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Edited Transcript of DIGI.KL earnings conference call or presentation 28-Apr-17 7:00am GMT

Thomson Reuters StreetEvents

Q1 2017 DiGi.Com Bhd Earnings Call

Selangor Darul Ehsan May 3, 2017 (Thomson StreetEvents) -- Edited Transcript of DiGi.Com Bhd earnings conference call or presentation Friday, April 28, 2017 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Albern Murty

DiGi.Com Berhad - CEO

* Karl Erik Broten

DiGi.Com Berhad - CFO

* Loh Jiat Keh

DiGi.Com Berhad - CMO

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Conference Call Participants

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* Alex Goh

* Arthur Pineda

Citigroup Inc, Research Division - Director and Head of Pan-Asian Telecommunications Research

* Choong Chen Foong

CIMB Research - Analyst

* Gopakumar Pullaikodi

Nomura Securities Co. Ltd., Research Division - Regional Head of Telecommunications Research

* Pang Vittayaamnuaykoon

Goldman Sachs Group Inc., Research Division - Research Analyst

* Prem Jearajasingam

Macquarie Research - Analyst

* Roshan Raj Behera

BofA Merrill Lynch, Research Division - Analyst

* Tzu Zhung Chan

Crédit Suisse AG, Research Division - Research Analyst

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Presentation

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Albern Murty, DiGi.Com Berhad - CEO [1]

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Hi, everyone. Good afternoon. Welcome to the DiGi First Quarter 2017 Conference Call. Thank you for all of you who are dialing in and joining this call. Standing with me is the management team. Particularly with me here is Loh, the CMO; and Karl Erik, the CFO. As far as the discussion, I will give key highlights and then I will hand over to both the CFO and the CMO, they want to give you the updates, and then they're going into the financials with Karl Erik. And then we, as usual, we'll take questions and answers after that. Please allow me to begin.

We started 2017 with stronger margins and solid postpaid growth. But we did some see some decline in prepaid year-on-year. Strong focus on internet acquisition and profitability of (inaudible), with 15.2% stronger internet revenue. We have improved profitability with 2.5% higher gross profit, and 1% higher with the margin improved by 2.66 percentage points, 2.5% compared to the same period last year. We also registered a postpaid revenue growth of 12.1%. Prepaid revenue (inaudible) its software as approaches on the company's bigger challenges. I would (inaudible) to step up - step over it from lower margin prepaid segment. This will result then (inaudible) and defined top line fixed expense (inaudible) substantiated by stronger profitability.

On the operations side, we built a robust asset subscriber base that which now stands at total 7 million, approximately 60% of smartphone subscriber base. Our new MyDigi app, with enhance [configurable] (inaudible) features, is now a (inaudible) with 1.7 milliion active users, and continues to be a new way to set up customers on a daily basis. (inaudible) that we continue to make solid progress in our deliver the digitization journey. We took some (inaudible) includes the (inaudible) online store. The first Malaysian mobile operator to do this and we will deliver better feature experiences going forward for our customers.

(inaudible) Q4, we also commenced work on spectrum (inaudible) completed the coming exercise (inaudible) in Q1. This means that we are going to activate (inaudible) who wants to register (inaudible) very soon. I will hand over to Loh to discuss the business performance on the prepaid side. (inaudible) As you know, we have to protect the margin. That goes to the lower-margin segment. It could be challenging during that period (inaudible) that can create big margins in Q1. (inaudible) to drive growth in the lower-margin segment. (inaudible) increasing headwinds in every segment. The reason because (inaudible) while (inaudible) comprised this segment accelerated (inaudible) subscriber (inaudible) to about 5 or 6 million, all (inaudible) fiber optics applied, we believe that the increase will -- is the strongest (inaudible) and is focused around margin and margin protection (inaudible) going forward. I will now hand over to Loh to go through the business development.

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Loh Jiat Keh, DiGi.Com Berhad - CMO [2]

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Thank you, Albern. Just to get through to the next part. (inaudible) the company could see a solid growth in the data, especially the LTE. If we look at the 4G data (inaudible) constantly growing year-on-year and consecutive growth for third quarter. Then the LTE penetration has reached 60%, while at the same time, this has (inaudible) placed year-on-year internet revenue growth of 15%. So I'll take you to the next slide is (inaudible) so what we have been doing in the last 3 quarters on postpaid is we continue to strengthen the entry-level 4G bundle. And this has (inaudible) bring more because of the 4G as well as the (inaudible). And at the same time, we have strengthened the value propositions for the more high-end users surrounding on roaming offerings and we actually offer the free roamings and (inaudible). A few highlights on this is work on the channel expansion and saw the digital customer experience (inaudible) pricing. I think this is support and also the reach are equally important at (inaudible) postpaid growth which we feel that (inaudible) basically the right focus and just how we have continued to be able to grow the postpaid much faster in the industry. (inaudible) on the prepaid, while we are looking on the postpaid at the same time in Q1, we also repositioned both our prepaid option from more to the Internet. So if you look at it today, we have 2 offerings of prepaid in the market. The LiVE is mainly targeted on streaming and mainly for the (inaudible), whilst the prepaid sets are mainly for the Internet (inaudible). And at the same time, these changes (inaudible) streamlining and refined set of internet portfolio, accounts with the daily, weekly and the monthly subscription which we feel that is relevant to the Internet users to adopt Internet and also easy for them to buy more. So we finished (inaudible) and we also strategically made a decision to change the growth strategy in Q1 and that way, we have seen in Q1 we had a lesser drop that's also in the (inaudible) which I will cover a bit later on the (inaudible) Q1. (inaudible)

So focusing on the mobile Internet of the prepaid segment. We continue to rationalize the low-margin IDD and also some of the third-party content for research (inaudible) use the Internet to research to the (inaudible) So I think you -- at the right price, we can look at the prepaid development so we could change in the growth strategy, so there's as a result, help with the lower growth and debt pay is achieved impacting the top base and the drop from MYR 10.2 million to MYR 9.5 million and with a relatively stable (inaudible). At the same time, (inaudible) now on the low margin, the fixed revenue from the (inaudible) linear base and a more targeted transact so we are can (inaudible) to the work on the mobile Internet within the bigger space.

I'll take you to the next slide on the fourth page. I thought I'd share earlier with the right focus and things that we do over the last few quarters on the business so we continue to see fairly healthy growth in both subscribers as well as the revenue. And this way, we are going to continue to (inaudible). So I appreciate the time and the (inaudible) a overall view on the branded of (inaudible) so weaker revenue (inaudible) from the prepaid but the postpaid is basically is what (inaudible). I think that's the basis on what is happening in the Q1 from the market besides the revenue development. I'll hand over to Karl Erik to share with you a bit more on the financials.

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Karl Erik Broten, DiGi.Com Berhad - CFO [3]

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Thank you, Loh. So then moving to our cost development. And we continue to demonstrate the supreme cost management with 10% year-on-year and 6.9% quarter-on-quarter improvement on total cost. Cost of goods sold improved 23.5% year-on-year and 9.5% quarter-on-quarter, mainly due to lower traffic volumes from legacy prepaid services, as well as more favorable traffic cost development. Gross profit strengthened to 45% year-on-year to MYR 1.2 billion although sequentially lower due to relatively higher demand for 4G-bundled devices. Excluding the shared site rental cost which was included only from second quarter 2016 and onwards, absolute OpEx remained relatively flat year-on-year, although core operations were significantly expanded with larger 4G+ network footprint and more advanced WiFi capabilities on a year ago. It's in line with our ambition to be the most cost-efficient operator and we will continue to expand our network and IT capabilities but at the same time, drive efficiency across the organization to show we have caused the improvements without losing competitiveness.

OpEx for the quarter ended 4.8% leaner sequentially, consistent with the moderated service revenue and improved operational efficiency.

Now moving to profitability. We delivered improved profitability on the back of a stronger gross profit, alongside a well-managed cost structure. Year-on-year EBITDA strengthened 1% to MYR 711 million or 45% margins. (inaudible) to service revenue declining of 5.6%. Profit before tax stood at MYR 510 million net after accounting for progressively higher depreciation from a robust annual investment in network and IT infrastructure capability. PAT remains healthy at 24% margins or MYR 373 million, steady quarter-on-quarter as effective tax rates retrace back to corporate tax rate levels.

Operational cash flow remained strong at MYR 514 million or 33% margin an uplift of 2.6% sequentially alongside with a 15.2% higher CapEx at MYR 197 million compared to the start of 2016. Business plans to complete the spectrum refarming exercise and the deployment of LTE 900 megahertz site. With the refarming and deployment completion entries for LTE 900 megahertz network is ready to support customers with better network quality and capacity to complement our existing 4G+ network.

For 4G and 4G+ network coverage remains very familiar to end 2016 but with a stronger fiber networks, spanning over 7,600 kilometers nationwide.

Moving to the balance sheet and shareholders return. Earnings per share for the quarter stood resilient at 4.8 sen, same level as previous quarter. The board declared first the interim dividend of 4.7 sen per share, equivalent to MYR 365 million, payable to shareholders on 30th of June, 2017. Total assets strengthened 16.4% from a year ago, with the inclusion of the MYR 598.5 million advance payments for the 900 and 1,800 megahertz spectrum and continued investments to support DiGi's 4G+ network expansion.

DiGi's net debt-to-EBITDA ratio remains stable at 0.7x while balance sheet continued to demonstrate solid financial capability and flexibility to fund immediate as well as future investments and operational commitments.

Post first quarter 2017, we raised MYR 900 million funding through the shares of Islamic Medium Term Notes, the IMTN, in 3 tranches of MYR 300 million each or 5 years, 7 years, and 10 years tenure as part of the MYR 5 billion Sukuk programs. With AAA IMTN, issuance was fully subscribed with favorable coupon rates. And with the establishment of diverse funding to complement our existing funding facilities, we are now well positioned to fund investments in data and digital growth opportunities, as well as future investments in strategic assets and spectrum. And we are committed to manage a prudent net debt-to-EBITDA of below 2x in the next 3 years.

I will now hand over back to Albern to share on our growth rates and outlook.

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Albern Murty, DiGi.Com Berhad - CEO [4]

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All right, Karl Erik, thank you. First basically on then moving on to the next couple of slides, we will talk a little bit about our digital ambition and what we've done. As we mentioned before, part of the strategy was to move into people -- sustainable future providing customer experience. It stands now completed, the all new MyDigi app version serving close to 1.7 million customers which is also integrated, particularly lifestyle, exclusive deals and personalized offers together with that service. In our channels, we've also changed our entire channel through a mobile sales app for dealers and just in our old channels, including self-serve kiosks at Digi Stores and also all new electronic queue systems for customers. Active customers, as I mentioned, on MyDigi is continuously growing, that's at 1.7 million today and we believe that we've been able to take a core position when digitizing our customer experience when they start to engage with us. On the network side, the whole campaign around Freedom to Internet focuses around 4G and 4G+. We have taken a little bit of a position on 4G advance and 4G+ and we continue to invest in both the network of 4G and 4G+ every product. LTE subscriber growth of 63.1% year-on-year and data traffic result surged driven 1.3x year-on-year compared to (inaudible).

Moving from customer digital experience (inaudible). We have taken a couple of (inaudible) the market, including we have (inaudible) the Handy device locally, as well as an IT solution after the business-to-business solution. For 2017, 2017 looks -- remains challenging from a market perspective. We will continue to intensify and deliver our strategic focus in the following areas. We will continue to focus on Freedom to Internet with 4G+ networks, focus now on delivering a better customer experience and network, leveraging on the 900-megahertz spectrum that will allow streams (inaudible); stronger operational efficiencies to deliver best value and affordable products; driving profitable revenue growth and this remains as a focus area to ensure that margins and profitable growth is sustained; and then continue to engage the digital product, both in the customer perspective and also for the businesses. On CapEx, our commitment on CapEx will be reviewed periodically on a dynamic basis, and we will make the necessary adjustments when we see it necessary. Q1 CapEx was as planned and we're happy with that achievement.

Our CapEx for 2017 remains (inaudible).

With that, I will conclude the presentation and open for Q&A, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Mr. Kumar from Nomura in Singapore.

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Gopakumar Pullaikodi, Nomura Securities Co. Ltd., Research Division - Regional Head of Telecommunications Research [2]

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This is Gopak from Nomura. A few questions on prepaid, sorry. Firstly, the slowdown in the segment with the new strategy, when do you expect some stability here? Secondly, (inaudible) not to mention multiple reasons for clearance price declines and competition (inaudible) pressure or from -- and due to pre to post migration. May I know (inaudible) which will drive (inaudible) price cutting by other operators in the segment (inaudible). And lastly, if you really look at the prepaid data revenue, that seems to be down also, can you please help me what's driving this?

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Albern Murty, DiGi.Com Berhad - CEO [3]

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Hi Gopak, this is Albern. Thank you for the question. First on prepaid slowdown in the segment. I sort of rethink what I talked about. A couple of quarters ago, we needed to reinvest. We were not able to sustain profitable margin and profitable growth given that we've already seen in the market in terms of competition. So yes, there was competition within -- on low-margin margin segment. I think we maybe mentioned before was the IDD and we have moved away from that. The competition still remains intense in that area. The competition on data is also still very prevalent. So very strategic, probably the areas where at least with those challenges. However, if both have strong prepaid data going forward, we have now clearly identified segments now where prepaid growth prepaid internet is critical and secondary approach (inaudible) happen again (inaudible) free cellphones.

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Karl Erik Broten, DiGi.Com Berhad - CFO [4]

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Just on the specific data, obviously if I look at the numbers, there's a [3 to 4] one of the factors. So whatever remaining is sitting in our today prepaid rate today. We are happy with it and we'll continue to work on the product portfolio in order to monetize the mobile internet revenue a lot more effectively.

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Operator [5]

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Our next question comes from [Thiosh from IGS VC] in Singapore.

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Unidentified Analyst, [6]

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I just want to understand firstly, what changes do you expect in the second half (inaudible) in being stable, (inaudible) there? So any color will do. And secondly, if you can talk about during a discussion that you're looking on some reallocation or option and allocation of (inaudible)?

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Loh Jiat Keh, DiGi.Com Berhad - CMO [7]

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Thank you for the question. I'll take the second question on spectrum and then we'll come back on the first from those. Within spectrum, there's no intention yet on spectrum coming for, I think you mentioned 700, I hope I heard you correctly. But you we will completely engage the regulators on that. For us, I think what has (inaudible) and seeing the way that such an allocation for the 900, 1800 was done. And as mentioned previously, I think we can see that the same process will be followed for any future spectrums allocation going forward.

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Albern Murty, DiGi.Com Berhad - CEO [8]

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Back to the first questioning, on the prepaid side, if you look at (inaudible) the last year maybe correcting the margin. But if you look at the last 2, 3 quarters, the growth activities in the prepaid scene is -- it feels very, very aggressive in the market. And one of the main reasons for the Q1 development is (inaudible) the high growth (inaudible) in Q1 who wish this correction. I mean, there's more reasons not to believe the revenue and the base are (inaudible) will be a lot more stable. I mean, so that's it.

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Operator [9]

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Our next question comes from Foong Choong Chen from CIMB in Malaysia.

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Choong Chen Foong, CIMB Research - Analyst [10]

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Foong from CIMB here. Three questions for me. Firstly on the 900 megahertz refarming in the LTE 900 deployment, is that deployed across all your sites or is it just partial sites? And can you provide more color on the network coverage and quality improvement that your subscribers can expect to experience once you turn the switch on? That's my first question. Second question on the prepaid revenue pressure. I'm just trying to understand if that is -- a lot of that has got to do with the IDD segment because a very big drop in your traffic cost. So I'm just trying to (inaudible) that corresponds with just the revenue decline because of IDD. And on the postpaid side, the net adds continues to be quite good. So how much of that is coming from your own customers migrating from pre to postpaid? And how much are coming from new subscribers?

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Loh Jiat Keh, DiGi.Com Berhad - CMO [11]

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We'll take the network question first and then we'll come to the commercial.

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Albern Murty, DiGi.Com Berhad - CEO [12]

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Let me just start off with our current solution on 4G and 4G+. In 4G, currently we are trending at 85% total coverage, and for 4G+, we are at 42%. So I think we are now quite active in moving on the 4G and 4G+. Coming back to your question on the 900 megahertz. Effectively, we will reach out to all of our sites but we are now taking a very positive approach to our second half of the year where we (inaudible). We will be addressing key areas that we see we get the biggest bang for our buck.

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Operator [13]

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Our next question comes from Ms. [Pang] from Goldman in Singapore.

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Loh Jiat Keh, DiGi.Com Berhad - CMO [14]

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Sorry, they're addressing the second part of the question. (inaudible) Karl Erik.

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Karl Erik Broten, DiGi.Com Berhad - CFO [15]

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Yes I think if I understood the question correctly, it was related to the revenue growth on prepaid, if it's related to also the traffic cost decline that we see and yes it is. It's mainly (inaudible) international outgoing traffic that is declining year-over-year, and this is low (inaudible) you say, revenue for us. And quite evident than we are able to (inaudible) growth on gross profit year-over-year.

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Operator [16]

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Ms. [Pang] please from Goldman Sachs.

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Pang Vittayaamnuaykoon, Goldman Sachs Group Inc., Research Division - Research Analyst [17]

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Maybe just to clarify a little bit more on the traffic cost. It seems like year-over-year you mentioned that fall off is mainly on the fall in prepaid revenue. Do you -- how do you -- how should we expect it to trend forward in the next few quarters and (inaudible) being that the base here is (inaudible)? And also secondly on the new plan that you the pending launch with unlimited data plan, do you need to see like more like color and why exactly do you want to move on to it like unlimited data plan? And how do you deal with expected network quality going forward?

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Loh Jiat Keh, DiGi.Com Berhad - CMO [18]

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Thank you for the question. And we launch for third quarter related to traffic cost going forward. I think traffic cost is definitely (inaudible) favorable in this quarter due to that we have been able to negotiate more (inaudible) good termination rates. At the same time, we have seen also volumes coming down. I think there is also an element of how the rest of the ringgit will develop going forward with this (inaudible). But we expect to still see (inaudible) favorable traffic rates. And we don't really see that it is historical levels of traffic volumes which come back at least our legacy services (inaudible) related to the prepaid.

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Albern Murty, DiGi.Com Berhad - CEO [19]

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On the second question, the unlimited trend [for starters], I think the unlimited offering is already in the market, and least the last 2 quarters. And the reason -- and they are doing this menu open for the utility online channels. And at the same time, the entry level is fairly high, and we will expect they will be more (inaudible) than downgrades. But at the same time, based on the subscriber that we have so far because there is also a fair usage policy in terms of tethering, and so we don't see any major abuse or anything on this plan.

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Operator [20]

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Our next question comes from Prem from Macquarie.

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Prem Jearajasingam, Macquarie Research - Analyst [21]

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A few questions from me please. Firstly, with regards to your -- the change in your accounting for capital. Could you explain why you've done this one? Could it be a prelude to some form of a bonus issue or that would allow you to even upstream more cash to shareholders? That's number one. Number two, with regards to cost initiatives, I mean, I must commend you on a great job in controlling costs despite the fact that your revenues have essentially gone back to what they were 4 years ago on the service revenue level, at least, you've been able to keep your EBITDA. How much more cost do you think we can take out of these revenues over the next 12 to 24 months in absolutes? If you can help me understand that, that'd be great. And finally, with regards to these unlimited plans, what has the experience been? I mean, at what point does the network start suffering from these unlimited plans? And do you have the capability to tone them down considerably before you start having to incur a lot more in CapEx?

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Karl Erik Broten, DiGi.Com Berhad - CFO [22]

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Thanks for the question, Prem. I just need a bit of a clarification on the first question. Is it related to the shared premium [that we saw]?

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Prem Jearajasingam, Macquarie Research - Analyst [23]

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Yes, that one.

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Karl Erik Broten, DiGi.Com Berhad - CFO [24]

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Yes, so that's -- if it is following the changes in the costing, that was made for [services] -- to generate (inaudible)

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Prem Jearajasingam, Macquarie Research - Analyst [25]

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Sure. That would allow you to upstream more cash or to potentially do a bonus issue, anything like that?

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Karl Erik Broten, DiGi.Com Berhad - CFO [26]

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No. That's -- you can say the same, you can say, limitations on the dividend distributions (inaudible)

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Unidentified Company Representative, [27]

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Prem, this is [Olivia]. [answered it]. For context, (inaudible) we allow this kind of 3 bps kind of extension by a company (inaudible). Technically, companies within 4 months is the right (inaudible). I think the (inaudible). No change (inaudible)

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Karl Erik Broten, DiGi.Com Berhad - CFO [28]

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On your second question was more of the cost development going forward, I believe. I think we have the same thing as the (inaudible) guided on Capital Markets Day in February. But from (inaudible) reductions between more than 3% to 7% (inaudible).

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Albern Murty, DiGi.Com Berhad - CEO [29]

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Yes. And Prem, on the last question on the level on the unlimited plan, just to reiterate now what was mentioned earlier and [because] the question that it is abused, that was done as a pure online only offer and a limited time offer, and it also differentiated the current based on speed as well. So it's not really a trend that one would pick up in the entirely abuse. So we have enough controlled elements in there, and the price points and the channels that we use is very controlled. So it's not -- it's flexible on a credit card. So there's enough control, and we feel comfortable with that.

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Operator [30]

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Our next question comes from Arthur Pineda from Citigroup in Singapore.

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Arthur Pineda, Citigroup Inc, Research Division - Director and Head of Pan-Asian Telecommunications Research [31]

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Several questions for me please. Firstly, wondering if you have talked on the continued slippage on prepaid revenues. I know you mentioned a deliberate payment to higher-margin purpose. But aren't low volume funds fare better than low revenues? Or there will be funds less to begin with? Second question I have is in regard to data traffic. It's up 1.2x. It seems to be well below what your competitors are posting at more than 3x. Wondering what's driving the significant discrepancy and because it impacted your ARPU trends. Any color there would be great.

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Albern Murty, DiGi.Com Berhad - CEO [32]

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Sorry, the first question, the prepaid revenue drops. [All I can say], I think the Q1 prepaid development (inaudible), majority is linked to the GA activities. And as I see in the market, then we go aggressive on the GA, on the growth activation, and the low deactivation are turning to 1 times 6, and it's nearly going to the IDD traffic as a negative margin. So that's the only reason.

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Karl Erik Broten, DiGi.Com Berhad - CFO [33]

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Your second question, if I understood it correctly, was the correlation between the increase in the data volume versus the increase in the -- in data of peers. And I think we have shown that year-over-year, we have a stable (inaudible) increase in volumes, and we have a growth of 15% in mobile internet revenues year-over-year. So I think that's the correlation that we see and also the (inaudible) to, say, (inaudible).

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Operator [34]

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Next question comes from Mr. Alex Goh from Maybank (sic) [AmBank].

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Alex Goh, [35]

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Alex from AmBank. I have two questions. The first is regarding your unlimited plan [on demand]. Your Digi Easy 100, I think, discontinued. And your (inaudible) is ongoing. Can you give us any color on -- yes, actually, that's going to be the 80 [impact]. And why was this discontinued while 100 is on? And how long the 150 plan will still be on the market, right? And how are you going to meet, example, the new mobile that the unlimited (inaudible). No, it doesn't (inaudible) challenges. That's the first question. The second one, your revenue is positive (inaudible). Positive EBITDA as well, [in fact], in 2016. But the first question (inaudible) you laid out 6% year-on-year. So I'm just wondering around in the late quarter or maybe 2 more quarters, should we have spent from one duration to your [5 years] at the end of this year? And my quick question is regarding the dividend. You described your 4.7 sen dividend, slightly lower than the fourth quarter's 4.8. I'm just wondering, are you beginning to be low partial with the distribution policy? And it's something (inaudible) going forward?

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Loh Jiat Keh, DiGi.Com Berhad - CMO [36]

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Thank you for the questions, Alex. Just to answer the question on the Internet plan, I have to say that the Internet plan is the plan that we (inaudible) in the market as an unlimited offer. We have 2, we have the 80 and the 150. And a couple of things. I think for any operator, there are different terms that you take out to the market given different situations and different (inaudible) for new market positioning. We did it for (inaudible). But the 80, we have stopped it because it was clearly [campaigned] the designed, and we clearly [stopped it] upfront. And then we -- when were sold out, we discontinue [the number to it], and then we stopped it. The 150 is still ongoing. (inaudible), but we think it's fairly manageable for the current condition that we [have]. On revenue, I explained dividend guidance under the -- sorry, you had about (inaudible) competitors offering to the marketplace. I think that one is really for the -- not the rest to comment on. And -- but for us, I think now the focus is continuously on the postpaid (inaudible) that we offer. We feel it's strong enough given our network position and our brand position to [reach] that high market.

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Karl Erik Broten, DiGi.Com Berhad - CFO [37]

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On the second question on the (inaudible) revenue guidance for the year, we have cash flow guidance to be around [MYR 5 million to MYR 6 million] level. And of course, you are right, but (inaudible) it's a defined offer, it's really a [5.6%]. I think both Loh and Albern have explained the (inaudible) when it comes to prepaid and focusing on rebuilding margins and focusing on more clients both in segments. So we believe that there we will be -- that they build back the prepaid revenue and stay within the recurring levels for the year than in recent periods, the present year. For the second question on dividend, we have, you can say, 4.7 sen last year. Now in Q1, that's the interim dividend. That's 98% of the remake. So it's very close to 100% payout and very close to what they paid for Q4. So I don't think (inaudible).

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Operator [38]

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Our next question comes from Sophia from KAS in KL.

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Unidentified Analyst, [39]

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The question, that has already been answered, so no further questions. Thank you.

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Operator [40]

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Our next question comes from [Ashunda] from Deutsche in Singapore.

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Unidentified Analyst, [41]

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My first question is on your traffic and more cost in the margins. What do you think happened in some markets? Is that as IDD goes down, it does have a positive impact because the traffic cost tend to form faster than your increase in your overall cost and your data traffic? But going forward, if the IDD cost have fallen to (inaudible) there (inaudible)? And your 4G, did that go to -- continue to have an impact on your cost which have been driving? Do you see a potential for the margin structure to soften going forward? So that's my first question. Secondly, this one micro question has to do with (inaudible). Are the revenue outlook for the sector itself improve any time in the next 12 months? Is that something which is too far to predict at this stage?

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Albern Murty, DiGi.Com Berhad - CEO [42]

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Thank you for the questions. I will answer the first one related to the traffic cost and this, let me say, international outgoing traffic. I think we have got a lot over the last couple of years to negotiate the most favorable termination costs having, you could say, big volumes. Now we have leverage in those negotiations, and we have successfully been able to reduce termination rates. Traffic will also have the element of, you could say, the exchange rates, so it's a bit unpredictable but we try as best we can to protect ourselves to fluctuation in the exchange rates. Outgoing international -- all international traffic is not a growing business anywhere in the world, in Malaysia, so of course it is a (inaudible) for the industry. We really need to be able to last the transition to more big bucks in the best possible way. I think we show that even if international or foreign traffic is coming down, we are protecting our margins. We are able to deliver at such higher margins. And by that, it may bring you to stable in regard (inaudible) improvement in the next 12 months.

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Karl Erik Broten, DiGi.Com Berhad - CFO [43]

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I say that the last one of the question you had was you wanted to know our view is the revenue for the (inaudible) that have improved in that segment. I think, for sure, I think the -- perhaps, I believe it would be trying to grow revenue into areas that have profitable margin growth and profitable segment. That will definitely a focus area for us, and you can see that in postpaid and segments in prepaid that are giving us this margin. Was it effective? I think effective. You'll probably see a little bit of a still trying time in this year. And that's why -- that's also (inaudible) coming to your guidance that we see that the cycle will continue. So there are challenges but then lots of opportunities for us, especially in the techniques that I talked about earlier and we'll talk about (inaudible). And also on postpaid, profitable segment.

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Unidentified Analyst, [44]

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Can I just add on my first question and also on the fact that you had actually a margin tailwind, to kind of say, from the low margin IDD call run that should be coming off? And is the rate of the decline now was likely to come off? I mean, for the margin period actually is less for you as you go into the rest of the year. So that's actually my question. I mean, do you actually expect margin to improve going forward from this delta? Did it actually potentially fall as you grow your 4G network? Where is the impact on your O&M cost (inaudible) how your revenues pan out? So that -- so my question, is the margin tailwind, which you have had from the lower IDD cost, will that continue for 3 or 4 more quarters? And the positive impact on the margin that you had up until now.

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Albern Murty, DiGi.Com Berhad - CEO [45]

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Thank you, [Shu]. And we have to bear in mind that the biggest impact on the margin on international traffic comes from the exchange rates as we look historically on how the ranges has been developed in -- through [USP] and also in general. The theory, I think, than having, you could say, a negative impact on our IDD margins as these termination rates are going through the USP . I think going forward, given that with these stable ranges going forward, you will see that there is quite a decent margin also on this business.

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Operator [46]

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We have our next question come from Mr. Rosh from Bank of America Merrill Lynch in Singapore.

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Roshan Raj Behera, BofA Merrill Lynch, Research Division - Analyst [47]

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Roshan from Merrill Lynch. Just one question with regard to this digitization of the core business trend on this innovative sell through that you offered, what's on the consumer trend? When you have this app and other online means to engage with customer, what sort of reduction do you see in customer acquisition and retention? And on the other side, when you have your fields team that are doing a lot of bid and possibly doing commissions and all that possibly distribution network again on the platform, what sort of possibilities for you on the front (inaudible). Any view would be very helpful.

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Albern Murty, DiGi.Com Berhad - CEO [48]

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Roshan, thanks for the question. Unfortunately, I can't give you the exact number because you won't believe that, but I can tell you that it is very encouraging. And when we see this 1.7 million customers now using this channel, not only they've been (inaudible) in terms of managing income deficiency that some of the others on the call have noted in terms of our savings, but it allows us a much more efficient resource management incredibly as well in terms of how we (inaudible) we give back to the customers. And we also give you as more precise information. So we will continue to do this. So I think that the digital channel is not only through the act, but it's also they're very good building our stores. If you [Google] our stores, (inaudible) digital platform (inaudible) for customers. And it's really encouraging that we will definitely continue doing this as part of our overall both the customer experience but also driving stronger efficiency.

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Roshan Raj Behera, BofA Merrill Lynch, Research Division - Analyst [49]

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Okay. And just, if I may follow up, how easy or difficult is it to have this kind of applications online or ways of interacting to customers and fielding your partners by your competitors? And what I meant to understand is, is it something that is what you get from Telenor group and then it's kind of very -- if you're going to do build or it's something that it's delivered by your competitors?

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Albern Murty, DiGi.Com Berhad - CEO [50]

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So there's 2 parts to the question. One is how difficult is this to do, and what have you gotten out from being part of a larger organization, Telenor. Second one is there something that is needed to be copied and done by competitors. So listen, the first one, I think the first one is it is fairly difficult in terms of conceptualizing and understanding that the needs there actually wants to see in regards to services. I think that's the first part. So there's definitely a lot of (inaudible) we're going to understand when we launch an app. Does the customer needs (inaudible) for this customer? Why do you do this? And what is the need (inaudible)? So it's definitely difficult. Yes we have some leverage on some of the services we have, and we've seen in the other markets that have now credit. But that should be viewed in the lead for this, and we are actually leading this in the kind of group (inaudible) just both on the app and on the confirmation that we're running into our physical stores when we digitized this payments right now. And hence why it will be easy to put an app up, I think probably they have it tough for competitors would be to make sure that it's relevant for their customers segment and their customers base.

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Operator [51]

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Our next question comes from Danny Chan from Crédit Suisse.

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Tzu Zhung Chan, Crédit Suisse AG, Research Division - Research Analyst [52]

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Just 2 questions from me. Noticed that your USP and license fees are down fairly substantial this quarter. I just wanted to check what's happening there. Are you closing down sites? Or -- some clarity would be great. And number two on your medium-term notes, will you -- or, Karl, could you give us a sense how you plan to sort of issue the rest of the bonds? That's it for me.

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Karl Erik Broten, DiGi.Com Berhad - CFO [53]

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Thank you for the questions. Let me say on the USP, we of course pay less USP when see the service level is coming down. I think that's the main reason. So this correlates with the service revenue development. On your second question, we have done the first issues now. We don't have to say engineered plans from sort of server utilization of the 5 Indian circuit program. So the MYR 900 million that we have issued now, that sort of the first half, and no needed plans for the next half.

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Operator [54]

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(Operator Instructions) Sir, there seems to be no further questions at this point in time.

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Albern Murty, DiGi.Com Berhad - CEO [55]

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Thank you very much. And as well, to those called in, once again, thank you very much for taking the time and for the questions. We certainly appreciate it from DiGi. Thank you, and have a good day.

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Operator [56]

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Thank you for your participation. This concludes your conference. Thank you.