Perusahaan Perseroan Persero Pt Telekomunikasi Indonesia Tbk Q3 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to Telko's 9 months of 2020 Results Conference Call. Please be advised that today's conference is being recorded. I would like to hand the conference over to your first speaker today, Mr. Andi Setiawan. Thank you. Please go ahead.

Thank you, Carina. Ladies and gentlemen, welcome to PT Telkom Indonesia's conference call for the 9 months of 2020 results. We released our third quarter of 2020 results on the 4th of November 2020, and the reports are available on our website, www.telkom.co.id. Today's presentation is available on the webcast, and an audio recording will be provided after the call for the next 7 days. There will be an overview from our CEO, and after that, all participants are given the opportunity to participate in the Q&A session. Before we start, let me remind you that today's call and the response to the questions may contain forward-looking statements within the meaning of safe harbor. Actual results could differ materially from projections, estimations, or expectations voiced during today's call. These may involve risks and uncertainties and may cause actual results to differ significantly from what we discuss today. Telkom Indonesia does not guarantee any actions that may have been taken in reliance on the discussion. Ladies and gentlemen, it is my pleasure now to introduce Telkom's Board of Directors who are joining us today: Mr. Ririek Adriansyah as President Director and Chief Executive Officer, Mr. Heri Supriadi as Finance Director, Mr. Herlan Wijanarko as Network and IT Solution Director, Mr. Dian Rachmawan as Wholesale & International Service Director, Mr. Edi Witjara as Enterprise & Business Service Director, Ms. Venusiana as Consumer Service Director, Mr. Budi Setyawan Wijaya as Strategic Portfolio Director, Mr. Muhamad Fajrin Rasyid as Digital Business Director, and Mr. Afriwandi as Human Capital Management Director. Also present are the Board of Directors of Telkomsel: Mr. Setyanto Hantoro as President Director, Mr. Leonardus Wahyu Wasono as Finance Director and Ms. Rachel Goh as Marketing Director. I now hand over the call to our CEO, Mr. Ririek Adriansyah for his overview. Please proceed, Pak Ririek.

Thank you, Andi, and good afternoon, ladies and gentlemen. Welcome to our conference call for the third quarter of 2020 results. We really appreciate your participation in this call. In the 9 months of 2020, Telkom has successfully managed business performance amidst the prolonged COVID-19 pandemic on the back of excellent IndiHome performance, healthy mobile data growth, strong wholesale segment as well as improvement in enterprise business. As a result, Telkom recorded IDR 99.9 trillion in consolidated revenue. With successful cost control, our EBITDA grew by 7.1%, with the EBITDA margin increasing by 10.1% to 53.6%. And the bottom line, net income increased by 1.3% to IDR 16.7 trillion, with a better net income margin at 16.7% from 16.0% last year. Ladies and gentlemen, in the mobile segment, Telkomsel continued to post growth in Digital Business in an effort to compensate for the declining trend of Legacy business. Digital Business revenue increased by 10.6% year-on-year to IDR 47.7 trillion, representing 73.2% of the total revenue, significantly higher compared to 63.1% last year. The data payload grew by 39.6% year-on-year, with the average data user consumption increasing by 42.5% to 7.09 gigabytes per data user per month. In the fixed-line segment, IndiHome continued its strong momentum and provided a higher contribution to Telkom's consolidated revenue. IndiHome recorded revenue of IDR 16.1 trillion, growing 17.1% with the contribution to TelkomGroup increasing significantly to 16% from 13% in the same period last year. IndiHome's new customer base increased by 17.1%, bringing the total customer count to 7.76 million by the end of September 2020. We believe that IndiHome's customer count could reach close to 8 million by the end of this year. IndiHome ARPU in the third quarter of 2020 improved to IDR 253,000 compared with IDR 241,000 in the previous quarter as we encouraged new customers to subscribe to higher speeds and for existing ones to purchase various add-ons, such as Minipack and speed upgrades. Revenue from add-ons grew by 38.2% and contributed to 15.7% of IndiHome revenue during this period. In the Enterprise segment, our strategy to strengthen business fundamentals and provide enterprise solutions by reducing low-margin business and prioritizing our business lines with higher profitability, such as data center and cloud and enterprise connectivity, seemed to work well. The Enterprise segment posted IDR 11.5 trillion in revenue and saw an encouraging trend amidst fundamental improvement during our COVID-19 pandemic situation. The segment is on the right track and significantly improved by only declining 23% year-on-year from a 35% decline in the second quarter, or it grew by 9.4% in the third quarter compared to the second quarter of 2020. Towards the end of this year, we will continue to strengthen our fundamentals with a focus on more profitable business and expect the Enterprise segment to turn around in 2021. The Wholesale & International business shows its resilience during the pandemic situation. Revenue from Wholesale & International business segment rose by 24.9% year-on-year to IDR 10.2 trillion driven by the healthy business in the tower, data center, and international wholesale voice and SMS A2P. In an effort to create value for the company, we are in the process of unlocking tower assets and have completed the first step, which is to consolidate towers within the group by transferring part of Telkomsel towers into Mitratel. We believe that our tower business still has opportunities to grow, supported by the upcoming 5G technology, which will require higher density. Ladies and gentlemen, the healthy fixed-line business with diversified segments helps us navigate through the highly competitive mobile industry and the pandemic situation. In the past 5 years, we've seen the revenue portion from fixed line increase from 28% in 2016 to 37% in the 9 months of 2020. Its contribution to net income also increased from 5% in 2016 and soared to 30% in September 2020. Going forward, we will strengthen the synergy between mobile and fixed line through various business models in an effort to maintain sustainable growth with healthy profitability for TelkomGroup. That concludes my remarks. Thank you.

Thank you, Pak Ririek. We will now begin the Q&A session.

Your first question comes from the line of Arthur Pineda from Citigroup.

Two questions, please. Firstly, on the Enterprise segment, what's driving the jump in the Enterprise side in the third quarter? Is this just lumpy because of contract bookings and should correct in the fourth quarter? Or should we expect momentum to sustain into the fourth quarter? Second question I had is with regards to mobile. I'm just wondering on the mobile revenue softness in the third quarter. This contrasts sharply with the subscriber net adds momentum. Why is there such a divergence? Is this just a timing issue? And should we expect things to pick up in the fourth quarter?

Okay. Thank you, Pak Arthur. I am Heri from PT Telkom. On the Enterprise segment, the improvement in the third quarter of this year is actually the result of the fundamental improvements that we have frequently mentioned that have already started since the third quarter of last year. So we focus on the more profitable segment and recurring segment. We basically reduced the segments in which we provide equipment and so on that have lower margins. So this fundamental improvement has already shown positive impacts for us. We believe the momentum will continue into next year.

Okay. For the second question, regarding the contrast between the revenue growth and the customer growth, actually if you look at the fundamentals on a quarter-on-quarter basis, in terms of the customer base and also the PAYLOAD is increasing. But if you look at our revenue, yes, it has slightly declined, but I think this is a good momentum for us because actually we need time to see the positive impact on the revenue side. Operationally, there are good indicators because the PAYLOAD is increasing quarter-on-quarter by 7%. Our customer base has also increased by 6% quarter-on-quarter. So this is only a matter of time until we can monetize in the next couple of quarters.

Okay. So it's a timing issue. Okay.

Your next question comes from Pang Vitt from Goldman Sachs.

Just 3 questions for me. Firstly on the competitive landscape. Can you give us a little bit more update on the current competitive landscape? Last quarter, you mentioned that you launched the unlimited data plan to better defend market share. Any more color on that? Second question is on IndiHome. The target for this year is 8 million. How about heading into 2021? Would you be able to give us some color on that? Do you see any changes in the subscription pattern if COVID remains better? Lastly, on cost control, you have done very well in that. You mentioned further about the distribution costs and high usage of modern channels. Do you expect this to continue in the longer period as well? So those are the 3 questions.

Okay. I'm Rachel from Telkomsel. So I'll address your first question regarding the mobile competitive landscape. In the cities where we launched the unlimited plans and also new combos, over 180 cities, which we started in July, have performed well. We're seeing double-digit growth in payload and data users, looking at about 13.4% and 20% from July to September, respectively. In terms of benchmarks in data subscriber market share, we have seen an increase in our percentage points here. But more importantly, we have gained a strong understanding of what our customers want in this current economy, allowing us to simplify our product offerings and improve our customer engagement even further. We are focused on three anchor points: First, the current economic situation under COVID that affects affordability and mobility of people; secondly, customer needs and wants are changing due to compliance with current norms; and finally, Telkomsel's network advantage and available capacity. This formula has worked well in helping us achieve our aims of stabilizing data market share and growing our payloads in those selected cities, and we will continue to focus on plans that are customer-centric while leveraging our network strength. From an outlook point of view, we believe we may need another 1 to 2 quarters to see a rebound in data revenue share. We aim to shorten this period by dialing down on unlimited plans and finding opportunities to price up and improve the overall value of the industry soon. However, we are watching very closely the actions of others in preparing this market for a healthier growth in 2021 when the economy picks up and COVID is under control. I hope that addresses your question, Pang?

Yes. That's really great. Thank you.

Okay. On the second question, on the IndiHome update and prospect for 2021, in Indonesia, there are about 65 million households. One-third of this, we believe, is a reasonably addressable market for us. Currently, we have around 7.8 million subscribers. So we believe we still have plenty of room for growth from the additional subscribers. In addition, we continue customer education to encourage them to utilize higher speeds of our services. This year, about 15% of revenue contribution is also coming from add-on services, which we have already experienced. We believe that in the medium term, there are still plenty of opportunities with our strength in capital and corporate. These will be the backbone for our growth. Number three, related to mobile cost efficiency and modern channels. We have seen a shift from traditional to modern channels that happened during the COVID period. We see that this has resulted in an efficient distribution impact, with our marketing expenses decreasing by 19.9% year-on-year. This has been significant because we now have a distribution model that has shifted from 60% traditional to 40% modern to now 33% traditional to 67% modern. We believe this change will continue in terms of using our modern channels while maintaining traditional channels where necessary in rural areas.

Your next question comes from the line of Ranjan Sharma from JPMorgan.

I have two questions. Firstly, on Mitratel. If you can share any tentative timelines for a potential IPO. Also, for Mitratel, as towers are being transferred from Telkomsel to Mitratel, can you share thought processes around how you're deciding which towers to transfer and lease back from Mitratel? That's the first one. The second question is on the omnibus law. Do you have any idea on the timeline of the introduction of the implementing regulations? And do you think that the omnibus law will support consolidation in Indonesia?

Thank you, Pak Ranjan. I will take the first question on the Mitratel IPO. We believe we will bring Mitratel to the IPO within a horizon of 12 to 18 months. During this time, we need to improve Mitratel's operational and financial performance by increasing its size and tenancy ratio while making efficiency improvements. Depending on market conditions and the rollout of 5G, that will also serve as a trigger for a favorable timeline for the IPO. Regarding which towers we transfer to Mitratel, we analyze from two perspectives: First, the opportunity to operate that tower for third parties and, second, maintaining the competitiveness of Telkomsel itself. We handle this process carefully to manage both aspects effectively. Concerning the omnibus law, we view it positively for the industry as it may facilitate potential consolidation and establish a favorable environment for it. However, we are still waiting for more technical regulations, such as ministerial decrees regarding guidelines for consolidation. We also recognize that the current market pressures with numerous players and limited spectrum availability may necessitate consolidation for a healthier industry.

Just a small addition on the omnibus law. The government is currently finalizing many matters related to this law, and we anticipate that the regulations will be in place by the first quarter of next year.

Your next question comes from the line of Choong Chen Foong from CIMB.

Three questions from me. Firstly, a question on the bad debt provision. Even though the economy remains pretty soft, you've seen lower bad debt provisions into the third quarter. Any one-offs in the quarter, reversals, or anything like that? And does Telkom expect bad debt provisions to stay low in the last quarter of the year? That's my first question. Second question on the CapEx. The year-to-date spend seems a bit low versus full-year guidance. Are we expecting the CapEx in the fourth quarter to rise significantly to meet the full-year guidance? Or have we successfully achieved some real savings for this year? My third question is on mobile. With the tariff adjustments you made in the third quarter, the data now goes up 35% premium to your peers. Additionally, you've seen double-digit growth in your data subscribers. Are you comfortable with Telkomsel's market positioning currently? Or do you see a need to extend your offers to more geographies or narrow the premium further? Or do you think that it's time to focus on monetizing the subscribers?

Okay, Mr. Foong. First, on the bad debt provision, we do not have any one-off adjustments in the third quarter. If you refer to the Enterprise segment, we expect most of the collection will come due in the fourth quarter, which may impact our collections. However, we are still in the process of collecting the revenue, and we hope performance will improve as it has so far. To be conservative, we acknowledge that some enterprise segment revenues may come due in the fourth quarter, and this merits our attention. On CapEx, we still maintain our guidance and look to accelerate our CapEx absorption in the fourth quarter to get closer to that guidance. The third question regarding competition, Rachel, could you please address?

We are comfortable with our current market positioning. Although we acknowledge the slight decline in RPMB, the gap between us and our competitors remains solid. We are seeing strong growth rates in payload and data user growth, which indicates that the market is responding positively to our strategic initiatives. We see the price gap as still favorable, and we anticipate a rebound in our revenue, with existing subscriber growth supporting future monetization.

Yes, for the additional details on mobile, we recognize the current pricing structure and will be making adjustments as necessary while ensuring subscriber retention. Our focus will remain on offering quality service while addressing the competitive landscape effectively.

Your next question comes from the line of Piyush Choudhary from HSBC.

Firstly, on Mitratel, could you help us understand what were the pro forma number of towers, tenancy, and lease rental per tenant? Given that Telkomsel has sold towers for IDR 10.3 trillion, what is the likely use of funds for Telkomsel? Can Telkomsel declare a special dividend? Secondly, on mobile, given the strong growth in subscribers, and you mentioned monetization can come probably in the next quarter, can you share what the exit month ARPU is like?

On your question about Mitratel, they currently have around 16,000 towers before the transfer of towers from Telkomsel, with tenancy around 22,000, leading to a tenancy ratio of around 1.58 per tower. The rental rates are based on the number of antennas installed on the tower and are comparable to market rates. In terms of funding, about 65% of the tower value will be covered by Telkom's ownership, enabling us to transfer dividends to Telkomsel and address the remaining 35% with external financing, such as bank loans. As for our mobile ARPU, in Q3 it is approximately IDR 44,000, and we are optimistic about its stability moving forward.

The new towers transferred from Telkomsel are expected to have about 2 tenancies already planned in operation. Our strategy will be to enhance the tenancy and further revenue generation.

Your next question comes from the line of Prem Jearajasingam from Macquarie.

Can I clarify that Telkomsel in the medium to long run is going to continue to see itself as a market leader and therefore continue to price at a premium? Or have we changed our strategy to become a price leader? Secondly, with regards to the Enterprise business, is it a change in the products that we are selling that is causing this revenue decline and margin expansion? Or is it just a change in the way we sell, i.e., we no longer book the revenues from the equipment portion of any contract as that has been passed straight through to someone else? Lastly, on the omnibus law, do you see the potential for spectrum sharing as something that should or should not be part of the final outcomes on this one?

From Telkomsel's point of view in the medium and long term, we will maintain our position as a market leader and keep our pricing premium, although it may not be as high as previously, to maintain our leadership in the market.

Regarding the Enterprise, we have seen pressure on this segment due to COVID, which has affected some customers. We are focusing on offering business models that provide recurring revenue, which has led us to transition away from low-margin equipment sales to services that yield better margins. We recognize these changes have positively affected our operational fundamentals.

On the omnibus law, the spectrum sharing is permitted as long as it pertains to new technology, which we see as being applicable starting with 5G onward.

Your next question comes from the line of Kresna Hutabarat from Mandiri Sekuritas.

Sorry if any of my questions are repeated. I had some call disconnection earlier. I have two questions, please. My first question is on the non-Telkomsel's businesses. If you look at the quarterly cash OpEx and quarterly EBITDA run rates at non-Telkomsel levels, they have been less volatile in the past 9 months versus previous years. Could we expect relatively stable quarterly cash OpEx to continue in the fourth quarter of 2020 and going forward? Is the stability more due to cost savings, IFRS 16, or the lower IT procurement business? Could we expect the 40%-plus EBITDA margin at the non-Telkomsel level to be sustainable in the coming quarters as well? My second question is on IndiHome. Can you provide some color on the quality of IndiHome revenues? How has revenue collection and receivables trended so far? We understand that the new Consumer Director is from Telkomsel, right? Will this influence how Telkom structures IndiHome home products and maintain growth going forward, particularly in terms of fixed and mobile collaboration as well as residential broadband market segmentation with Telkomsel?

In terms of non-Telkomsel business cash OpEx, we have made significant efforts over the past 9 months to enhance efficiency through technology and IT solutions to better meet market demands. Overall, we continue to maintain cash operating costs effectively. Our collections should improve as we continue to expand our business, enhancing our operational efficiency. Regarding the EBITDA margin of 40%, we believe we can continue to maintain and improve our EBITDA margins with our current strategies and operational enhancements.

IndiHome will collaborate with Telkomsel for fixed wireless services in areas where IndiHome cannot penetrate effectively. This will expedite customer penetration as our current fixed broadband penetration remains relatively low. Regarding the quality of IndiHome subscribers, we have around 100,000 customers in the SME segment, particularly those using their homes for business such as shop houses and small medium enterprises.

Your next question comes from the line of Niko Margaronis from BRI Sekuritas.

I would like to ask about the omnibus law with relation to the product tariffs and minimum prices for products. How do you see this being implemented? Do you expect to see prices changing significantly, potentially moving upwards following the implementation of omnibus law? May I add a second question regarding the quality of IndiHome subscribers? What is currently the generate on the IndiHome subscribers? With ARPU rising to IDR 253,000 on a monthly basis, do you consider this sustainable?

Regarding the omnibus law, we expect that the interpretations will lead to healthier industry conditions, including the potential for prices to rise. However, the specifics will depend on the details within the ministerial decrees as they finalize their work. As for IndiHome's ARPU, we believe our changes, like selling only higher speed plans starting from 20 Mbps, will stabilize our ARPU while maintaining a stable churn rate of around 1% to 2%.

You have a follow-up question from the line of Arthur Pineda from Citigroup.

Just one follow-up question regarding the Enterprise segment. I know you had mentioned you pivoted to more profitable enterprise streams, focusing on recurring revenue. However, looking at your segmental results in your FS on Note 34, the operating losses have actually expanded on the Enterprise side. What's driving this? Is it intercompany bookings that we're missing? Is Enterprise actually profitable as a stand-alone entity?

What we mean by focusing on improvement of the fundamentals is that certain segments, while profitable in the past, have faced collection delays that affect overall profitability. We aim to enhance our strategies moving forward. We can discuss these details further after this call.

Thank you for your participation in this conference call. We apologize for the questions we could not address. Should you have further questions, please feel free to contact us directly. Thank you, everyone.

Thank you.

Thank you.

Thank you.

Thank you, everyone.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.