 million users of our digital application was also the result of our ongoing efforts to deploy investment in digital transformation. Last slide. Finally, I will finish off today's presentation by restating our full year 2023 guidance. Due to the strong revenue growth in the first and second quarter of 2023, we now aim towards a high single-digit growth in total revenue, with EBITDA margin at around 49% and CapEx at IDR 8 trillion. Largely allocated to further strengthening network quality and improved digitalization. With that, I conclude the presentation. Thank you very much.

Thank you, Ibu Dian for the thorough walk-through of the XL Axiata performance and strategy. Ladies and gentlemen, we will now move you to the Q&A session. As a reminder, the Q&A session will be on hybrid mode. [Operator Instructions] Okay. So the first question will be from Arthur Pineda from Citi.

Two questions. The first one is, what are your expectations for [indiscernible] entering into the second half 2023? Is there a room for further price increases? And the second question is, what are the margins for the Home business? How will general business impact your total margins over the longer term? And how well the Satu [indiscernible] contract is structured, and this will also answer [indiscernible] on potential with the price increases. So I would like to pass on the first to Pak David and then followed by Pak Abhijit and Pak Feiruz.

Okay. So thank you for the question. I think, we can see that our strategy of increasing the prices during quarter one has paid off. So we have seen an ARPU increase. We have seen the revenue increase significantly, and our customer base is still growing and is strong as well as the traffic. Now I will be very clear and direct answering the question. So is there room for further price increases? Yes. Are we going to increase prices further in second half? Yes. That is the plan unless again, I mean, if something very weird happens, et cetera. For us, it has played well. We believe that we have still room to go in that direction, and we have already planned price increases for this -- for the second half. I won't disclose when are we thinking on that, but it's already there. Because we truly believe that there is still room for it. Of course, we will always, as I will always say, we monitor what's going on in the market, and I'll play along with that, but the answer is yes.

This is Abhijit. I will take your questions related to the Home business. So the model that we have followed -- actually, let me take the last question first, and then I'll come to the margins. So typically, when you enter into a leasing kind of a model way, somebody is building for you and you are riding on the network as a tenant, there are multiple models we observe in the industry. First is the traditional Fiber Co model, where one provider builds the network, and there are multiple tenants. But there are other models as well where fiber providers actually go and build where we ask them to build. And we are the tenant for a certain period of time. Typically, there are 3 variables in these discussions. First is, what is the lease fee that we have to pay to the fiber provider. Second is, what is the minimum commitment of penetration that we commit to them. But the other variable is, what is the period of exclusivity that they give us. So in our case, we have deployed both the models in the market. We will continue to do so and evaluate what is the long-term feasibility of these models. Going back to your question about the margins. Given that we are not injecting our own CapEx into this business, it's a leasing model. Then what you would typically expect is that the margins are slightly lower as opposed to if you are injecting your own fiber and building it. At this stage, we are still evolving the business. So I cannot share a specific number with you, but we will come back to all of you in due course.

Okay. The second question will be from Henry Tedja from Mandiri Sekuritas. This is Henry. Congratulations for the strong results. Would you mind to share some updates on the mobile competition so far? And how we should look at the ARPU tracking on half of 2023 update? We have elaborated on the mobile convergence. Maybe you would like to add some, ARPU trend by Pak David.

Yes. So as I was saying, right, for us, the price increases that we did in quarter 1 played very well. Not only -- I mean, we did price increases in the market, of course, but we have also done a lot of effort with our personalization, trying to keep increasing the ARPU, taking out a lot of the freebies that we were giving. So it has been a bigger fault. And as I was saying, we are fully committed in keeping the price increases during this second half because we truly believe that there is further growth. Have we seen competition following during quarter 1 or even quarter 2 in the price increases? To be honest, we have not seen big movements from anyone in any direction, which it's not a marketing. So we have not seen prices going up, but we have not seen either any aggression or prices going down. So we believe that the market is now rational, and we believe that there is room for it to keep improving. We are going to move in the current direction. We are going to increase prices. We hope that the market goes in the same direction, because then the order of magnitude or the impact of what can be achieved will be much higher. So I think that's a little bit. Market is rational. There is room for more improvement in pricing. Our commitment is very clear that we are going to go in that direction during this second half.

Thank you, Pak David. I would like to check with Henry if there is any follow-up. Henry, you may unmute your mic.

This is Henry. Thank you so much for the answer. Perhaps if I might slip another one question regarding the home broadband business, would you mind to share some kind of the guidance? What will be the XL Home subscriber target for this year and also next year?

So Henry, if you will recollect that in previous calls, we had indicated an ambition that was north of 400,000 homes connected. Given the current rate of growth, as Ibu Dian elaborated in her presentation, we are fairly confident about that ambition that we had set, so which is around 400,000 homes connected for this year. Next year is a function of -- you see this market is a function of supply. We all agree that the demand is pretty strong. So as we move towards Q3 and Q4, as the partnership with Link Net crystallizes and develops, I think we'll be in a position to give a better indication of our ambition for 2024.

Okay. Okay. Thank you. Okay, we will go to circle back to Hussaini from UBS. He asked, why there is [indiscernible] when the first shop would be double-digit growth and also how much more investment in the state IT is required?

So, I will take the first question. So thank you, Hussaini for the question. So actually, the high growth that we achieved in first quarter is actually supported by [indiscernible] as David has mentioned. One of them is the price increase that we did in quarter 1. And the other is because that price is actually mildly adjusted when Lebaran is coming. So that's actually why the second quarter, we have a very good growth. Which -- this situation might not happen in the second half. So that's why for the second half, we still have to be conscious with the market movement and also for the macroeconomic situation. The other thing that's probably you might see from our [ FS ] is that the addition of the growth is also coming from the acquisition of Hypernet that has happened starting second quarter last year. I think the second question from Hussaini about the further price increase has been answered by David. Right?

Yes.

Okay. Hussaini, we will open the line for you if you have any further questions.

Congratulations for the good set of results. Just a few questions. Firstly, on the fixed broadband. Now, Pak Abhijit, 400,000 homes connected target. Any number on how many lines do you expect to connect or how many customers you expect by the end of this year? And the related question is on the competition that how do you see your competitors respond to XL expansion into fixed broadband? And any color on the ARPU as well, would help. And the second question is on the mobile side. Just wanted to check like while the competition remains rational, but do you see any impact of price increases on consumer spending or some rationalizations on their data spending and things like that with price increases?

So yes -- Any more questions?

That's it from me.

So thank you. I think your first bucket of questions, that 3 questions. The first one was how many lines? So when I say homes connected, these are actual fiber lines into the home. So this means our ambition is to have 400,000 fiber lines into the home. It's my understanding of what you asked us.

So Pak Abhijit, my question was more on the number of customers.

Well, it's a function of how many -- we consider a home as 1 customer set. And then depending on the number of individuals living in that family, which we also target through our XL Satu proposition, then we give the SIM card. So from customer definition standpoint, 1 home is actually 1 customer.

Understood.

Okay. So this is your first question. Second thing is competition. Look, all of us agree Indonesia is one of the most underpenetrated market when it comes to fixed broadbands in the region and perhaps globally as well. So it is quite natural that there is a significant interest from not only the existing players, the telecom operators, but there are other [ ISVs ] as well. And even on the supply side, we talk about Fiber Co, et cetera. So there is significant interest on that. So I would assume that any competitor or any player in this value chain who has an interest will expand all energy and effort to rather get a strong positioning in this market. Sorry, what was your third question? It was related to ARPU, right?

Right.

Observing is the -- we are in a phase of tremendous growth. So we are observing our ARPU is closer to 300,000. Now let's see how this develops. Typically, when the acquisitions are high and during the growth stage and competition intensifies, I think, this will naturally subside a bit. But as of now, we are near 300,000.

Okay. So let me take the mobile question, right? I think it was regarding like, okay, we have increased prices, what's happened to the customer base, whether we see any type of behavior change, et cetera. So as you can see, our traffic has still increased, right? And our traffic has increased because one thing that we have seen during the second quarter is that consumption per subscriber has increased very healthy. So one thing that we have seen is like, okay, our customers are consuming more. And that's a very good sign. It's true that when we increase prices, there are always movements among different buckets. Usually, a couple of effects usually happen when you increase prices. One is people tend to stretch a little bit more the packet that they buy. So we are already in very high numbers, right? But the percentage of the quota that they buy, that they use, it's very, very high, and keeps increasing whenever we increase prices. That's one thing that we see. Another thing that we see is also people tend to migrate a little bit to lower GB packets. So they can spend maybe a little bit more -- or buy packets that are a little bit more expensive, sorry, but that they can get a little more of gigabytes at rupia, right? So those type of effects we see. But again, those are normal effects that happen when you increase prices, but there would be -- that the traffic increases and the consumer per subscriber has increased. So I think, that's number one regarding the consumption. Number two, the number of subscribers. You can see also that our number of subscribers increase, and that's also healthy, which means that even with the price increases, we have been able to attract and our value proposition is actually good. Now -- and I want to also underline this because for us, it has been a very, very big effort that has started already a while ago, but in quarter 2, it has been big. And in quarter 3, it's even bigger, right, the push that we are doing. We are doing a very big effort in trying to -- let me use the word kill the negative EBITDA subscribers or the subscribers that we believe are not profitable for us because they are obviously either the packet or I will translate in more, if they use and throw behavior of the speed when we know that the speed is very expensive. So we are attacking that segment very strongly. We have been able to reduce the amount of let me call it unprofitable subscribers in big amount. And even with that, we have been able to grow the number of subscribers, which you can see that it's very positive, right? So I think answering to your question on price increases. Have we seen a big change in our behavior of our customers? No. Usual trends? Yes. Maybe they optimize a little bit more of the packet, they move here and there, but the consumption per subscriber has increased. The number of subscribers have increased, although we have attacked very strongly, and we are doing so. Now, what we call, unprofitable subscribers, which in a big part of them, it's like they use and throw -- SIM use and throw subscribers. I hope this answers the questions.

Yes. This is very clear, Pak David and Pak Abhijit. Maybe just one follow-up, Pak David. What portion of your revenue or subscribers this use and throw kind of behavior kind of subscribers are there or represent?

Yes. I cannot share a percentage of the total revenue, it's small. I mean, it's relatively small as you can imagine. And by doing that, what we are doing is to migrate these guys to vouchers. So what previously was use and throw, now they are becoming like longer tenure subscribers. So it's not a big percentage, and it keeps decreasing, right? And we are moving that revenue towards revenue that is much healthier revenue that is longer tenured subscribers. And it's much healthier not only because the delay is there, but mainly because we start to know these subscribers better and we can improve there are to be our personalization engine. You know that if I have data of a subscriber for a few months, I perfectly well know how to increase their ARPU, what they like, how they use, et cetera. On the other hand, if the subscriber is using and throwing the SIM card, it's very difficult for me to understand the subscriber. Because it's always like a new SIM card, a new -- like a new subscriber, right? So it has many positive effects this one.

Okay. The next question will be from Indra Cahya from Macquarie. His question is if can you elaborate on the BTS additions. Are these new sites or existing sites of our location? And geographically, where do you see better investment return for network expansion. We will start with Pak Feiruz.

I think with regards to the BTS additions, I think certainly, we were looking at more co-location because certainly co-location is faster time to market. I think that's key for us. Secondly, in terms of the areas that we will look, certainly, we are looking at areas where smart investments to our analytical engine, but there are certain pockets that we see growth not only in Java but also ex-Java, right? Maybe, David, would you like to add any particular areas that you see as well?

No. As Pak Feiruz was saying, right? So I think it's -- yes, it's more co-location, but we look to both, right? So we know where our coverage -- in the end, when we invest, we know where we need additional capacity. We know where we need additional coverage. Additional coverage can be complete greenfield areas, but it can also be in [indiscernible] where we are already there, but our coverage is not enough for us to let us compete properly. And we are very clear what is the -- let me put it this way. The amount of coverage that we need in order to be competitive. So some of the BTS that we are adding now will not only bring revenue to that new BTS, but it's going to support a lot part of the network that we have created in certain areas that currently because of the scale, it's still not there. So we are very positive that this new network that we are deploying is going to bring not only the impact of them by themselves but also the impact on the surrounding BTSs.

Okay. So we would like to open the line for Indra if there is any follow-up questions?