Chairman's Statement

DEAR VALUED STAKEHOLDERS,

As the new Chairman, I am pleased to submit my first assessment of the Company’s financial and non-financial performance for the year 2018. Firstly, I would like to thank the Board for their trust in me as the successor to Tan Sri Dato’ Seri Dr Sulaiman Mahbob. With my experience and passion for the telecommunications industry, I hope to humbly continue my predecessors’ journey of transformation and growth for TM.

Chairman's Statement
Normalised Group EBIT
RM 1.07 Billion
Interim Cash Dividend
RM 75.1 Million
Customer Satisfaction Measure Score of more than
73
Management Discussion & Analysis

Acting Group Chief Executive Officer’s Statement

DEAR VALUED STAKEHOLDERS,

I am pleased to present the performance report for the year 2018, the first in my capacity as the Acting Group CEO (AGCEO). At the outset, I would like to thank the Board of Directors for entrusting me with the responsibility to champion TM Group’s next phase of transformation.

Management Discussion & Analysis

It is indeed a great honour for me to be selected as the successor of Datuk Bazlan Osman. I look forward to pursuing the plans that we, together with the Board and management, have meticulously put in place to bring the organisation to greater heights as we continue to be “Here for You”, serving all Malaysians and contributing towards building a Digital Nation.

2018 was undoubtedly one of the most challenging times TM had ever faced, as we worked to address the competitive landscape and industry dynamics, without losing focus on our strategies and organisational mission. We experienced significant challenges but this had only strengthened our resolve to make good on what we need to deliver to our customers, shareholders, and indeed all our stakeholders.

Our strategy and focus on Accelerate Convergence and Empower Digital remained, though we faced unprecedented challenges that impacted our performance. Hence, the PIP2018 was introduced as a short-term focus to execute significant initiatives that will improve our performance for year 2018. PIP2018 was anchored on four (4) pillars, which are (1) Revenue, Preservation and Uplift; (2) Sustained Profitability; (3) Improved Cash Flow; and (4) Increased Productivity. For 2019 onwards, we are extending the PIP2018 to the next phase via PIP2019-2021. While the PIP2019-2021 remains as our execution plan over the next three (3) years, our overall strategy will focus on three (3) strategic pillars – Converged Services; Simple and Digital; and Lean and Lower Cost. These strategic pillars will be enabled by our integrated network infrastructure together with its digital platforms and Warga TM.

In doing so, TM will be going through the next phase of transformation. Our new strategic direction reinforces on customer centricity, hence reinforcing the ‘customers first and simplicity’ philosophy. This will see us go back to basics, build on our strengths and review every aspect of our business in order to chart a new path. TM needs to do things differently and we need to up the pace of change. This is a challenge we, as Warga TM, are ready to take on and I am proud to be part of this journey together. I will elaborate more on what this means and the better future that awaits us in the following pages.

Market Analysis & Outlook

REAL GROSS DOMESTIC PRODUCT (GDP) OUTLOOK

Overall, the industry has been facing many challenges in an era marked by rapid digitalisation, stiffening competition, price wars, datafication, industry pressures and other cultural and socio-political factors affecting consumer preferences and behaviour. Both fixed and mobile operators and their ability to operate viably and profitably are hugely impacted by these trends.

In 2018, we saw operators evolving their operating models by embracing digitalisation and ICT to supplement growth, while working on operational and cost-efficiency initiatives to remain sustainable.

According to Malaysian Institute of Economic Research (MIER), Malaysia is projected to achieve a GDP growth of 4.5% in 2019. Domestic demand will continue to be the engine of growth, however, there will be a slowdown in external demand.

Malaysia: Real GDP Growth
% change y-o-y
Source: Malaysian Economic Outlook 4Q18, MIER
e: estimated, f: forecast

RETAIL MARKET SIZE

The telecommunications sector is facing increasing challenges in this digital era, and Malaysia is not exempted as hyper-competition, price reductions, an exponential rise in data consumption, and regulatory changes are putting pressures on operators’ business operations.

The consumers’ and businesses’ demand for fixed-line services will persist. The traditional voice subscriptions are expected to continue to decline as consumers move towards Mobile Voice and OTT voice platforms. The demand for fibre connectivity and high-speed broadband, on the other hand, will be driven by the introduction and mass adoption of high bandwidth services such as streaming 4K content, virtual reality, eSports, cloud applications and smart homes.

To encourage fibre rollout, there is a need to incentivise building owners, managers and developers to prepare for fibre within their premises. It will also be important to streamline and accelerate local authorities’ approval process and right-of-way requirements to deploy fibre in a timely and affordable manner.

Technical development for data transmission via copper such as Very-High- Bit Rate Digital Subscriber Line (VDSL), Vectoring, Super-Vectoring, G.fast, Fibre to the Cabinet (FTTC) and Fibre to the Distribution Point (FTTdp), which increase the broadband bandwidth from the traditional basic copper connection, has increased significantly over the years, providing a viable medium-term solution before the fibre network is installed.

WIRELESS COMMUNICATIONS

In response to the increasing dependence of consumers on smartphones for internet access and digital experiences, the 4G mobile coverage will continue to be our focus, and will be extended to the remaining sites/ areas in the country. The digital lifestyles of current and future consumers will drive the need for faster and affordable connection speed and bandwidth. This will put pressure on Mobile Network Operators to continue to invest in infrastructure to provide high data speed plans, without increasing prices.

As the standards and specifications for 5G are being finalised, we will see its adoption in ecosystem, trials and initiatives in 5G becoming more common. Models of 5G smartphones are expected to be introduced into the market. Hence, it is important that the spectrum roadmap and availability, coupled with the right policy and guidelines for 5G are finalised in 2019, in order to keep Malaysia ahead of the 5G development.

With Internet of Things (IoT) gaining popularity to gain insights and improve decision making, more physical objects, sensors and devices will be connected to the internet. According to a report by GSMA Intelligence, we can expect a sizeable increase in the number of 5G connections, reaching 1.1 billion by 2025, driven by opportunities in the health sector, electronic payments, auto-piloted cars, virtual reality, artificial intelligence and machine learning, new smartphones and wearables.

INFORMATION & COMMUNICATIONS TECHNOLOGY (ICT)

As Malaysia aspires to achieve a developed-nation status by 2025, ICT has been identified as one of the key enablers of all development. The transformation of both consumer and business landscape will continue to be driven by key trends such as the shift of users from traditional computers to smartphones and tablets; the rising demand for real-time interactive multimedia content supported by mobile technology; and popularity of cloud computing, Big Data Analytics, X-as-a-service (XaaS – delivering anything as-a-service), social media applications, and the IoT.

DATA ANALYTICS & ARTIFICIAL INTELLIGENCE (AI)

Datafication is a technological trend turning all aspects of our life and business into computerised data, transforming such information into new forms of value. In other words, with digitalisation, we will continue to see huge amounts of data being produced from different sources and activities. The survival of businesses and their appetite to compete and deliver new solutions will, therefore, depend on their ability to process and make sense of such data (with speed) to ultimately create and deliver value. Advanced analytics and AI will continue to play a huge role in shaping our future, transforming every aspect of the Telco business – from automated data processing, intelligent efficiency improvement solutions, hybrid computing and connectivity to personalised customer experience and differentiated product solutions.

INTERNET OF THINGS (IoT)

IoT has revolutionised the way businesses operate. It creates a wide-ranging ecosystem for meaningful and intelligent exchange of data. The Government of Malaysia has taken a special interest in developing the IoT sub-sector, which has resulted in several market partnerships. IoT continually focuses on integrating the massive, new flow of data from machines and sensors with existing and emerging data source in order to produce novel and actionable new insights. Moving forward, the commercialisation of ‘smart city’ infrastructure is expected to drive IoT adoption across key social and economic sectors.

DATA CENTRE & CLOUD

Cloud computing is attracting investment in data centres and is driven by the demand from Software-as-a-Service (SaaS); Infrastructure-as-a-Service (IaaS); and Platform-as-a-Service (PaaS). As users are feeling more comfortable and secure about storing data on the cloud, businesses are also recognising their ability to scale and reduce cost through the deployment of cloud infrastructure.

Key Risks and Mitigation Measures

At TM, our business and operating models are supported by a robust ERM Framework, which endeavors to future-proof the organisation against market uncertainties and performance deterrents. Broadly, our primary risks to business arise from increased competition and changes in the industry landscape, in addition to other risks associated with sustainability and reputation. Below are some of the key risks and mitigation actions outlined for 2018.

Competition
Key Risks
Mitigation Risks
  • Preserving revenue, margins, competitive advantages and reducing customer loyalty due to changing customer demands and behaviour, emerging new technologies and increasing bandwidth consumptions for content and applications in the market.
Mitigation Risks
  • Implemented several action plans to improve TM’s competitive position via PIP2018. The initiatives included:
    • Intensified sales activities and customer engagement nationwide via ‘Gerak-Gempur’ initiative and personalised sales call to customers.
    • Accelerated speed upgrade for unifi and Streamyx customers.
    • Introduced unifi Basic plan as introductory and most affordable package.
    • Launched new unifi Mobile postpaid plans and packages.
    • Shifted from pure connectivity offering towards integrated ICT and converged solutions tailored to industry verticals.
    • Placed greater emphasis on consultative selling integrating both connectivity services and beyond connectivity solutions.
    • Strengthened competitive edge towards becoming a total end-to-end solutions provider by leveraging on affiliate companies to capture regional opportunities with minimal investments as well as through collaborations with other established global players.
Pricing Pressures
Key Risks
Mitigation Risks
  • De-growth of revenue, market share and competitive advantages due to the entry of more service providers into niche segments on the back of pricing revision for High Speed Broadband (HSBB) Access and Transmission services.
Mitigation Risks
  • Realisation of targeted go-to-market in positioning convergence and digital offering as market differentiator. Bundled packages are offered to preserve average revenue per customer (ARPC).
  • Implementation of cost optimisation and management across the Group to affect revenue gaps.
Future of 5G
Key Risks
Mitigation Risks
  • 5G spectrum policy and availability is currently uncertain for Malaysia, which hinders further planning and progress of 5G.
  • G device and application ecosystem takes time to mature with mass adoption, and may require subsidies in early phase.
  • 5G investment is expected to be significantly high with uncertain returns.
Mitigation Risks
  • Participate in 5G Showcase Launch organised by MCMC, to convey TM’s capability and expertise in deploying 5G technology.
  • Contribute to National 5G Taskforce led by MCMC – in Working Groups for Spectrum, Infrastructure and Regulatory – targeted to be completed by end October 2019.
  • Conduct field trial in Q3’ 2019 to better understand the performance and limitations of 5G for future deployment, as well as to explore new use cases. The field trial seeks to validate the viability of 5G as a Fixed Wireless Access solution for TM.
  • Acquire 5G knowledge and competency by continuously keeping abreast of 5G market development on a global and local front.
  • Results from our 5G initiatives will help us perform a feasibility study on 5G deployment to ascertain our capability to invest, by managing our investments in spectrum and network development.

We continue to focus our efforts on anticipating and reducing risks while taking advantage of any opportunities that may emerge. The adoption of the ERM framework across the organisation continues to provide the assurance that the risks affecting us have been reasonably identified, assessed and addressed to minimise the risk impact on TM.

Financial Performance Review

In 2018, we faced various headwinds from competitive market dynamics such as industry liberalisation and challenges on the backdrop of increasing competition. The challenging operational environment and intense competition have had a significant impact on TM’s performance.

Nonetheless, the various initiatives undertaken to improve our efficiencies via our PIP2018 were reflected in the overall financial results for the year 2018.

Group Revenue
RM11.82
billion
Normalised Group EBIT
RM1.07
billion
Normalised Group PATAMI
RM632.4
million
Total CAPEX 18.1% of revenue
RM2.14
billion
Interim Cash Dividend 2.0 sen per share
RM75.1
million

For a more in-depth review of our Financial Performance, please refer to the accompanying separate book on Financial Statements; and on our Financial Management, to the Group Chief Financial Officer (Group CFO) Review, on pages 76 to 79 which immediately follows this MD&A.

Business Review

Key Bytes
>2.5 million homes, 1.3 million unifi customers
>400,000 SME customers
53.0% convergence household penetration
109 (62 HD) unifi TV channels

As an enabler of the Digital Nation, unifi has a unique role to ensure that all Malaysians are able to enjoy the benefits of broadband everywhere. In moving towards a digital and creative-led economy, it is imperative that Malaysia scales up to higher broadband speeds to enable the endless possibilities that technology and a digital lifestyle can bring. unifi is here to lead the charge to realise the vision of a Digital Nation, with what we do best – providing reliable high speed broadband services at affordable prices and best value in the country.

Key Bytes
2 State-of-the-art Tier III Data Centre
>7,000 enterprise customers
>4,000 public sector customers
Call Centres
9 in Malaysia 3 in Indonesia

TM ONE is our business-to-business arm serving the enterprise and public sectors. Leveraging on our wide- ranging capability, we partner with businesses to realise their digital aspiration. Digital has enabled new value creation, cost savings and new revenue generation. In return, Malaysians benefit from the convenience of various digital services across these industries.

Key Bytes
>20 Submarine Cable Systems spanning >190,000 km
28 Point of Presence
>100 Domestic customers
>400 International customers
6 Regional Offices Worldwide

TM GLOBAL is our business arm offering domestic wholesale connectivity to the local service providers as the industry’s backbone and international connectivity to global telcos, as well as servicing several prominent OTTs. In today’s challenging world, we understand the importance to engage with the right technology and innovative solution partners to keep up with dynamic market demands. TM GLOBAL customised integrated solutions are tailored around each customer’s requirement to deliver a seamless converged experience of voice, data, bandwidth and multimedia. Listed among the top service provider in Asia Pacific, we are constantly developing advanced infrastructure coverage across Malaysia through fixed fibre connectivity, comprehensive mobile solutions and content hub ecosystem.

Malaysia, unifi is doing right by you!

In running a business, everything about your customers becomes ‘your business’. This would include their feelings, emotions, and understanding what every customer needs and wants, which is crucial towards the success of a company.

In these highly competitive times, customer experience has garnered much attention. Many experts believe it is the next competitive battle ground. Products and services are no longer the competitive differentiators for businesses. The focus has shifted towards the experience a brand is able to deliver to their customers across the entire customer journey.

The situation is no different for unifi, a lifestyle brand across our services, dedicated to serving individuals, homes and SME customers in Malaysia. While it is important to acquire new customers, retaining the existing ones are equally critical. Therefore, to solidify unifi’s position as the nation’s leading Converged Service Provider, it is imperative for unifi to make Customer Experience (CX) as a key driver of its ultimate business strategy.

Customer experience (CX) refers to a customer’s perception of their overall interactions with a company. Since customer expectations are higher than ever, customer experience has become a key driver of customer retention and acquisition. In short, customer experience is more than just customer service.

To stay ahead of the competition, we regularly review and enhance our customer interaction journey for our homes and SME customers. As we continue to invest in our people development to address customer pain points, we are constantly reminded that to deliver a high-quality customer experience is to ensure a seamless service throughout the entire customer journey. As such, we have gradually been shifting away from the traditional customer support via call centres and outlet interactions, towards an enhanced customer experience by going omni- channel. What this means is that instead of adopting a multi-channel approach, we enable our customers to interact with us and be serviced via any channel. It eliminates disjointed systems and interaction silos between various departments and also provides the opportunity to collect valuable feedback to map the common ‘pain points’ along the customers’ journey.

Today we see more and more customers wanting to help themselves and perform their own troubleshooting with ‘self-service’. A variety of initiatives have been introduced, with the aim to reduce customer effort during engagements while delivering faster and high-quality resolution. Keeping customers informed (KCI) is key, and customers are now proactively notified of new features, installation/restoration updates, outages and potential suspensions via care@unifi app and a much improved www.unifi.com.my.

Value creation is another way unifi has proactively addressed its customer pain points. Value has many different meanings. To some, ‘value’ means price (what is the value of this service?), to others it means benefit (the value I get from this service). It also means the worth of something. That is why you hear some people saying “value for money” (meaning they are price sensitive); and others who prefer “money for value” (meaning they are willing to pay for what they consider as benefits, from a brand or a better product, or more convenience etc.).

What the customer pays for is not only price (cash) but also the benefits, advantages or quality of the product, after sales service, image and brand of the company or the brand of the product, overall experience, satisfaction one gets in using the product and so on. Guided by all of these from a product and pricing perspective, unifi caters to the different types of customers based on affordability as well as their usage pattern (low/ high). While for some, value is driven by a greater speed experience via speed upgrades, others might consider richer content offering delivered via Video on Demand (VOD) and OTT content collaborations more valuable. To string all of these together is the opportunity to have/enjoy seamless access/ connectivity via unifi Home, unifi Mobile and unifi Wifi. Creating customer value increases customer satisfaction and experience.

Our efforts today is part of a journey to be a truly customer centric organisation. unifi will continue to listen and work together with our customers (through Focus Group Discussion sessions) in our efforts to not only remain competitive but also relevant in an ever-changing digital landscape for individuals, homes and SMEs. We will incorporate the element of ‘care’ (which we believe will go a long way) throughout the end to end customer journey.


“The golden rule for every business is this: ‘Put yourself in your customer’s place.”
Orison Swett Marden

Group Chief Financial Officer’s Review

HERE TO SUPPORT BUSINESS SUSTAINABILITY

TM’s financial performance in 2018 reflected the challenges we faced from the intense shifts in the competitive landscape and industry dynamics. At the same time, it also served as a catalyst for the finance organisation to take a lead in ensuring TM’s sustainability as a business was protected and that the Company remained resilient in the uncertainties we faced.

Group CFO’s Review
Shareholder Return (2014-2018)
New dividend policy is based on Reported PATAMI

Enabling Industrial Revolution (IR) 4.0

Throughout the past century, we have seen major industrial shifts across several sectors of the economy. The introduction of the assembly line propelled the manufacturing industry to become the main mechanism for the economy. However, in recent years a new wave of thinking has emerged which could disrupt the current economic landscape. The economy is moving towards a more data-driven approach. Companies and businesses are valuing data analytics to predict new global market trends. People are calling this movement Industry 4.0 (IR4.0). It refers to a new phase that moves away from the old models in the Industrial Revolution. IR4.0 emphasises on the importance of interconnectivity, automation, machine learning, and real-time data access. Plants that have adopted this concept are being called “smart factories”. These factories incorporate technology into their systems thus allowing them to monitor the physical processes of production hubs and make decentralised, non-human reliant decisions.

To be considered as IR4.0-enabled, factories and systems need to be interoperable, provide a highlevel of information transparency, give technical assistance, and make decentralised decisions. The machines within these factories and systems need to be able to communicate with each other. It allows for a more fluid interaction that would help in the operations as a whole. Systems need to be able to store any data or information produced as a virtual copy which can help in contextualising information accurately. Creating these complex systems would enable a high-level of technical assistance that could support humans in making strategic decisions and solve pertinent issues. Self-correcting systems would greatly reduce the amount of human interaction needed to provide upkeep and instead focus on more innovative developments.

In Malaysia, we have begun to take steps towards embracing IR4.0. Based on the “Industry4WRD National Policy on Industry 4.0” by the Ministry of International Trade & Industry, it was mentioned that the digitalisation of production-based industries is driven by a set of rapidly evolving and converging technologies. The government realised the potential of the digital economy and has identified the major factors which contribute to it. The policy discusses about four (4) key IR4.0 technologies which are cloud computing, cybersecurity, Internet of Things (IoT), and Big Data analytics. These sectors have been the main topics in the new digital economy and it has seen a rise in demand worldwide.

On TM’s side, we have taken it upon ourselves to answer the challenge set by the market and government. We are currently restructuring our product and services portfolio which focuses on catering to Cloud services. By creating a virtual ecosystem for our services, we would be able to gather and analyse data efficiently at any given time. Cloud services consist of technology stack delivering applications such as Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS), and Infrastructure-as-a-Service (IaaS) which would be able to accommodate broad variants based on our customer’s needs.

As part of our cloud-based connectivity initiatives, we have started to introduce Software Defined Wide Area Networking (SDWAN) products for our services. Through this, we are able to offer our customers superior value-added services with distinct levels of services. This gives more power to the consumer to choose what works best for them. The choices range from Multiprotocol Label Switching (MPLS), Long Term Evolution (LTE) and C-Bands which show that our SDWAN packages were made to meet various customer demands. In 2017, we launched the ‘Biz Accelerator Suite’ (BAS) which aims to meet the minimum requirements of budget-conscious customers. For those with low and medium sized budgets, we have included the ‘SDWAN Professional’ package. These packages are catered to solve connectivity issues for the majority of our customers. As part of our premium services, we have designed the ‘SDWAN Premier’ which allows our customers to take full advantage of our high-speed connections.

Looking into the future in 2019, we have mapped out the plans for our smart services. We will focus in two (2) areas – Smart City and Smart Real Estate. With the increasing population in Malaysia and more people moving into the cities, we have created a plan to help alleviate this concern. By incorporating the use of technology into urban planning, we are able to improve on previous plans and develop a more sustainable city. The use of technology in our surroundings would help local authorities to work efficiently. Cities would be safer and any problems found in local operations would be handled by a smart ecosystem. We firmly believe that this is the right direction that we need to make in order to progress as a society.

TM ONE as the enabler for businesses and the public sector offers a comprehensive suite of fully integrated digital and infrastructure services that aid customers’ transition to new operating environments enabled by cloud, virtualised services and IoT such as digital payment platforms, Digital IDs, Cybersecurity, Geo Information System, Cloud as well as smart cities. In realising the customers’ digital transformation. These solutions will fulfil the needs of businesses in embracing digital convergence as the next frontier of advanced innovation. In today’s world of digital disruption, businesses are now able to find the best way to efficiently transform their operations through data. With technological advancement, digitisation and data analytics have rapidly reformed the business landscape, enabling the advent of new business innovations and new forms of competition.