Perusahaan Perseroan Persero Pt Telekomunikasi Indonesia Tbk Q1 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to Telkom Indonesia Corporate Presentation for First Quarter of 2023 Results Conference Call. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Edwin Sebayang, VP Investor Relations. Please go ahead.

Thank you. Ladies and gentlemen, welcome to PT Telkom Indonesia conference call for the unaudited results of first quarter year 2023. There will be an overview from our CEO, followed by the Q&A after the session. Before we start, let me remind you that today's call and the responses to questions may contain forward-looking statements within the meaning of safe harbor. Actual results could differ materially from projections or estimations, and may involve risks and uncertainties that may cause actual results to be different from what we discussed today. Ladies and gentlemen, it is my pleasure now to introduce Telkom's Board of Directors, who are joining us today. First, Mr. Ririek Adriansyah as President, Director and CEO; Mr. Heri Supriadi as Finance and Risk Management Director; Mr. Herlan Wijanarko as Network and IT Solutions Director; Mr. Bogi Witjaksono as Wholesale International Service Director; Ms. Venusiana as Consumer Business Director and Enterprise and Business Service Acting Director; Mr. Budi Setyawan Wijaya as Strategic Portfolio Director; Mr. Muhamad Fajrin Rasyid as Digital Director; Mr. Afriwandi as Human Capital Managing Director. Also present are the Board of Directors of Telkomsel, Mr. Mohamad Ramzy as Finance and Risk Management Director; Mr. Derrick Heng as Marketing Director; Mr. Adiwinahyu Basuki as Sales Director. I now hand over the call to our CEO, Mr. Ririek Adriansyah, for his overview.

Welcome to our conference call for the Unaudited First Quarter Year of 2023 results. We appreciate your participation in this call. Entering the year of 2023, Telkom Group is very convinced that more prospective telecommunication business opportunities are looming ahead. With the 5 Bold Moves as our main strategy, we could continuously improve our competitive advantage in all aspects of the business. Business repositioned into B2B and B2C telco markets give the thrust for Telkom Group to concentrate on capturing more growth both in market share and revenue in digital connectivity, digital platform, and digital business. We are aware that in the connectivity business, Telkom is the dominant player with 2 strong products in mobile, fixed wireless access, and fixed broadband. That is why on the connectivity, which most of the revenue comes from the B2C segment, Telkom Group relies on Telkomsel to compete with other B2C telco players. Market synergy, CapEx, and OpEx efficiency in the thin-margin business are the key success factors to win the competition in B2C. In B2B business, namely the digital platform and digital business, Telkom could concentrate all resources and capabilities to capture more market share in high growth and profitability in this segment. However, Telkomsel still has to improve its internal capability and capacity to become one of the greatest players in data cloud, B2B IT services, and digital companies in Indonesia. Just recently, in the first week of April 2023, Telkom signed a conditional spinoff agreement with Telkomsel that marked significant progress towards the implementation of fixed mobile convergence initiative under Telkomsel. Our grand strategy, 5 Bold Moves, will continuously be in effect to create sustainable long-term business growth. During the first quarter of 2023, Telkomsel maintained growth in revenue and reported net income with an increase of 2.5% year-on-year and 5.5% year-on-year, respectively. EBITDA, however, decreased by 2% due to a significant amount of spectrum costs allocation to keep our mobile business competitive advantages as part of the longer-term investment strategy. The biggest revenue contributions were still dominated by mobile and fixed broadband segments due to more favorable competition in mobile business and continuous growth of new customers in fixed broadband. Data, internet, and IT services grew by 5.5% year-on-year while IndiHome contributed 5% growth year-on-year. Supported by healthy conduct in mobile segment competition, Telkomsel still experienced a healthy growth in revenue of 1.1% year-on-year with EBITDA margin maintained at 55.7%. Digital business remained the engine of growth supported by the focus on maintaining dominance in network supply. The segment recorded positive performance with 7.1% year-on-year growth to IDR 18.15 billion and increased its contribution to total revenue to 84.4% from 79.7% in the same period last year. Ladies and gentlemen, in fixed broadband business, the competition is about to intensify, especially the high-income household segment that has been served by IndiHome and other competitor's products. IndiHome has become the market leader as the main portion of the customer is high-income customers. To maintain sustainable growth, we are targeting the other income segment household with overall better services delivery across IndiHome's customers. IndiHome recorded positive growth in revenue and maintained its dominance, with its contribution to the total consolidated Telkom's revenue steadily increasing to IDR 7.2 trillion, growing at 5% year-on-year. As of the first quarter of 2023, the blended ARPU of IndiHome was diluted to IDR 264,000, with the additional new customers growing at 7% year-on-year, adding up its subscribers to 9.4 million customers. Along with the economic recovery in Indonesia, the Enterprise business segment also grew in positive correlation. As of the first quarter of 2023, the Enterprise segment successfully grew by 7.8% year-on-year in revenue to IDR 4.5 trillion due to growing enterprise connectivity business, digital solutions, and satellite business. This achievement marks the successful strategic alignment of the Enterprise segment business and hope to be in positive territory throughout the year. On the Wholesale & International business segment, it also experienced positive growth in the first quarter of 2023 by contributing IDR 4 trillion in revenue, increasing by 4.0% year-on-year. The driver of Wholesale business revenue growth was driven by our growing international wholesale voice business and our digital infrastructure business. Our strategy of 5 Bold Moves continued to take its effects towards positive development. Among these positive movements were the signing of the CSA in the FMC initiative, intensifying activities towards the development of InfraCo, and consolidating Telin's international Data Centre Business into Telkom Data Ecosystem. Some materialized implementations of our strategy are as follows: on April 6, 2023, Telkom and Telkomsel signed the conditional spin-off agreement, in which Telkom agreed to transfer its IndiHome business to its controlled subsidiary, namely Telkomsel. As the consequence of this transaction and as the party who transferred its business to Telkomsel, Telkom's shareholding position increased from 65% to 69.9%, whereby Singtel as the minority shareholder diluted its shares in Telkomsel from 35% to 30.1%. FMC initiative's execution is very strategic to maintain the competitiveness and advantage of the company in facing business competition in the Indonesian telecommunications sector and to improve the quality of services provided to the customers. In addition, the spin-off of the IndiHome business segment to Telkomsel is also expected to accelerate the process of providing broadband services to the public throughout all regions of Indonesia. As part of our commitment to enhance our good corporate governance, Telkom puts serious attention to the minority shareholder's interest for every significant corporate action. Before FMC's final step towards the spin-off agreement, Telkom already proposed an independent general shareholders' meeting to seek the approval of this corporate action. Post spin-off agreement signing, Telkomsel will fully control the implementation of the FMC initiative by preparing human resources management such as organization, human capital, and working culture, as well as business and commercial aspects such as product differentiation, sales strategy, and synergy value. Following the FMC initiative, Telkom will continue the InfraCo project to explore the potential of unlocking its asset through infra-sharing, either within the group or sell to the telco industry if any idle capacity exists with B2B arrangement. By implementing the InfraCo initiative, Telkom could position InfraCo as the solution to the telco industry, which currently faces industry headwinds such as growth saturation, declining profit, as well as CapEx pressure. In the near future, we will develop a business plan and carve-out scenario, establish a new entity to manage the business and align the fiber-related business portfolio within Telkom Group. Data center and cloud remain as one of the areas that become our focus as demand is growing significantly with the rising activities in digital business players. Our HDC Cikarang has secured several anchor tenants as the first campus building has completed. In addition to our growing data center business, TDE expects to add 21 megawatts this year coming from the consolidation of DC Telin Singapore of around 17 megawatts and Cikarang HDC 4 megawatts. Within the year of 2023, TDE also manages to further consolidate overseas data centers in Singapore and Hong Kong with Telin, so that DC overseas will become part of TDE's ownership. Following the acquisition of 997 towers from IOH, we expect Mitratel could strengthen its position as the largest tower provider in Southeast Asia in terms of total tower ownership of 36,439 towers. Mitratel is also expanding to the Fiber to the Tower business as part of its strategy to strengthen its product portfolio to become a digital infrastructure company. Mitratel also expanded its portfolio in the fiber optic sector to strengthen the business ecosystem. That's the ending of my remarks and thank you for your kind attention.

Thank you, Pak Ririek. We will now begin the Q&A session. Operator, may I have the first question, please?

I'll now invite the first question from Hussaini Saifee from UBS.

Several questions from me. First is on the mobile side. Now we see that there has been a high level of competitive rationality and price increases in the market. But despite that, we are seeing that the revenue growth remains relatively low or relatively subdued. My question is what is needed for the industry price increases and competitive rationality to better flow through into revenues? Do you think that the weak macro economy is weighing on the growth side? That's question number one. Second question is on the fixed broadband competition. And in the earlier remarks, it was alluded that it is likely intensifying. My question is, can you please provide more color like is the competition mainly concentrated in big cities? And have you seen the churn level increasing on that side? And where do you think that the new ARPU levels in the fixed broadband is settling down? And just a housekeeping question. Why did general and administrative and interconnect costs rise sharply in quarter 1?

Okay. I will take on the first question about the impact of the macro as well as the potential growth in terms of the mobile. On the growth side, actually, our growth for the first year, 1.1% compared to last year is contributed by 2 key items. First, the declining of legacy which currently contributes about 15% of total revenue. It's still declining by 22% on a year-on-year basis. But in terms of the mobile broadband as well as digital services, we see strong growth supported by our wireless growth by 11%, and it also contributes to the growth of the revenue of about 7.1%. In terms of the macro side, we were aware of that impact mostly in the increasing of the inflation. As the current quarter inflation is about almost 5% compared with the previous one in around 3.75%. So in some of the offerings to the customers, we look and attract the right offering to the customers by also seeing the competitiveness in each of our clusters. So I think we still look at the right track in terms of the improvement of the overall industry healthiness. And by doing so, I think at the ground level, we see that the other operators also are doing so. I hope that can have the feedback for your question, Saifee. Thank you.

Movements in the fixed broadband competition, especially in the big cities?

Yes. Actually, we're facing very high competition in the big cities. There are many local competitors coming, and we fight each other. And there are many new customers who, with some pricing efficiency, they don't just get the 1P offering, only Internet service. So the growth of revenue as the group. But it's a level increase because of the high competition, operators offer very attractive pricing at a fairly cheap price with high speed. So there are some customers moving to competitors. And then we offer customers to maintain their relationship by providing an increase with the only Internet because some customers don't want to continue with 3P, even though or the 2P options because they don't want to go with the 3P with the TV or the fixed phone. So they only want to go with the Internet only. This is for the ARPU level. They've been good because of this.

Regarding your question about the significant increase in G&A costs, this is primarily due to the seasonal patterns in the first quarter, during which we took a conservative approach to revenue recognition and set aside some allowances for bad debt. Over time, we expect the allowance for bad debt to grow in line with revenue growth, which suggests that the growth rate will moderate during that period. Additionally, the growth in the first quarter is also driven by provisional fees associated with our corporate activities, as we executed numerous corporate actions and required extensive professional support. This growth will smooth out over time, particularly in the first half of the year. As for interconnection expenses, these are in line with business trends. A significant portion of our business is now focused on Application-to-Person messaging, while personal interconnections are decreasing. Furthermore, the market has become more competitive, leading to moderate margins due to advancements in technology. Overall, we anticipate that cost growth will align with business growth over the years. In terms of fixed broadband competition, as mentioned by my colleague Ibu Venus, we manage churn effectively by adjusting prices and responding to demand. During the COVID period, some customers opted for lower-speed broadband, and we have accommodated this change in service. Notably, despite acquiring BC through the consolidation of IndiHome and Telkomsel, we have still achieved a subscriber growth of around 140,000. With the integration of fixed and mobile services, we expect this number to increase significantly in the upcoming quarters.

Just a quick addition to the Telkomsel fixed broadband internet. Telkomsel, if you look at the Telkomsel business, especially the legacy business, which is basically broadband and digital, the growth of the Telkomsel is comparable with other players. And then on the fixed broadband and the churn rate, yes, the churn rate is increasing, but we managed to have the net effect positive and at a healthy level.

Do you have any further questions, Pak Hussaini?

No. This is very clear. I will get back into the queue for more questions.

Next question, please, from Ranjan Sharma.

Your next question is from Mr. Ranjan Sharma of JPMorgan.

I have a bunch of questions. So maybe one feedback. The line is not clear. If you want to speak closer to the mic, it's just very difficult for us to follow. My questions are like if are you expecting the wireless revenues growth to accelerate in the coming quarters with the adjustments on tariffs? Or should we expect like 1%, 2% growth for the foreseeable future? The second question is on the cost side. If your underlying revenues are declining 6%, 7% and this pressure on inflation, then does the management have any cost optimization programs in place, which can support the bottom line? Similarly, if there's less demand for triple-play fixed broadband services, is there any plans to also reduce the content costs as well?

I'll begin by addressing the inflation and cost concerns. My colleague will later discuss the anticipated improvement in wireless revenue for the upcoming quarters. On the inflation front, we've seen our operation and maintenance costs slightly exceed revenue due to new spectrum coming in this quarter. In the same quarter last year, those costs weren't accounted for yet. We acquired additional spectrum last November, contributing to the increased operation and maintenance expenses. The new spectrum costs approximately IDR 222 billion. Over time, we expect to optimize the use of this spectrum, which should help decrease capital and operational expenditures, leading to competitive advantages and cost savings in the long run. Additionally, some costs have risen due to a new tax on personnel expenses this year and a more conservative approach to bad debt allowances. However, if we normalize these costs, they should remain manageable, especially with revenue increasing by about 2.5%. This indicates that we have implemented some efficiency measures. Looking ahead, we anticipate continued growth in both mobile and fixed-line services, including Enterprise and wholesale segments like towers and data centers. We believe our figures will improve over time. Now, let’s move on to the cellular side, and Ramzy can take it from here.

Thank you, Pak. I would like to provide some insights regarding our cost management efforts. Since 2021, we have initiated a cost transformation program aimed at identifying areas for improvement and enhancing efficiency. Our current reports indicate positive trends in marketing and sales expenses, as well as in service costs. This aligns with our strategy to better acquire new customers and improve offers for our existing customer base, which has also benefited from our renegotiations with vendors, including those related to operations and tower rentals. These initiatives are expected to continue in the upcoming quarters and have positively impacted our financial performance. Regarding anticipated growth this year, last month’s Ramadan session allowed us to capitalize on our offerings, generating peak usage driven by our network. I invite our marketing colleague, Derrick, to provide further details on this topic.

Yes, Pak Ramzy. Yes, allow me to continue some of our thoughts on our pricing strategy moving forward in 2023. So we will continue to drive market repair we have gained from a healthier conduct, and we will maintain this to drive competitiveness, customer centricity, and we will look into being more simplifying our products and to do differentiation. We will scale up our content offering as well as our CDN efforts to provide a similar package to stay relevant to our customers. So we will apply multiple strategies, which include feeding the market needs. We will be technical and granular in terms of where we want to target our customers. So we are on the search for optimal level of pricing when we do price adjustments, but we will keep continuing to monitor the balance between profitability and market share. Thank you.

Can I just have quick 2 follow-ups? With all the things that the management has clarified, do they expect an acceleration of wireless growth in the coming quarters? And regarding content, again, like if people are choosing not to go for 3P or triple-play plans, not to take bundled content from telecom operators, can content be a source of differentiation for telcos?

Okay. On the first question, actually, we still maintain our outlook in cellular in low single-digit growth, and it goes hopefully till the end of this year. But especially in the second quarter, I think we expect to have a better month as we experienced the first discussion in the Ramadan session.

Pak Ramzy, I would like to add still on customer choice with regards to digital content. I think we have a proposition that's relevant to our customers. When we offer a partner with our digital content offering, we also bundle in mobile data so that customers can enjoy watching entertainment while on the move. So that is our key proposition and we drive more value to our customers. Thank you.

We have follow-up questions from Ranjan Sharma from JPMorgan.

Just 1 quick follow-up. If you can, again, remind us about the guidance for 2023 and are there any changes?

Pak Ranjan, we are still keeping the guidance as we believe the cellular is going to improve over time with IndiHome combined with mobile becoming fixed mobile convergence that can address home broadband. We also believe that with these initiatives, we can accelerate the growth in the second half of the year and also some other business, especially in the Enterprise and also in the Wholesale, for example, the tower and data centers can provide, let's say, low 10 or double digits. And this is going to provide us with, I think, a potential to keep the growth in the same like the guidelines that we already provided to you. That's, I think, explanation from us.

Okay. And on the margin side?

On the margin side, of course, we try to maximize all the potential cost savings on this one. We also keep that guidance with the maximum effort to keep the costs still in line with the guideline.

Thank you very much for the questions. As of now, there are no more questions from the line. May I hand the call back to the management for closing remarks.

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

That does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.