XL Axiata banking on mobile broadband for growth-

XL Axiata, Indonesia’s second largest telecommunication provider by subscriber base, has continued to work towards consolidation of its market position in the recent past. In an attempt to improve its competitiveness in the Indonesian telecom industry, XL Axiata acquired its market rival, Axis Telecom, in March 2014 with an investment of $865 million. The funds for the acquisition were raised through a loan worth $500 million from shareholders and a $365 million secured loan from third parties (mostly banks), raising XL Axiata’s total liabilities by around 99 per cent in 2014-15. Of the total liabilities, the company’s non-current liabilities increased by 101 per cent in 2014 due to an increase in the long-term loan for Axis Telecom’s acquisition. Thus, primarily on account of the company’s spending to acquire Axis, it reported a loss of Rp 891.06 billion in 2014 against a profit of Rp 1.03 trillion in 2013. Its total operating expenditure increased by 17.5 per cent from Rp 12.6 billion to Rp 14.83 billion over the same time period.

On the revenue side, a surge in data demand led to an increase of 43 per cent from Rp 4.4 billion to Rp 6.27 billion in 2014 in revenue from data and value-added services. The segment’s contribution to total revenues was around 27 per cent of total revenue. The shift in demand towards more data-centric services resulted in an extremely moderate revenue growth rate of 3 per cent from voice and SMS services. The company posted a revenue increase of 10.3 per cent from Rp 21.35 trillion in 2013 to Rp 23.56 trillion in 2014.

By end-2014, the total assets of the company increased to Rp 63.7 trillion, experiencing a 58 per cent increase over the Rp 40.2 trillion at the end of 2013. This was primarily due to its acquisition of Axis, an increase in network infrastructure and other related financing activities.

Paring debt

The company has been making several efforts to reduce its debt. One of the strategies has been to monetise its tower assets to help it concentrate on its core business and reduce the cost of operations. To this end, the company divested its tower infrastructure in December 2014 and sold 3,500 towers to PT Solusi Tunas Pratama (STP) for Rp 5.6 trillion. As part of the arrangement, XL Axiata will lease back these towers from STP for a period of 10 years.

According to the operator, the proceeds from the tower sale will be utilised to pare down debt and improve its capital position. Further, the sale is expected to dilute the earnings before interest, taxes, depreciation, and amortization margin suppression from 200 basis points to only 120 basis points.

After the conclusion of the tower sale, XL Axiata now has a portfolio of 6,500 towers. The company is looking forward to further divesting its tower infrastructure business to focus on core competencies.

Data surge drives growth

In 2014, data traffic on XL Axiata’s network grew by 127 per cent year on year, supported by the increasing adoption of smartphones in the country and increased use of mobile internet through a wide array of affordable devices and service bundled offers. During the year, the company launched a new starter pack called “Internet Super Unlimited” aimed at new data users which allows them to access the internet and other data services through a simpler data package. It also entered into strategic partnerships with various smartphone makers like ASUS, Samsung, BlackBerry, LG, Sony and Nokia to provide bundled offers to its customers. Recently, the iPhone 6 was introduced in the Indonesian market with a data bundled offer on the handset.

In October 2014, XL Axiata became the first mobile service provider to conduct trials on 4G long term evolution (LTE) technology with access speeds of up to 100 Mbps in Indonesia. Following the trials, the company launched 4G LTE services in the four cities of Jakarta, Yogyakarta, Bogor and Medan in December 2014. For the service, users are required to replace their old SIM card with a new USIM card that stores 4G LTE network configuration settings.

XL Axiata is also planning to launch new bundled plans such as HotRod with LTE-enabled devices and free digital content to enhance its strong position in the data segment and monetise the growth in internet-related services.

In order to capture the surge in the demand for data services, XL Axiata has been modernising its infrastructure. The company added over 6,100 new base transceiver stations (BTSs) in 2014, taking the total count of 2G BTSs to 36,006. It also added around 1,000 3G Node B stations during the year.

Further, XL Axiata worked on various network modernisation strategies in key Indonesian cities to deliver greater stability, expand network capacity and improve the quality of both voice and data services.

Beyond traditional telecom services

XL Axiata provides services other than traditional telecom through its digital services on the lines of digital entertainment, mobile advertising, mobile payment, mobile banking, machine-to-machine (M2M), cloud, business development and Elevenia. In 2014, revenues from these digital services increased by 51 per cent year on year.

In 2014, Gudang Aplikasi, the company’s digital entertainment platform, had over 18,000 applications with more than 1.3 million registered users. Its mobile payment system through XL Tunai has over 130 registered merchants with a customer base of 1.3 million. The subscriber base of people using mobile banking grew by 38 per cent. During the past year, XL Axiata increased its bank partnerships by 10 to 50 banks and launched the debit-credit card payment method in July 2014.

XL Axiata has also made efforts to expand its customer base to include small and medium enterprises (SMEs), which are today becoming the largest consumers of telecom operators’ solutions. In 2014, XL MAds served more than 500 SMEs and around 509,000 subscribers of the company were using its M2M services. Further, in July 2014, it partnered with Sweden-based Ericsson to work towards its M2M market plans Further, to enhance its M2M presence, the company collaborated with PT Persero to become the first mobile operator to provide a two-way smart metering system in Indonesia.

The way forward

Despite an increased debt burden, the outlook for XL Axiata seems positive. The company has been taking various initiatives to deleverage its balance sheet including the sale of its tower assets. Further, it has been betting high on its data services, and revenues from the non-voice segment are likely to continue experiencing an upward trend. The company is planning to launch 4G services in the areas near the capital to tap the potential demand for high speed data services. Its acquisition of Axis reflects a long-term benefit as it will help the company cater to a large customer base. The acquisition will also enable XL Axiata to utilise Axis Telecom’s 2G and 3G frequency airwaves to increase its telecom reach in Indonesia.