PT XLSMART Telecom Sejahtera Tbk

Good afternoon, ladies and gentlemen, and welcome to Excel AXIATA Earnings Conference Call for the 2020 Financial Year, ended 31st December. My name is Rohit, and I'll be your coordinator today. During the presentation, all participants are in a listening mode. Instructions will be given on how to register your questions when we get to the question and answer session. As a reminder, this conference is being recorded for replay purposes. Now, we would like to turn the conference over to our host, Mr. Inder, please proceed, sir. Thank you, Rohit. Apologies, everyone, for a bit of the late time. Good afternoon and welcome to the call today. On behalf of the Excel 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, Inder, 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 preferred critical care for the individual care. Our service revenue grew 6% year-on-year in 2020. Given by strong demand of data, due to the increasing digitalization of daily life, and as many Malaysians continue to work in this role from home. This was by 31% year-on-year. Over the same period, due to the revenue increase and cost-effectiveness, as well as IFRS system adoption, the EBITDA margin is now about 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. All players now have some form of unlimited offering in the market, respectively with the market leaders, increasing the ability of these unlimited plans across Indonesia. Progressive pricing is also seen across the smaller social data packets. Operators price the share of customer wallets, driving data yield 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 will also have a negative impact on and industry. Mass law and segment continues to see this demand because of the COVID-19 impact with many businesses struggling. So cost 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 a result of the measures we have put in place to ensure our business continues to perform well in the light of COVID-19 and its impacts to the business environment. These steps 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 industry faces today. This year, Our distribution has been achieved through digital, with more products being sold online and through our own channel. This comes as both our refund app, which is MyXL and AccessNet, both have seen good reception from our customers with 11 million active users and increased revenue contribution from this channel. This will be key going forward in allowing us to offer customized products and increase customer share interaction as well as such points while further increasing the revenue using rates from this channel. On the analytics side, we have further improved our capabilities in the year 2020 by establishing a cross-functional team to drive analytics decision-making across business functions. This allows us to improve our dynamic pricing model and customer-friendly management in our hiring channel, as well as our online channel offerings, to enhance our interaction with our customers, and remind competitors in a challenging market. Politically, XJava continues to be an extremely well-thought-out. It is growing well ahead of the Java growth age, increasing its contribution to our revenue to around 25% in 2020. Our investments that we have made are delivered in return and stay in line with what we had initially planned. In 2021, we will continue to invest in Ex-Jaffa, guided by our operational experts' principles and strategies, and ensure that we can continue to grow and deliver returns for our stakeholders. Our network rollout and upgrades continue to be on track, and thus, we continue to roll out networks on schedule. Our GDTFs count now above 144,000. For GDTFs in 158 cities across Indonesia, it's more than 44,000 for GDTFs. We also continue to fiberize our networks to manage the actual state growth of data traces. and ensure our customers will continue to enjoy this network experience. Our balance sheet is strong with net debt to a data of below 1x. We have no U.S. dollar debt, and we have also secured committed facilities with the bank that we can test anytime we see additional findings. This is important today deepen 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 on COVID-19, on rising unemployment and lower income for men in the region. After the impact by competition in the short-term, it is likely to impact the long-term investment growth. As a result, we see opportunities in the medium to long-term and demand for data systems to grow with an increased digital way of living and working. Industry customization will also be of positive if this happens, as it will reduce the competitive intensity and improve the pricing dynamics due to less players in the market. The only backload which was passed at the end of last year will 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 the central area and allocating that capacity to 40. As a result, in this past quarter, we have reduced the useful life of our 3G access, taking a one-off depreciation charge to reflect that. This makes our assets less more reflective of the underlying state, and this will reduce our depreciation charges going forward and further improve our profitability. In line with our professional excellence strategy of monetizing our non-core assets and further strengthening our balance sheet, we have also started doing a sale and lease back of our PicoCell site in past years first. We have both completed the sale of 143 sites in the past year and are looking to sell around 500 T-Costal sites in total in 2021. Finally, we would like to introduce our guidance for the year. In 2021, we are guiding for revenue growth to be in line with market. We become margin in the low 50% and capped to be around 7 trillion for the year. Thank you, and let us proceed to the Q&A session. All right, can we have the Q&A?

Suddenly, sir? Ladies and gentlemen, we will now begin the question and answer session. To ask a question, please press star 1. To cancel, please press the pound or hash key. Please kindly but strictly limit your questions to only two and to allow other participants to raise their questions. Should you need to ask more questions, you can go back to the queue by pressing star 1 again. We shall end the conference call sharp at 3 p.m. Jakarta time. Once again, it is star one to ask a question. Kindly note, as there might be a slight pause as the questions have been correlated. We have the first question coming from the line of Piyush Chaudhary from HSBC. Please go ahead.

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

Okay, so David here. I will take your first question regarding the growth in X-Java. So, Java versus X-Java. So, 2020, we have grown both in Java and X-Java in the three years. The X-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 declined for both areas because the competitive aggressiveness and the market difficulty has been all over Indonesia. But again, the ex-Java has behaved much better performance. So it has given a better performance than the Java one. I will answer the second question. I'm sorry, there is a lot of echo in the noise.

I can't understand properly. Sorry, the line is not very clear.

Is it more clear now? Can you hear better? little better but there's no 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 and 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 one one more time Yeah, sure. OK. OK. Anyway, so I was talking about the Java x Java. So for 2020, we have grown. Both areas have been positive growth. Xjava 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 Xjava, one order of magnitude bigger. Now, Waterfall has been declined also for both areas, although Xjava has performed almost flat, so has been in a slight decline, and Java has been the one who has declined a little bit. So overall, both in quarter four and in 2020, the X-Java performance has been significantly better, and it's been much better than the Java one. Now, regarding the profitability, I'm going to let Abubi, our CFO, to answer it. Hi, Abubi.

Could you hear us?

Yeah, it's better than before. Thank you. Okay, okay, yeah.

Okay, I would like to answer that question related to X-Java profitability. We don't really disclose the details, but just to give the high level, X-Java is not yet in a positive position, but they are a degree of investment that we did since 2017, or we start profitable, or in the positive numbers. because we will continue investing in Xjava. As we discussed before, we continue with our all-year approach. We continue looking at the payback and return. In Xjava, we will be aiming for a return between three to four years, around three years in our all-year approach in Xjava. I hope that answers your question. And the second question, related to 3D test, timeline, there are two things in this 3G shutdown. The adoption of the market and also our own efforts. So, this is the timeline for how fast we're going to do this shutdown. But, to give guidelines, we're looking at one to three years horizon, maximum to two and a half years. Those are the guidelines that we're looking at. Again, the reality, when we're going to shutdown, 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. I hope that answers your question still.

Sure. Thanks a lot.

Thank you. We have the next question. This is coming from the line of Arthur Pineda from Citigroup. Please go ahead.

Hi, thanks for the opportunity. Two questions. First, in the revenue side, what's driving the drop in revenues Q&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 undergeared. What are the expectations on the dividend? Thank you.

So I will answer to the first question regarding the revenue drop in the fourth quarter. So on the revenue and the ARPU you're asking. So I think there have been a couple of factors, two, three 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 shutting. So I think that's a given for everybody. now on top of that i think there have been another two additional factors that have impacted our performance the first one is the competition aggressivity so as we have thought 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 that was the government school program which, via the subsidy, we also lost some of the ARPU of our own customers, plus it had impact on some of the customers that we have that now are dual simmers, and the ARPU also decreased. So I think those two 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 declining in quarter four. I think that was for the first question. I will let Abubi 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. Hello?

Sorry, we lost the line.

Yeah, can you hear me now?

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

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

Normalized net income.

Understood.

Do you hear me?

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

Yeah, 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've been looking at the final decision on that decision distribution.

Understood. Thank you.

Yeah.

Welcome.

Shall we move to the next question, sir? All right. The next question comes from the line of... Pardon me, sir. Shall we move to the next one? Yes, next question, please. The next one comes from the line of Sachin Mittal from DBS. Go ahead.

Hi, thank you. Two questions. We saw data yield decline almost 11% quarter-on-quarter to almost 3.9%. So the question is, which are the plans which you had launched, which actually kind of brought the data yield so low. And again, the question, the question is, are we seeing a bottoming out of the, 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 stays at the current levels, what are your expectations of the industry growth for revenue for FY21 and for yourself? Any color will be good, thank you.

So David here, I will answer the two questions. So regarding the first one, we 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 programs subsidized by the government. The school program, as you know, is a program where the data package is high, it's big, and the yield is very low, which has driven down our data yield. So the government package, the school government package, has had impact in declining our yield. It also has an impact in the ARCU. Why? Because you will see that many of the operators, I am sure that during this quarter four, will announce increase of a number of SARs. That means that the number of dual shimmers has increased, mainly according to our analysis because of this program. This has also had an impact in the ARCU going down. So those are, we believe, the two factors. the two 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 two programs. 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 is that 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 CBN capabilities, so our own customer optimization, app optimization engine in order to focus on that. Now, given that, the current context, what is our perspective on the market? We believe that the first half will be bad, so we expect that there will be a slight, mild growth during the first half. because of two reasons. Again, one will be the pandemic that 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 the economical situation can improve and also because of some external factors as potentially industry consolidation or competition rationalization in the aggressiveness. I hope that I answered both the questions.

Yes, thank you. Thank you very much.

Thank you. We have our next question. This is coming from the line of John Peng. Fong from CIMB. Please go ahead.

Hi, this is Fong here. Thank you so much for the call. Two questions from me. Firstly, I wanted to ask about the EBITDA margin guidance of low 50s, 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 7 trillion rupiah 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 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 $7 trillion, although I'm happy to see that number. Thank you.

Hi Phuong, thanks for the question. The first one is related to Our EBITDA margin deadline, right, the low 50%. So we confidently will hit those figures because we still have a few areas on cost savings, mainly on, for example, like our big renewal. We have around 30% of our power will be due in the next few years. Also expect some on other area like sales and marketing because we grow more digital, as David mentioned. There are also some upside, unfortunately, mainly on the frequency fee. We just extend another 10 years of our spectrum, and the fee has been increased quite significantly, like around 10%. So this impacts our overall EBITDA margin. Okay, on the second question related to our CAPEX guideline, $7 trillion, whether it's enough or not, I think that's your real question. For us, we still believe that $7 trillion would be still enough. That will be to the level of the intensity that we have, that we've been trying to hold as a guideline. So the CAPEX will be focusing on and other businesses that we have. I hope that answers your question, Kong. And also, another point on that $7 trillion, we will continue with our strategy on XJava. 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, that's why we start putting Plastu in terms of growth. That's why we're going to continue with our XTR partner.

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?

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

Yeah, I think we've been saying that we will grow the market. So I think that's the guideline that we're giving. So I think after you can come back and estimate what will be the future that we're looking at. As you know, the industry is growing based on the GDP growth of the country. So there are a lot of assumptions right now floating around about an impact growth in 2021. So they will pick up the most close and most reasonable assumption on the growth.

Okay. Thank you so much, Pakwudi. Thank you.

Thank you. We have our next question. This is coming from the line of Prem Jairajasingham from Macquarie. Please go ahead. Hi, thank you for the opportunity. Just one comment before I ask my questions. Your line is very, very bad and we can hardly hear you. So I'm going to ask my questions and hopefully we can get some clear answers. First of all, what is our strategy around retail broadband? And do we think that we need to ramp up coverage on this more aggressively? And is there room for us to actually make an acquisition to fulfill this demand? The second question is, how much of a window of opportunity in terms of time frame do you think that we will have when Indosat and Hutch actually do merge? Do you think there's a 12-month or 24-month window for you to take some share in that period while they're merging. Thank you. Yeah, hi. This is Abhijit. I will take the first question that you asked about the retail broadband. So as you must be aware, we entered this space about a year and a half ago with the intent of tapping the opportunity in the market. The strategy is still the same. We intend to scale our presence in the market. So far, in the past year and a half, we have reached around 550,000 home spots, and we have seen a very good response.

On our footprint, we have exceeded penetration of 30%. So the intent now is to continue progressing along these lines. and explore options with our shareholders on how to scale.

Did I answer your question, or was there a second part to the first question as well? No, that's good. But how much further do we think we can scale up, and should we consider M&A to get this number up considerably from here?

So how much to scale up is a function of one's appetite, right? Because we are talking about a market with less than 10% penetration. Sorry, just bear with me for a second.

Sorry, I can barely hear you.

Shall we move to the next question, sir?

Sorry, I was answering the question about... I do apologize.

We continue facing some technical challenges, but hopefully you can hear me. So I was answering the question about how much do you scale, right? It's a function of what appetite you have, because we are still talking about a market with roughly around 10% residential broadband penetration. So yes, the ambition to scale is definitely there. And you also asked me about a potential acquisition. To be honest, at any given point in time, anybody is talking to anyone. I don't think we can comment on any speculation on this.

Hello, Brent. Just a second question. Can you hear me clearly? Slightly better, yes. Hello? Okay. So you are asking about the potential merger between Indosat and Hatch, and how long the window? Before answering that, let me actually explain what we think about the merger. So we are positive about the merger, as I mentioned in the opening speech, that if it happens, this will reduce the number of players in the market and result a more healthy industry structure in the future. But we actually learned from our previous experience when we acquired Axis, that such a merger will require quite some time because the merger core will actually integrate the two different networks and then two different IT systems, two different channel networks, different brands, and so on and so forth. So it will take quite some time, and we see a short to medium-term opportunity where we can grab market share while the integration process is ongoing.

Thank you.

Did you say two years or do you think it's less than that?

Actually, there are two possibilities, right? If it's going well or if it's not going well. I should say probably between two to three years.

Okay. And do you feel that Excel would be willing to go and acquire or merge with someone else to make ourselves even stronger? Or do you think we are fine the way we are?

Yeah, so actually that question probably is better addressed to Asiata, but what we understand is Asiata as a shareholder is always trying to find opportunities in doing merger and acquisition because they understand that it will improve the industry structure situation.

All right. Thank you. All right. Thank you. We have our next question. This is coming from the line of Alex Goh from AM Bank. Please go ahead. Thank you for the opportunity. And I do have to agree with what Prem said. The quality of the conference call this time seems to be quite bad. I couldn't make sense of what was going on. My first question is regarding your data revenue in the fourth quarter. It was down 4% quarter on quarter. What was the reason for that? And my second question is on the IFRS impact in 2020, should we continue to see the high depreciation and finance charges in 2021? Or are there any one-off lumpy items in 2020 that we should need to offset? And the third question is regarding your effective tax rate for this year. Given that 2020 was a positive charge, should we expect a normalization in 2021 or should it be a lower rate? Hello? Hello? Alex, can you hear me? Yes, I can. Sorry, could you just repeat the question again? Sorry, we were having a bit of trouble hearing you. Can you repeat the question again, please? Okay. Your fourth quarter data revenue had dropped 4% quarter on quarter. What was the reason for the drop? Or is it a one-off seasonal event? The second question is on the IFRS 16 impact on your depreciation and finance costs. Should we expect these elevated numbers in 2021 or is there any one-off items in that 2020 numbers? And my third question is regarding your effective tax rate for this year, given that last year was a positive tax charge. Should we expect a normalization this year or should we still be much lower levels for this year? Alex, so I will answer your first question regarding the drop on quarter four, the revenue drop on quarter four. So we believe there are different factors to it. One factor is the macroeconomy, which the pandemic is still having an impact, and the purchasing power of our customers has decreased. That's one. Number two is the competition aggressiveness. So as we have been talking about, you have an incumbent who has changed their commercial strategy massively in the fourth quarter, going to much lower prices and entering value propositions like unlimited or short value, really low denominations. that previously they were not doing. So that's the second one. And there is a third factor, that is the school program subsidized by the government, which created many dual-teamers, but it's supposed to add to cannibalization of our own customers as well. So we believe that those three factors have impacted us in the fourth quarter in order to take the decline that you can see. Regarding the second question, I will let Budi, the CFO, answer. Yes, Alex and everyone, we do apologize on this technical issue, but we can assure you nothing to do with our network quality. It's not on the technical in this office. Alex, can you still hear us? Just want to make sure that you can hear us clearly. I'm afraid I can't quite hear, but maybe I will... I will email Inda later on this. Thanks very much.

Alex, can you hear us?

There's still a lot of echo. I don't know why.

Hold on, hold on. What about the rest of the audience? Can you hear us?

Can you hear us?

Shall we move to the next one, sir?

Yeah, let's try the last question. I think what we'll do is answer Alex's question first. Hopefully the rest of the participants can hear, yeah? Let me try to answer. Yeah. So I think the second question related to impact on IFRS 15, yeah, whether it's one time off or is it going to come again? It's only one time off because we adopted that IFRS 15 in 1st January 2020. So it won't come back. The impact on the financial cap is $402 billion that you see in our chart. That one only happened in 2020. So going forward will be business as usual. All numbers will be of personal difference. I hope that answers your question, Alex. I see, okay. So what numbers should we be looking at for 2021? I mean, how much do you think the depreciation and financials will drop if you compare to 2020? The number one, in terms of whether the financial chart will be dropped or not, or the depreciation will be dropped or not, on the financial chart, yes, it will depend on the interest rate that that are in the market, that will be. And also the investment on this thing that we're going to do, that will impact the financial charges. In terms of depreciation, again, depending on our capitalization, right, on the $7 trillion, that will impact the numbers. I cannot really give you the guideline on how much the number is going to be. Okay. Okay. Yeah, the third question is regarding your effective tax rate. Given that last year was a positive tax charge, I mean, what I mean is 2020 was a positive tax charge. This year, should we be expecting a normalization of the tax rate or will the tax rate be lowered significantly than what is your normal corporate tax rate? Yes, we are right now at 20-22%. That's the effective tax rate that we have. If you look at 2020, you should look at the detail of the structure of that tax number that we have in our financial. They have a detail of that one, have detail on which one is 22% and which one is the impact of other figures related to tax. 2021 will be roughly the same at 22% tax rate. I see. Okay, thank you so much. I think, Rohit, let's try the last question from Arthur. If it's possible to bring him up. Right. We will move to the next one. The next question comes from Arthur Pineda from Citigroup. Please go ahead.

Hi, sorry. One follow-up question just to comply with the two questions limit earlier. If Indosat and Hutch do end up merging, how do you think this will affect the longer-term competitive position? Would you need to ramp up on network upgrades? Would you need to look for other M&A options? I'm just wondering why there is such conservatism on capital with 30% payout, given that your parent, Akshata, had stated a desire to become a youth play anyway.

Thank you for the question. Yes, it is true that with the potential merger between Indosat and Hatch, it will position us into the number three position. So we are currently looking into our long-term plan, and at this point, we are not able to share you or disclose that. So we are assessing any possibility in actually defending our market position in the industry. However, we are confident in our company's ability to compete with the merge entity. And also, as I mentioned before, we see a short-term opportunity because the merger will require a lot of activities in the region and so on and so forth. So we will come back soon. in terms of our long-term plan if the merger happens. Thank you.

Understood.

Thank you.

Okay, I think we'll just close it here. Again, everybody, I apologize for the audio quality today. I think we're having some technical issues. But nevertheless, everybody, please get back to me. You know where to reach me if you have follow-up questions, and we'll address them. So thank you, everyone, for the call, for your participation today, and we'll speak to you next quarter. thank you that concludes today's conference call all lines may disconnect now