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Edited Transcript of MAXIS.KL earnings conference call or presentation 26-Apr-19 6:30am GMT

Q1 2019 Maxis Bhd Earnings Call

Kuala Lumpur May 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Maxis Bhd earnings conference call or presentation Friday, April 26, 2019 at 6:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Claire Featherstone

Maxis Berhad - Head of New Business

* Gokhan Ogut

Maxis Berhad - CEO

* Robert Alan Nason

Maxis Berhad - Non-Independent Non-Executive Director

* Wayne Norman Treeby

Maxis Berhad - CFO & Chief Strategy Officer

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Conference Call Participants

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* Arthur Pineda

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

* Choong Chen Foong

CIMB Research - Analyst

* Prem Jearajasingam

Macquarie Research - Analyst

* Wei Shi Wu

BNP Paribas, Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon. Good morning, ladies and gentlemen. Welcome to the conference call.

Gentlemen, please begin the call and I'll by standing by. Thank you.

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Robert Alan Nason, Maxis Berhad - Non-Independent Non-Executive Director [2]

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Good afternoon, ladies and gentlemen. This is Robert Nason. A warm welcome to everyone taking time to participate in this briefing session on our financial and operational results for the period ended 31 March, 2019. Joining me today are Paul Zaman, our Head of Investor Relations; and members of the management team, we have Gokhan; Wayne; [Gushan]; Lay Han. Morten unfortunately is unavailable today so Rob Sewell is sitting in for him; and likewise Paul from Enterprise is not available today, but we have Claire Featherstone from that group with us, so we're ready to answer any questions you may have.

I would like to remind everyone that Gokhan officially takes over as CEO from the 1st of May and I will return to my duties as a board director. With that in mind, I think it's best that Gokhan manages the remainder of the call today. I will remain on the call to help answer any questions you may have at the end of the presentation.

But with that, I'll hand over to Gokhan.

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Gokhan Ogut, Maxis Berhad - CEO [3]

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Thank you very much, Robert. Good afternoon, ladies and gentlemen. I would like to start with a summary of our vision and goals. Our long-term vision is to be the leading converged solutions company in Malaysia. In order to achieve this, we started a new long-term strategic plan that we call Max Plan. And we presented and discussed this with you in quarter 4 2018 results teleconference call back in February.

We have a very clear strategic action plan and we are committed to invest MYR 1 billion of growth CapEx over and beyond our core annual CapEx of MYR 1 billion in the next 3 years. We will be at the same time be delivering an OpEx productivity savings of MYR 1 billion over the next 3 years. Our internal target is to bring our company to deliver service revenues of over MYR 10 billion by 2023.

2018, and leading into 2019, is the financial rebasing period and 2019 is the operational transformation year for us. The first quarter has been a good start to this trajectory of change. Our convergence strategy is being mobilized. We have scaled up our Enterprise business, building capacity and capability to get the talent that we need. We have added more than 100 additional talented resource to support and stimulate the growing Enterprise pipeline of products and deals.

We have planned and developed new products. An example is in April, we launched the ultra high-speed fiber offering for homes and businesses as well as the first in Malaysia, our narrowband IoT offer for businesses again in April. We have also streamlined and reengineered our fiber provisioning and fulfillment process.

We have transformed and refreshed our go-to-market organizational structure. Maxis 2.0 is underway with this new vision and strategy, a new organization with a culture ready and willing to embrace change.

At the same time we have not taken our eye off of our core mobile business either. It is strong and stable. We have underlying stability in postpaid. Prepaid market continues to change and the whole market continues to contract due to SIM consolidation and pre to post migration. We also delivered another quarter of strong growth in our fiber subscribers, our base for convergence.

And very importantly, we are on track on our operational and financial plan in line with delivering our full year commitment. We have stable underlying earnings and cash flow, and in line with the guidance.

Productivity. Our Q4 growth program enables us to harvest early low hanging fruits as built in our plans. Q4 growth is on track for delivering savings in fiscal year '19. And finally, our board has declared a 5 sen dividend for the quarter.

Now let me take you through some of our performance highlights in the quarter. Overall, the quarter 1 fiscal year 2019 performance is in line with our expectations, and we're building momentum in the execution of our converged solutions vision and strategy. The mobile market continues to have strong competition in the first quarter especially in the prepaid segment. There's continued [wandering] growth mobile Internet data and services for the same price point. Our prepaid business continues to stabilize while using big data and other [6] for segmented and personalized offers and rewards.

So Hotlink RED app has been adapted by 55% of our prepaid customers who use mobile Internet. The Hotlink RED app adoption has increased from 50% in quarter 4 2018 to now 55%. We continue to grow and maintain our leadership in postpaid. Hotlink Postpaid Flex and Flex Plus are attracting budget conscious customers including migration from prepaid. My Maxis app has been adapted and used by 39% of our postpaid primary account holders.

As you know, mobile apps are important as they enable us to directly market to our customers and offer uniquely customized offerings based upon big data analytics which we call [MaxisONE]. We also maintain our network leadership and continue to differentiate our 4G LTE network in terms of speed, performance and experience. Our 4G LTE speed for bigger than 5 megabits per second was achieved for 91% of the time during the quarter.

Demand for data continues to grow, supported by 4G adoption and greater data usage. We have seen solid 4G LTE adoption momentum across our customer base. Landed smartphone penetration has also risen to 85%. On average, our customer consumes data of 11.7 gigabytes per month on a blended basis for quarter 1 '19 which is 7.1% higher than Q4 '18.

We are also pleased with our customer service and our continued focus on providing our customers with an unmatched personalized experience. We have taken the fiber installation service issues that we experienced in quarter 4 '18 very seriously, and we have invested further in our customer service and fiber installation processes. We maintained high customer satisfaction with a touchpoint NPS scored at plus 55 points, another great achievement in a time of transition and change.

Now I would like to hand over to Wayne to take us through the financial highlights.

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Wayne Norman Treeby, Maxis Berhad - CFO & Chief Strategy Officer [4]

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Thank you, Gokhan and Robert. Good afternoon, ladies and gentlemen. Overall, we are pleased with our performance for the first quarter this year. We are happy with the quarter-on-quarter increase in EBITDA, EBITDA margin and profits despite fairly challenging market conditions. We had a solid finish with service revenue at MYR 1.947 billion with a decrease of 4.9% quarter-on-quarter.

The key factors driving this drop include firstly the competitive situation in the prepaid segment. This was partially offset by growth in postpaid and home fiber. The drop in income due to the wholesale network sharing agreement termination, and finally, the MCMC mandate dropping interconnect termination rates, and hence produced interconnect termination income. Whereas normalized EBITDA increased 24.1% to MYR 953 million at quarter 1 versus MYR 768 million in fourth quarter '18. We remind you that fourth quarter '18 did have some one-off costs. We'll also discuss the CapEx in more detail later in the briefing.

Free cash flow importantly was stronger, increasing 21.7% first quarter of '19 on fourth quarter '18. On dividend, as Gokhan has said, we have declared a first interim dividend of 5 sen per share, payable on the 27th of June this year. The entitlement date is 31st of May this year.

Turning to service revenues. Service revenue was MYR 1.947 billion for Q1 '19, down 4.9% compared to MYR 2.048 billion fourth quarter '18, yet only down 1.7% on first quarter '19 compared to first quarter '18. The service revenue excluding the wholesale income largely attributed to network sharing agreement declined just 2.8% first quarter '19 compared to fourth quarter '18. Whereas on a year-on-year basis service revenue excluding the wholesale revenues, so this is an underlying number, was up 0.9% first quarter '19 compared to first quarter '18. This importantly shows that our underlying core business is very stable.

In terms of postpaid, Maxis maintained its market share leadership position based on revenue. We also delivered on a firm underlying ARPU, although during this period the reduction of the interconnect termination rate meant that the ARPU declined for both postpaid and prepaid. We have migrated prepaid to postpaid, and winning entry points in budget-conscious customers with our new entry point postpaid plot Hotlink Flex. Overall, RGS increased by 126,000 to end first quarter '19 at 3.26 million subscribers.

Comparing first quarter '19 to fourth quarter '18, ARPU sees a decline from MYR 94 to MYR 88, this is largely due to the reduction in the mobile termination rates that I mentioned, structural change and some seasonal holiday roaming and dilution. As a result, postpaid revenue declined 5% from MYR 1,053 million in the fourth quarter to MYR 1 billion first quarter '19, with the reduced ARPU offsetting RGS subscriber gains. However, year-on-year, MYR 1 billion at first quarter '19 versus MYR 985 million first quarter '18 showed a 1.5% increase. The underlying postpaid business is very resilient.

Prepaid demonstrated a stable underlying ARPU of MYR 40 per month. RGS declined by 143,000 due to SIM consolidation and migration of the prepaid to postpaid with a successful Hotlink Flex entry-level postpaid plan. Prepaid ARPU declined because of the reduction in [NTR] rate and also some higher value subscribers moved to the Hotlink Flex entry point and entry-level postpaid plan. Prepaid mobile Internet revenue is now 63.1% of prepaid revenue in the first quarter.

The main concern with the prepaid market is the higher dependency on the migrant and foreign worker segment. There is a softer migrant foreign worker segment market currently in Malaysia, which means shrinking revenues from this segment. Also, currently, there are heavy discounts on IDD rates, aim to retain our migrant subscriber base.

In fiber, we continue to drive our first mover advantage in converged mobile fiber services. Our attractive and affordable fiber nation plans for both homes and businesses continue to receive positive response. We are closing the first quarter with over 280,000 fiber connections, an impressive increase of 31,000 K.

Our fiber nation campaign continues to be successful. We've converted the majority of our existing base to these new plans already. With the new cost structure, it enables us to offer affordable connectivity. We will continue to grow the market and gain market share in fiber broadband. We've seen great success in our consumer converged offer, MaxisONE Prime, enabling families to choose a combination of any MaxisONE Plan starting from MYR 98 a month, and into home fiber plan of their choice starting from just MYR 89 a month.

We started to reorient the organization from a product to a services mindset with new structures and processes announced this week. We are aiming for refreshed organization design and resourcing for better go-to-market execution. Although taking a longer time than we expected, our desire to seek access to all available fiber in Malaysia will accelerate. We have signed fiber access agreements with TM and Sacofa and now have access to over 3.3 million homes past. And now we have the best coverage of any operator and of any converged fixed mobile operator in Malaysia.

In April, we launched a new ultra high-speed fiber offering to homes and businesses. We also have a large talent pool of Max experts who are technical experts in the Maxis service and solutions to help deliver our brand promise of unmatched personalized service delivered to the homes and businesses of our customers. Convergence is also helping us in the enterprise segment. Fiber nation for business solutions and with the segmented focus is growing as I mentioned in the following quarters.

Operators who can deliver converged fixed and mobile options are ideally positioned to not only compete but to win. Enterprises are adopting network delivered and cloud converged services, ICT services rather, to cater to the demand for higher productivity, flexibility and efficiency. Customers today demand end-to-end solutions to be always on, safe and secure and to be able to access these experiences on any device and consumed as a service with complete peace of mind and at predictable costs.

We have seen good progress in Q1 as we embarked upon this journey with the acceleration of our capability build and the launching of a number of firsts into the Malaysian marketplace. An example of these firsts in Malaysia is the launch of Maxis narrowband IoT service. This introduced a number of the future features lowering the cost for users to deploy and improving the life cycle management of devices through longer life and as a result lower power consumption requirements.

This new offering is very complementary and delivers many new features that will come as part of the next generation 5G networks, albeit tailored for low bandwidth applications and services. This is particular important for the adoption of smart city based initiatives where everything is connected, whether these are environmental sensors, traffic monitoring or smart lighting, to name just a few applications. This has already borne fruit with the recent announcement of a smart cities partnership between the state of Penang and Maxis to accelerate the adoption jointly for these new innovative technologies for the benefit of the state and citizens.

In addition, we recently launched our first convergence offering for business and government customers with the introduction of our new MaxisONE business broad solution, which brings voiceover IP hosted telephony solutions that when combined with the Maxis mobility offerings promises to deliver significant cost benefits for customers in reducing their telephone call charges. This is just the start as we see significant potential to unlock value for Malaysians as a result of converged fixed mobile collaboration and cloud offerings. The buildup in Enterprise's capacity and capabilities is already translating to growing sales, pipelines and new products and services and some very positive feedback from our customers.

In terms of CapEx, we continue to invest to maintain our superior network, offering the best coverage and quality. Our core CapEx is phased, with Q4 relatively higher than Q1 as our network capacity upgrade and coverage enhancement being planned towards the end of the year. Also, investments in digitalization and internal productivity also took place in Q4 '18. CapEx was MYR 127 million first quarter '19 compared to MYR 524 million Q4 '18 compared to MYR 107 million Q1 '18. A growth CapEx of MYR 1 billion over 3 years as forewarned is largely enterprise customer driven. So this will accelerate period by period. We started our first live trials to 5G in March and signed an MOU with Huawei for 5G acceleration program in February. We are getting our core network 5G ready, supported by network virtualization and fiber connectivity for these base stations.

Moving onto profitability. We recorded a normalized EBITDA of MYR 953 million with a solid margin on service revenue of 48.9% for the first quarter, driven by our continued focus on profitable segments and cost optimization initiatives. Comparing Q1 '19 EBITDA of MYR 953 million to Q4 '18 of MYR 768 million shows a 24.1% increase. This was due to Q4 '18 one-off costs already reported. We've had a few one-offs impacting the financials for the Q4 '18 as reported. The total impact is approximately MYR 250 million, which was to drive the fiber nation campaign and to mobilize our productivity and growth strategies.

Comparing first quarter '19 EBITDA of MYR 953 million to first quarter '18 of MYR 1,020 million shows a 6.6% decline. This is largely attributable to the expected termination of the network sharing agreement. This is in line with our guidance and rebasing the cost base. In terms of profit, normalized profit first quarter '19 on first quarter '18 declined 20.8% to MYR 404 million. The decline is in line with the decline in EBITDA and the costs already discussed. Yet, first quarter '19 to fourth quarter '18 increased 56% due to the rebasing factors already discussed.

Importantly, cash flow is in line with guidance. Our overall guidance is on track, and we aren't making any changes. Our key priorities in '19 are to maintain leadership and high-performance in our core business, to execute our converged services strategy and to capture market share in a more broadly defined market. We are building and strengthening our fiber in convergence advantage as we continue to invest in building a superior 4G LTE and fiber network.

We expect low single digit decline of service revenue and mid-single-digit decline in EBITDA. We are giving guidance of core CapEx of MYR 1 billion plus growth CapEx for new businesses over the next 3 years of an additional MYR 1 billion. We expect stable operating free cash flow at a similar level to full year '18, along with solid operational and financial performance as we mobilize the productivity and cash management programs.

I will now hand back to Gokhan.

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Gokhan Ogut, Maxis Berhad - CEO [5]

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Thank you, Wayne. Now we're ready to take your questions. And as usual, please address all housekeeping questions separately to Paul. We'll now start the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Prem from Macquarie in KL.

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Prem Jearajasingam, Macquarie Research - Analyst [2]

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A few questions from me, please. First of all, the postpaid revenues and ARPUs, I appreciate the wholesale revenue impact. But it seems they've got a bit lighter this quarter. Will I be right in thinking that part of this is driven by the contract assets from all the handsets bundles that were sold last year? Is that the right read of it or is there something else? And if there's something else, what is it?

And secondly, I appreciate that the enterprise push is still in its infancy. But is that really the reason why we have not seen any big shift in terms of revenues on a quarter-on-quarter basis? That's two. And finally, what are your thoughts around the competitive situation for the rest of this year? While the headline prices looked to have stabilized, we continue to see what yourselves and DIGI report for the declines in prepaid, and I struggle to appreciate that it's all due to [NTR] reductions, that's never been a huge one to play out in Malaysia. So just trying to work out what's going on.

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Gokhan Ogut, Maxis Berhad - CEO [3]

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Okay. Let us try to answer one by one. On the first one, on wholesale line contract prices, let [Gushan] answer this.

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Unidentified Company Representative, [4]

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Basically, postpaid does not matter. It's not an impact on the contract values. There are a couple of things you're always on. There is a cyclical effect of the Q4 to Q1 roaming revenues, the significantly higher roaming revenue in Q4 versus Q1. We also do a lot of end of year promotion in terms of sales of devices at a discounted price. Q1, with the addition of Flex has actually moved fairly well. The RGS is still very strong. The growth is still very strong. And we see contract values at or about where they were last year. So that won't have much of an impact even for this year.

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Prem Jearajasingam, Macquarie Research - Analyst [5]

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So do you think Flex is so successful that it's beginning to dilute the ARPU then?

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Unidentified Company Representative, [6]

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No, we will tell you the blended postpaid ARPU of course because the Flex ARPUs comes at a much lower ARPU of about MYR 60. But in terms of the dilution of the postpaid base we see minimal impact. In fact, most of the Flex acquisitions are coming from new sales as well as [importing] and from prepaid, pre to post, and very little from the MOP plan, and that was one of the reasons we also branded it Hotlink so it can identify itself clearly from the Maxis benefit.

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Gokhan Ogut, Maxis Berhad - CEO [7]

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And on the second question on Enterprise, let me try to answer that for you. As we've been talking about Enterprise, we have been a good quarter in terms of the preparation for the growth of our Enterprise business. The core performance is quite strong that is within the core mobile performance. And on top of it, we've been working on price point initiatives that takes up our value, escalates our strategy, as evidenced by the NB-IoT launch. And also, the voiceover IP launch that we just completed in April, which is a strong example of convergence of mobile and fixed. And voice over IP on the cloud, how enterprises can actually benefit from the power of convergence. This will continue in terms of new product offerings in the value escalated and should be reflected in the revenues following these launches. On the first question.

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Unidentified Company Representative, [8]

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First question in term of the prepaid market. There is a fairly substantial impact on interconnect rates that impact particularly prepaid ARPU and therefore prepaid revenue. In addition to that, it's primarily a foreign worker segment impact. IDD minutes and foreign workers in general for us, we feel this market in essence is softer, but we also have a weak quarter with that segment in Q1. We are putting things in place to ensure that we see a turnaround of that during the rest of the year, but as you know the foreign worker segment is quite price-sensitive and we have to come out with the right products for the time to maximize growth in that segment.

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Wayne Norman Treeby, Maxis Berhad - CFO & Chief Strategy Officer [9]

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Fortunately from a financial point of view, it's not a high-margin segment, so the team is pretty much focused on the higher end here, but we still don't like losing markets, so we'll be very active in the next quarter, but it's not a big value creator but it's still a market, so you'll see a lot more action from us shortly.

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Operator [10]

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Our next question comes from Choong Chen from CIMB in KL.

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Choong Chen Foong, CIMB Research - Analyst [11]

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A couple questions from me. Firstly on the Enterprise business, can you talk a bit about the opportunities that you see, whether some of that would actually come from the public sector side of the business and have you had discussions with government agencies on exploring at least at the very, very start as to providing those [ITT] solutions to those agencies. That's the first question.

Second question, regarding the fiber business, the net add momentum has been quite good in the first quarter. Can I ask how it's looking like so far into the second quarter? And do you expect the net adds to sort of stay at the 10,000 net adds per month level or you think that would accelerate going forward? And thirdly, just to clarify, the MYR 88 ARPU for postpaid, does that include the wholesale revenues from U Mobile or is that excluding? And the drop is as you said, largely due to IT rate cut and dilution from Hotlink Flex. Is that right? Those are my 2 questions.

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Gokhan Ogut, Maxis Berhad - CEO [12]

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Okay. Thank you for your questions. Let's start with your first question on Enterprise and Claire will help us answer this.

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Claire Featherstone, Maxis Berhad - Head of New Business [13]

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Yes, we're actually seeing a great response from state governments particularly in context of smart cities. As mentioned, we have launched the smart city initiative with the finance [state] where we hope to collaborate with them on new infrastructure services related to our NB-IoT network in Penang.

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Gokhan Ogut, Maxis Berhad - CEO [14]

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Let's take the second question.

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Unidentified Company Representative, [15]

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Yes, we're really happy with the momentum of fiber since we launched fiber nation and we've also launched new fast speed higher-speed broadband lines this week. We're encouraged by all the fundamentals. We're encouraged by the fact that we are capturing new market in terms of fiber and geographic markets. We're also happy that the significant amount of our fiber customers are now becoming converged customers and that bodes really well for our overall long-term strategy in terms of maximizing our [cost] and minimizing churn. So we're very happy with the current trend and of course we'd like to see this continue for as long as possible.

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Gokhan Ogut, Maxis Berhad - CEO [16]

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Just an add on that as you know we can't make a forward statement on this one, but you need to also look at last quarter, which was at the same level, 30,000 net adds level. And this quarter also comes at the end of the access agreements that we have currently. And as we have declared it, we are willing to extend our access agreements to all the fiber in the country, which would also help us in the future. For the last question, postpaid ARPU, no, it does not include the U Mobile phone revenues, wholesale revenues, and the decline goes to the cost there before, mainly due to the [NTR] cut, which has been 1/3 of the rate, has been cut down to 1/3 of the previous rate, and the roaming seasonality that Q4 is historically a high-roaming quarter and quarter 1 is not.

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Unidentified Company Representative, [17]

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And a slight impact on, not dilution, but a slight impact on the lower end base that's coming in with the Hotlink Flex product as well.

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Choong Chen Foong, CIMB Research - Analyst [18]

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Okay. And just a quick follow-up. On the fiber nation net adds, do we know whether these are new customers or are these coming from existing players in the market?

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Unidentified Company Representative, [19]

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It's a combination of both, but we're very encouraged by the fact that we are getting acquisitions in new markets and new areas as well.

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Operator [20]

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Our next question comes from Mr. (sic) [Miss] Wu Wei Shi from BNP.

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Wei Shi Wu, BNP Paribas, Research Division - Analyst [21]

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My first question is with regard to your enterprise strategy/ambition. Can we get some thoughts about how management is thinking about the balance or in building this business, the balance between growing your own resources internally versus M&A versus partnerships. Secondly, with regard to the home services business, I noticed in your comments earlier about how the net adds has been quite strong because you get some of the numbers. And also, there's been some comments about how you're converting from these subscribers from pure connection to converged services as well. However, the revenues for home subscriptions have been very flat for the last few quarters. So I would appreciate some color as to the underlying dynamic there.

Related to that, what is the mainstream product for broadband, for home broadband, in terms of fees at the moment? And lastly, it's more positioning question. So I noted in your comments that you've decided to brand your new entry-level postpaid plan as Hotlink for the reference to prepaid. But as you also pointed out, the ARPU difference between Hotlink Flex and your MaxisONE is quite big. So how does this impact Maxis' postpaid value proposition? How should we be thinking about your positioning for the postpaid product going forward?

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Gokhan Ogut, Maxis Berhad - CEO [22]

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Thank you very much for the questions. Let me try to answer the first one on the enterprise strategy and ambition. Yes, our strategy is to build capability actually in all 3 ways that you mentioned, building internal capability. Quarter 1 has been a good example of this. We have on boarded more than 100 talented resources in order to ramp up our enterprise capability. We're also looking at definitely partnerships, partnerships with the leading industry partners to go to our enterprise customers together. We have examples of this. And M&A, of course, we are always open on how we can drive scale through inorganic opportunities. And we'll be looking at both partnership and acquisition in this coming future to continue to build our capability.

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Unidentified Company Representative, [23]

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I'll take the second and third ones. Those are very good questions, actually. In terms of the home broadband and the balance between the plans and also why the ARPUs have declined and the revenue stays flat. Clearly, when we went into the market in October last year, we want to radicalize the market by creating much greater speeds to more homes and more customers by benchmarking our pricing. That's something that was competitive against copper. And based on that, we made certain assumptions that our existing base -- and, of course, the other thing that we wanted to do is we want to proactively move our base onto faster speeds onto the new broadband plan, so we went down and actively migrated our existing base onto the new plan. And then in doing so, because of the new price point, we took a slight hit in terms of the ARPU of that base and we managed to migrate most of them, who are now enjoying a fantastic broadband experience with much faster speeds.

So going forward, the new subscribers who will be coming on won't have an effect on the ARPUs or the dilution of the ARPUs and you should see revenues grow from now because of the new [G8] that we're including. So the balance between the plan, it's a good mix between both the 100 mbps and 30 mbps. Clearly, the 30 mbps is still the mass plan being sold in the market. On the next question about Flex, I mentioned it already -- the next question on Flex and how Flex is impacting MOP, I think one of the strategic reasons we launched Flex was because clearly as Maxis is a premium player with a great customer experience and a much better network and experience, we've always attracted the premium customers onto our Maxis base. And there was a fairly significant shift about 2 years ago from the prepaid base to the postpaid subscription base proposition.

And at that time we realized that probably where the Maxis brand was playing doesn't necessarily identify with this group of customers. And although Hotlink has a really strong equity with these group of customers, they didn't have a product that fits into that space. So when we launched Hotlink, it was a very specific product that identified with that segment and less so the Maxis customers who identify with the premium service and the best customer experience. So actually strategically when the decision was made and we were quite aware that it could have caused some dilution of the Maxis base, so we've been really encouraged by the fact that most of the growth is coming through Hotlink Flex is coming from a new segment that we haven't identified with before and our Hotlink base continues to enjoy great experience and better network and all the benefits that come as being a Maxis customer without moving onto a Hotlink plan. So the strategy's been very well-executed and we feel very positive about the growth in the postpaid revenue moving forward.

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Wei Shi Wu, BNP Paribas, Research Division - Analyst [24]

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I would like to ask a follow-up question regarding the enterprise strategy. Could you give us some examples as to what sort of acquisitions you might be considering in the coming years to support your enterprise ambitions?

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Gokhan Ogut, Maxis Berhad - CEO [25]

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Thanks for your questions, but it's too early to say and name any target acquisition. I hope you understand. Thank you.

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Operator [26]

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Our next question comes from (inaudible) from (inaudible) Bank.

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Unidentified Analyst, [27]

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Thank you for the opportunity. I've got 3 questions. One, I would like to look at your Slide 6. You've given a breakdown between the service revenue including and excluding wholesale, which I understand the wholesale is coming from the U Mobile revenues. I noticed that in this first quarter, there was the wholesale revenue of MYR 71 million. I'd just like to know whether in the second quarter we'll be seeing a significant drop. Because in this first quarter, there's a drop of MYR 47 million.

And wondering would that still be any significant wholesale that will be coming in the second quarter? And since the arrangement with U Mobile in the last year, how is it that you're still seeing these revenues coming in? That's my first question. My second question is was there any MFRS 16 impact from the change in operating lease to finance lease? How did it impact your bottom line? And my third question is on your 5G implementation plans. Could you give us some sort of estimate what sort of CapEx will be involved going forward?

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Gokhan Ogut, Maxis Berhad - CEO [28]

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Let's take the first 2 questions answered by Wayne.

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Wayne Norman Treeby, Maxis Berhad - CFO & Chief Strategy Officer [29]

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So in terms of MFRS, so you should have a look at Note 1 there. So the impact is obviously noncash but it's negligible at PBT line. So it's just a reclassification between lines. We haven't sort of disclosed the amount. I will say it's less than the amount that DIGI has, but with the [PBT] it's insignificant. In terms of the impact per quarter, we still have some wholesale revenue coming through from U Mobile. We don't sort of disclose those amounts. So the best guidance would be to look at the previous advice on the wholesale impact and divide it by 4. So that wholesale impact will continue to be the same roughly each quarter. It will increase a little bit in the later quarters as we still have some wholesale revenue there from U Mobile.

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Gokhan Ogut, Maxis Berhad - CEO [30]

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Let me take the first question on the 5G implementations plan. As you know we've been quite active on 5G in the last couple of years. We started with the lab trial. In February, we announced an MOU moving through live trials with Huawei, and in March, consequently, we've started the first ever live trial in the country. Meanwhile, we've been also, investing it -- investing in as a preparation for 5G, the fiberization of our base station and also virtualization of our network. It's too early to say what kind of total CapEx will be once we move to national 5G launch, because it looks like it will not be before [an official] roll out before 2021, as evidenced by a couple of factors, the availability of spectrum, availability and penetration of the devices, and your network revenues. So in terms of the total CapEx, it's still early, but always we're doing the preparatory CapEx investment within our current budget.

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Operator [31]

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Our next question comes from Arthur from Citigroup in Singapore.

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Arthur Pineda, Citigroup Inc, Research Division - Director and Head of Pan-Asian Telecommunications Research [32]

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Three questions, please. Firstly, can you remind us when the U Mobile roaming revenues fully end? And if it was supposed to end last year, why is it still reflecting in 2019? My second question I had is with regard to the strategy on the new businesses. Should we envision that these are initially dilutive on earnings over the next few years as with most businesses which are building scale, or would you really focus on things which will be at least earnings neutral?

Last question I have is with regard to the dividend. I'm wondering what your philosophy is on this. Because if you look at free cash flows over the last 4 quarters or so, if you include interest, it barely covers your 5 sens quarterly commitment, but now that doesn't even include the additional MYR 1 billion or so with your budgeting for the new services, and on top of this, your gearing is fairly robust at 2.2x. I'm just wondering what's the outlook on the dividend.

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Gokhan Ogut, Maxis Berhad - CEO [33]

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Let me start with the first question, U Mobile roaming revenue. As we have announced back in quarter 4, the U Mobile contract will be over by the end of June 2019. On the strategy on new businesses, yes, on the enterprise side, some of the new initiatives might have mobile EBITDA percentage profitability versus our high call mobile business. But all our clients are taking this into account. Our objective is to grow both our top line and also at the same time absolute EBITDA. Let me give the floor to Wayne on the third question, on the dividend.

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Wayne Norman Treeby, Maxis Berhad - CFO & Chief Strategy Officer [34]

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Yes, I might just add a little bit too to that comment on our growth strategy. I mean, we've built a 5-year plan here that we've spoken to that does have lower margin in new areas we're looking at. We must keep in mind though that the capital requirements for the enterprise space is much lower. So this is a value accretive strategy that we're building. It's not an earnings dilutive strategy that we've got. Now tied to the other question you've got in terms of philosophy on dividends and how we're financing this, we have a MYR 1 billion productivity program we're implementing. We have a MYR 250 million target for this year, of which MYR 220 million is already scoped, detailed in the end receivables plans. So were confident we can finance the growth strategy.

We don't comment on dividends. Our comment though is around free cash flow. So our operating free cash flow is expected to be at the same levels as previous years. In terms of balance sheet capacity, we are adding investment grade parameters and we can certainly even borrow more and still stay within investment grade. So we've got strong balance sheet, strong cash flows and good productivity. We have a major working capital program underway, which we did speak about. So it's a 7-tier set of programs underway. So we're quite comfortable. We've got all the levers and we know what to do, how to build those development programs and it's an accretive program over the whole period.

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Operator [35]

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(Operator Instructions) We have no questions at this point in time, sir.

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Gokhan Ogut, Maxis Berhad - CEO [36]

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Okay. Ladies and gentlemen, thank you for joining in our conf call. As always, happy to have you here. And as a follow-up, we'll be looking forward to your questions and follow-ups to Paul Zaman. Thank you, and looking forward to seeing you next quarter.

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Unidentified Company Representative, [37]

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Have a good weekend, guys.

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Robert Alan Nason, Maxis Berhad - Non-Independent Non-Executive Director [38]

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Have a great weekend. Bye-bye.

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Operator [39]

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