XL Axiata (EXCL IJ) 1Q11 results - rather weak due to 6% decline in voice revenues - CLSA

• Due to heightening competition in January and February, voice revenue dropped 6% YoY. The drop is also a result of cannibalization from SMS and data services. SMS and data services continue to show healthy growth of 23% and 44% YoY respectively. Hence, overall sales grew by 7% YoY. Estimated industry growth last year, the management admitted, is lower than what they have expected. From the 8-10% expected industry growth, the telecom industry achieved 7+% last year.
• EXCL is looking to modernize its older networks in Sumatra and Kalimantan. We are not likely to see lower capex for the next two to three years due to this program. The replacement of old base station with greener technology however requires less power that can save up to 50% of fuel costs. This has positive implication in the far future when the modernization is fully rolled out.
• The company also aims to grab the 3G growth. Work has to be done in building 3G layers, which more capex in the coming years. EXCL plans to grab the higher end market that consumes higher value product. Estimated mobile penetration is peaking at 55-60% (counted by unique body over total population).
• Net profit grew by 26% YoY making up 20% of consensus estimates, in line but on the weaker side. The slight earnings disappointment reiterates our thesis that the telecom market in Indonesia remains highly competitive. ARPU is still declining (9% down YoY in 1Q11) while data and SMS will potentially continue to cannibalize voice revenues. EXCL is currently the best out of the big three telecom companies due to
clean execution, lower RPM to start with, and efficient cost structure. These however does not exempt EXCL from the maturing mobile market and highly competitive environment in Indonesia.