Perusahaan Perseroan Persero Pt Telekomunikasi Indonesia Tbk Q1 FY2022 Earnings Call

Good day, and thank you for standing by. Welcome to the Telkom Earnings Call of First Quarter of 2022 Results. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Andi Setiawan, Vice President of Investor Relations. Thank you. Please go ahead.

Thank you, Desmond. Ladies and gentlemen, welcome to PT Telkom Indonesia Conference Call for the First Quarter of 2022 Results. There will be an overview from our CEO, followed by a Q&A session. Before we start, let me remind you that today's call and responses to questions may contain forward-looking statements within the meaning of safe harbor. Actual results may differ materially from projections or estimates and may involve risks and uncertainties that may cause actual results to differ from what we discuss today. Ladies and gentlemen, it's my pleasure to introduce Telkom's Board of Directors who are joining with us today: Mr. Ririek Adriansyah, President Director and CEO; Mr. Heri Supriadi as Finance and Risk Management Director; Mr. Edi Witjara as Enterprise and Business Service Director; Ms. FM Venusiana as Consumer Service Director; Mr. Budi Setyawan Wijaya as Strategic Portfolio Director; and Mr. Muhamad Fajrin Rasyid as Digital Business Director. Also present are the Board of Directors of Telkomsel: Mr. Hendri Mulya Syam as President Director; Mr. Mohamad Ramzy as Finance and Risk Management Director; and Mr. Derrick Heng as Marketing Director. I will now hand over the call to our CEO, Mr. Ririek Adriansyah for his overview. Please, Ririek.

Thank you, Andi. Good evening, ladies and gentlemen. Welcome to our conference call for the first quarter of 2022 results. We appreciate your participation in this call. Before we start, please allow us to wish you a very happy Eid Mubarak to all of you who celebrated this holy festival. In order to continue telecommunication network and services while enhancing customer satisfaction during the holy Ramadan and Eid holidays, Telkom assigned a task force monitored by management. Ladies and gentlemen, in the first quarter of 2022 Telkom showed interim growth in revenue, EBITDA and net income, which increased by 3.7%, 3.1% and 1.7% year-on-year, respectively. Slower growth of bottom line profitability was mainly contributed by unrealized loss from investment in GoTo. IndiHome’s contribution to Telkom’s consolidated revenue has steadily increased. During the first quarter of '22, IndiHome’s contribution was 19.5%, up from 18.7% in the same period last year. With the additional intake of 136,000 new customers, IndiHome has successfully maintained an EBITDA margin at around 50%. On the Mobile side, amidst continued competition, Telkomsel has maintained modest revenue growth of 0.2%, while earning a whole EBITDA margin of 27.7%. Telkomsel continues to establish a legal ecosystem to pursue lucrative growth in the beyond-connectivity mobile business. Growing digital business revenue has steadily offset declines in legacy product revenue, making digital business revenue almost 80% of the total revenue in the first quarter of '22. Enterprise business saw positive growth as the profit in Indonesia has lessened. This brings a positive effect to the economy and the enterprise business, with COVID-19 subsiding has led to increased business activities. This segment also saw positive growth by recording a slight revenue increase of 1.9%. Enterprise business growth is from B2B IT services and Enterprise Digital Solutions. On Wholesale and International Business, the ever-growing tower business and international wholesale price were the largest contributors to this stunning revenue performance, achieving 16% growth year-on-year. Our strategy to increase competitiveness and sustainability amidst competition known as 5 Bold Moves continued to intensify its effect by reinforcing significant business cooperation and consolidation, both internally and externally. In order to cater to fast opportunities for business-to-business at this service, Telkom already conducted subsidiary alignment by raising the status of PT Sigma Citra Caraka, or TelkomSigma, to be a direct subsidiary of Telkom. This strategic alignment enables the Telkom Group to concentrate on B2B IT Services under 'One Roof'. Just recently, in April '22, Telkom and Microsoft signed a Strategic Partnership Agreement that aims to accelerate Indonesia’s national digitalization, strengthen the country's intelligent infrastructure, and enable the internal digital transformation of the Telkom Group to become the first choice of the digital telco. This is one of the infrastructure initiatives to establish strategic partnerships with several global tech companies that would have a positive impact on Telkom's business development, especially in the digital platform and digital services domains. That is the end of my remark, and thank you for your kind attention.

Thank you, Ririek. We will now begin the Q&A session. When relating your questions, please speak clearly and state your name and company. Operator, may we have the first question, please?

First question comes from the line of Piyush Choudhary of HSBC.

A few queries. Firstly, on your fixed mobile convergence product, can you update us if there is any timeline for the launch? And what are the possible kind of options you're exploring? Secondly, on Telkomsel or on the mobile side, do you think there could be a possibility of further tariff hikes during 2022 with ongoing industry consolidation? And thirdly, on the dividend, when does the company think about a dividend payout ratio, is it based on reported profits or normalized profits?

Okay. I think I'm going to ask Derrick to address the first two questions. And then I will come to the third question, Piyush, on the dividend. I think as you've already addressed here, we do expect the dividend to be paid based on the normalized profit, as you are aware that the unrealized profit can cause discrepancies. I think unrealized loss as we experienced in the first quarter because we do it mark-to-market for our investment in GoTo. So that's going to be a basis for us. In addition, we also have to provide a good dividend to the shareholders, which is comparative compared to other telcos. When we decide, for example, to have a different figure for the dividend, it is supposed to be a kind of investment emphasis purpose. I mean we're going to do as already mentioned here the 5 Bold Moves that require us a lot of our investments, but it is going to provide us with a basis for the future sustainability of the company, ultimately delivering value to the shareholders. That's about the dividend. I hope I addressed your question.

Yes. Allow me to continue. So for the first question on the fixed mobile convergence, Currently, we are looking at how from an FMC perspective, we want to be relevant to our customers. We are validating with focus groups the options of relevant offers. What we want to ensure is we want to have a meaningful package that allows customers to enjoy our offerings both at home and on the move. Regarding the timeline, it's something that we are still calibrating, but at the end of the day, we want to be meaningful and relevant to our customers. So that's your first question on fixed mobile conversions. Maybe just to add some context to our feedback from customers. They wanted to enjoy both at home and on the move. They also appreciate control over the price offerings that we can provide. For your second question, currently, we are still faced with very intense competition from the various operators in the market, both Jakarta and the outskirts of Central Jakarta. Our agenda is to make sure that we drive a healthier state of business for the industry. When we say a healthier state, we believe there is room for right pricing, but at the end of the day, we want to drive relevant customized and personalized offers especially targeting high-value customer segments. So this is how we want to ensure that we will drive relevant offers, affordable packages contextualized to their requirements and sustain profitability while promoting a healthier industry behavior.

The next question comes from the line of Choong Chen Foong of CGS-CIMB.

Three questions from me. Firstly, I wanted to ask about the recent signing of the strategic partnership with Microsoft. In that announcement, I saw that Microsoft will be utilizing Telkom's data center. So can I ask whether Microsoft has committed to be an anchor tenant in the hyperscale data center? And if so, what capacity will it pick up in the data center? So that's question number one. Number two, what is the data center revenue and also growth for Telkom in the first quarter of 2022? And my third question is regarding enterprise revenue. It is down Q-on-Q, and I understand that there is some seasonality to this revenue line. But even on a year-on-year basis, it's only up about 2%. So can you sort of provide us a bit more color regarding the performance of the enterprise revenue in 1Q? And what should we expect in terms of the outlook for this revenue line for the remaining quarters of this year? Those are my three questions.

Thank you. I will address the core financial results. This is part of our partnership strategy. Additionally, we will work on enhancing data center performance. We faced challenges that affected our data centers, which has impacted our data offerings.

And on the data center revenue and growth in the first quarter of this year. Actually, the revenue, but the same as we recorded last year. This is because we expect the capacity to ramp up in the second quarter of this year, which we believe will result in higher data center revenue that we have today. Regarding the question on the enterprise revenue decline on a Q-on-Q basis, it is because in the last quarter of last year, we recorded some revenue as a result of seasonality, which was quite high because we had a number of contracts that were completed. This quarter looks mostly in the progress with our customer base and the demand that they have. We do expect in the following quarter that we will see improved revenue. What we do expect in this enterprise revenue line is going to be in line with the GDP growth this year. That's the situation that we have seen on the enterprise side.

Understood. Can I just follow up with the first question? Just to clarify again, because the line wasn't entirely very clear. So did I hear it correctly that if Microsoft were to provide any sort of services to the enterprise or the government sector and it requires that service to be based out of a data center, they are committed to use Telkom's data center?

Yes. We have agreement on this with regards to resources on this matter.

And also from the potential clients that we have locally here requested us to have a data center in Indonesia, which provides us with the demand that can be which also intersects with this point.

So there are two parts between Telkom and Microsoft. The potential use of Microsoft for utilizing our data center. And then the second part is providing the IT services, including some sort of addressing the needs of B2B and B2G segments.

Next question comes from the line of Hussaini Saifee from UBS Research.

Multiple questions from me. First is on Mobile competition. And I heard to your earlier question from Piyush that the competition remains quite intense. So I just want to understand if you see any change in the intensity of competition from January to April. Has the competition remained in the same state? Or do we see that by April we have seen some improvement in competition? Second question is on IndiHome. So IndiHome subscriber growth has been slower compared to last year. So I just want to understand the outlook for the IndiHome net additions, subscriber net addition target for this year? Finally, on the fixed mobile convergence. Have you decided on the structure between Telkomsel and IndiHome? How will it be structured?

Yes, I'd like to answer your first question on mobile competition. Yes, it's true that we remain intense regarding acquisitions and renewal packages to grab the low-end market share in the prepaid segment. However, we believe that all operators are trying to establish a healthier state of business by focusing on the right pricing for both acquisitions, improving ARPU, and growing our existing customers, especially our high-value customers through hyper-personalization and content delivery networks, ensuring we have the right offerings for customers. From the competitive landscape, it remains intense, but all operators are driving towards a more sustainable and healthier state of business. That would be my answer to your question.

So in that light, how should we see the overall industry growth, mobile industry growth for the year? Should we expect mid-single-digit growth to be achievable?

From a momentum perspective, we are seeing many reasons for optimism regarding the economy bouncing back, especially concerning the COVID situation, which appears a lot more stable in Indonesia. Thus, we expect more business activity. People movements from point A to point B will further drive our momentum in the months to come.

Regarding your second question, the net additional lines for IndiHome have been slower compared to last year because we have been more cautious with sales activities in order to achieve a lower churn rate compared to what we've experienced. This provides us with a base of a healthier customer base. Additionally, we expect from this month and last month, we have been experiencing many challenges regarding in-home installation. However, we believe that we can accelerate installation and improve this in the second half of this year, targeting to return to double-digit growth for the entire 2022.

Yes. This is very clear. Just a color on the last question. Any updates on the fixed mobile convergence structure between IndiHome and Telkomsel?

I think as we have the MOU with Singtel to address how is the best to run the fixed mobile convergence for the benefit of Telkomsel's shareholders. Telkom and Singtel agreed to explore what is the best structure in running this business. We expect the structure design to be finalized in 6 months from now, so we believe we can complete the final structure for IndiHome and Telkomsel.

Next question comes from the line of Ranjan Sharma of JPMorgan.

I have two questions, but let me take them one by one. Firstly, on your wireless ARPUs. I mean, you've been discussing for a while that the industry is moving in the right direction. There have been efforts to improve pricing, tariffs have been increased. But why are the ARPUs down? And this is not just telecom-specific, it's for the operators as well. So I would love to hear your thoughts on why ARPUs are still declining and if you expect them to turn around. I'll stop here and then take on the second question after your answer.

Yes. From an ARPU perspective, I would like to recollect that in Q1, there was still some headwinds and uncertainties. If you could recall, it was a time of uncertainty, especially with the Omicron variant, along with the movement restrictions that were mandated by the government. That fear factor drove lower purchasing power, consumer spending, and household consumption. Being at home also led to WiFi offload, especially in our high-value customer segment. This has led to a lower-than-expected economic recovery that impacted ARPU. However, we see strong fundamentals for sustainable growth moving forward, with stable ARPU from data traffic increase driven by the right pricing and economic recovery.

Great. Quick follow-up. One of your competitors today was saying that they're also facing issues on supply chain and they are ascribing some of the weakness to what's happening in Europe. Are you seeing any of that?

Yes. Regarding SIM cards, we observe that most of the suppliers are increasing their prices by around 20% to 40% due to the limited supply of chipsets.

Sir, the voice is not clear, I apologize, but can you repeat that again? What happened with the SIM cards?

Yes. We are currently facing a problem related to the supply of SIM cards. Most of the vendors are increasing prices by around 40% due to a shortage of chipsets and other factors.

Understood, yes. My last question is regarding the financials for the first quarter. Can you walk us through the one-offs or non-operational impacts on your earnings in the first quarter?

I think the non-operational impact mostly comes from the GoTo. In addition to that, we have the old technology, which is a hybrid between copper and fiber, that we've been accelerating the depreciation on. The amount is around IDR 400 billion. That has also impacted there. However, if we normalize with both sectors, actually, the bottom line is supposed to grow by around 19%.

19%, you said?

Yes, plus 800 plus and plus 432 of the accelerated depreciation.

We have new questions from Arthur Pineda from Citigroup.

Two questions, please. Firstly, on the mobile side, can you clarify what's driving the softness in this momentum? You seem to be contracting faster than XL on a Q-on-Q basis. What's driving this differential? Second question I had is regarding the data center business. You mentioned that you should start to see contributions in the second quarter. Just to clarify, what was the operational capacity in Q1? And where does it go to in the second quarter?

Yes, Arthur, I can share more details. I believe the softness was predominantly a Q1 situation. Indonesia still faced several headwinds and uncertainties, including the Omicron variant, along with government-mandated restrictions. This environment led to lower purchasing power among consumers and affected household consumption. Moreover, our high-value customers were more likely to use WiFi while staying at home, which contributed to the decline in mobile data usage. Moving forward, we anticipate more economic activity as markets open up, which will improve our performance.

Understood. If I could phrase it differently, it seems like the company is contracting faster versus your competitor. Is it because you're expanding into new spaces or is it due to your consumer base being more susceptible to offloading traffic to WiFi? I'm trying to understand the differential in performance.

Yes. There are various factors at play here. First, regarding our customer segments, particularly in our high-value customer segment, during periods of lockdown, many customers were predisposed to rely more on home WiFi services. Additionally, our customer mix has a large segment base, combining both legacy and digital business drivers. Thus, we are addressing the decline of our legacy revenue while simultaneously promoting digital revenue growth. We are striving to offer engaging digital packages tailored to customer preferences and incorporate it with various digital initiatives.

Understood. My second question is about the data center business.

Thank you, Arthur. Heri here. On the capacity of the data center, we expect to come online in the second half. It will be 22-megawatt, which we believe is ready to market by June. We anticipate that starting in June, we will see additional tenants and revenue from this space. This will take time for full installation of required equipment and setup to meet the strong demand we expect. But that's the capacity that will soon be available to market.

Understood. You mentioned around 43 megawatts, is that right?

The existing capacity is 43, and the one that just finished is 22 megawatts.

If there are no further questions at this time, I would like to hand the call back to Andi Setiawan for closing.

Thank you, everyone, for participating in today's call, and we apologize for those whose questions could not be addressed. If you have any further questions, please don't hesitate to contact us. Thank you, everyone.

This concludes today's conference call. Thank you for participating. You may now disconnect.