Perusahaan Perseroan Persero Pt Telekomunikasi Indonesia Tbk Q3 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to PT Telkom Indonesia Conference Call for the unaudited results of Third Quarter 2023. My name is Hanifa Hasan, and I'll be your moderator for today. There will be an overview from our CEO followed by 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 and estimates or 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 and foremost, Mr. Ririek Adriansyah, President, Director and CEO, and Mr. Heri Supriadi, Finance and Risk Management Director; Ms. Venusiana, Enterprise and Business Service Director; Mr. Bogi Witjaksono, Wholesale and International Service Director; Mr. Budi Setyawan Wijaya, Strategic Portfolio Director; Mr. Honesti Basyir, Group Business Development Director; Mr. Herlan Wijanarko, Network and IT Solutions Director; Mr. Afriwandi, Human Capital Management Director; and Mr. Muhamad Fajrin Rasyid, Digital Business Director. Also present the Board of Directors of Telkomsel here with us Mr. Hendri Mulya Syam, President Director. We also have Mr. Mohamad Ramzy, Finance and Risk Management Director; Mr. Derrick Heng, Marketing Director, last but not least, we also have Mr. Adiwinahyu Basuki Sigit, Sales Director. So let me now hand over the call to our CEO, Mr. Ririek Adriansyah, for his overview. Over to you, Pak. The floor is yours.

Thank you, Hanifa, in this call. Ladies and gentlemen, our journey implementing the 5 Bold Moves strategy is becoming more granular and starting to have a positive impact on Telkom Group financial and operational performance. We believe that the impact of the Five Bold Moves implementation results will be more significant year-by-year. You need to be ready for the political situation, as this may have a negative impact on the overall business. Entering the end of year 2023, the global macroeconomic situation is still facing serious challenges, especially from the dynamics of the U.S. and China. The strong U.S. dollar and high inflation are still forcing monetary policy to reduce inflation by raising U.S. interest rates. The slowing economy in China and the property crisis are putting more pressure on unemployment and could cause the Chinese economy to be in a depressed state. Our capital structure also has low efforts. With that, the debt-to-equity ratio is 46.2%, considering interest rate volatility. The cumulative gap of local currency versus foreign exchange is so high that our exposure is negligible. Finally, our contracts with the major vendors, both local and global are mostly stated in IDR, so that Telkom's contract exposure to foreign exchange is also not material. The PT Telkom Group business and financial performance result during the 9 months of 2023 is satisfactory, and we believe that the Five Bold Moves is working very well. On the B2C segment with the FMC initiative, we are realizing synergy initiatives by improving efficiency in many cost elements as well as cross-selling revenue and product differentiation. OpEx leadership has been successfully implemented by merging mobile and IndiHome customer contact points and efficient joint marketing initiatives. CapEx efficiency is created towards joint penetration with mobile and broadband expansion planning. Revenues have uplifted through cross-selling and upselling among mobile and fixed broadband customers. The company also successfully launched Telkomsel One to support the differentiation with various customer needs. On the B2B business, Telkom is actively implementing business strategies to expand and target B2B customers, ranging from infrastructure units, data centers, integrated B2B services and dealer subsidies. B2B business expansion has been achieved not only through organic activities and internal improvements but also through collaborations with other B2B entities. M&A and high-end growth foster our B2B business. The establishment of our company to manage the infrastructure business is expected to be realized in 2023 as well as the asset consolidation of our data center into Telkom data ecosystem. This especially applies to our international data centers that could provide a quick opportunity to operate and handle the largest market share of B2B products. In 9 months of 2023, Telkom still maintained revenue growth by increasing 2.2% year-on-year to IDR 111.2 trillion, with EBITDA standing at IDR 59.1 trillion and EBITDA margin increasing from 52.2% in the first half of 2023 to 53.1% in the 9 months of 2023. Net income grew 17.6% year-on-year to IDR 19.5 trillion. We are confident that our improvement in revenue and profitability in the 9-month of 2023 will continue until the end of the year 2023. The commencement of FMC initiatives is marked by the legal transition of IndiHome business ownership from Telkom. The results indicate that both mobile data and internet services revenue increased 4.8% year-on-year, while fixed broadband IndiHome continues to contribute positively by growing 4.3% year-on-year. User business revenue of Telkomsel grew 7% year-on-year, becoming the most significant contributor to the top line. This performance increase its contribution to mobile revenue, raising it from 81% last year to 86.1% this year. We consistently applied customer value maximization in the mobile business, and by this quarter, the quality mobile customer base has already reached 158.3 million, marking a significant increase of 5 million Q-on-Q, remaining relatively stable on ARPU at IDR 48,600 in the third quarter of 2023. On IndiHome B2C, we successfully acquired around 105,000 new premium B2C customers, resulting in a stunning total of 8.5 million customers. The ARPU of IndiHome B2C could reach IDR 237,000. Our new product, Telkomsel One, signifies our commitment to delivering connectivity for the community with a wide selection of customer packages. Telkomsel One also offers broadband services within a single network. Our ongoing efforts with Telkomsel prepaid services now feature a unified billing system and portfolio. The integration that began 3 months ago is progressing on schedule, including cross-sell activities and service integration, enhancing operational efficiency while avoiding investment duplication. The wholesale and international business segment contributes by providing connectivity for both local and international clients. As of 9 months of 2023, the wholesale international business generated revenue of IDR 12.3 trillion, with significant contributions from the international wholesale voice business and digital infrastructure. During this period, wholesale international business revenue increased by 9.1% year-on-year. The growing demand for data centers has drawn attention from the business sector, including Telkom. This remains a focal point for Telkom, which has invested heavily in its CapEx. As of 2023, Telkom operates 32 data center facilities, 27 of which are located nationwide and 5 internationally. The average utilization of our data centers is 70%, with a total IT load capacity of 42 megawatts. Our data center subsidiary, PT Telkom Data Ekosistem, focuses on hyperscale and enterprise data centers to support local governments, local ISPs, and small and medium enterprises. The data center business also enhances customer experiences and boosts various digital solutions. Following the InfraCo initiative, we're optimizing network utilization and CapEx while increasing market penetration for infrastructure sharing. We expect the new entity to cater to Telkom's InfraCo business to be operational and commercial by 2024. The Mitratel segment, as the largest tower operator in Southeast Asia with over 37,000 towers and an improved tenancy ratio of 1.5 in the 9 months of 2023, has demonstrated strong financial results with standalone revenue of IDR 6.27 trillion, an increase of 11.9% year-on-year driven by tower leasing revenue. EBITDA and net income also grew by 14.8% and 16.6% year-on-year respectively. The number of colocations and tenants increased by 21.3% and 10.5% year-on-year, respectively, demonstrating a strong financial position with a low leverage ratio of 1.9x net debt to EBITDA that allows the company to withstand macroeconomic downturns. The enterprise business segment achieved a revenue of IDR 14.6 trillion, growing by 6.6%. The largest contribution comes from B2B IT digital services and enterprise connectivity solutions. Following the spin-off of IndiHome to Telkomsel and further implementation of the 5 Bold Moves Strategy, the Enterprise Segment through the B2B Digital IT Service Initiative has successfully launched a new umbrella brand named Indibiz in the third quarter of 2023, aimed at securing the SME market. Indibiz provides connectivity solutions and digital platform services to these SMEs. Through ESG and business sustainability programs, Telkom seeks to create synergies among stakeholders to contribute to environmental preservation, social progress, governance development, and business sustainability. Telkom received a good rating in the Indonesian Ministry of SOE's ESG Implementation assessment in 2023 and was rated A by Morgan Stanley Capital International for three consecutive years.

Thank you, Ririek. We will now begin the Q&A session. When asking your questions, please state your name and your company. Also, kindly speak clearly. So I think, operator, maybe we have the first question, please?

Two questions. In the third quarter, we saw mobile subscriber growth was quite strong at 3.3%. So does it reflect that the company is going after the low and mid-end consumer segment? Can you share light on what is driving this? And if you can talk about the outlook for mobile ARPU as well? Secondly, can you share how the initial response has been to Telkomsel One offers? Are you able to share how cross-sell opportunities have helped both IndiHome subscribers and mobile subscribers, along with the outlook for the IndiHome B2C subscribers growth?

Yes. Thanks for the question. Telkomsel managed to achieve a 3.3% quarter-on-quarter growth in terms of subscribers. We have consistently applied a healthy market conduct and have delivered a smart customer acquisition strategy, optimizing customer behavior management; the focus is really on renewal, hence resulting in consolidation of customers, essentially healthy, productive subscribers. With that said, the FMC integration helps us with quick wins like cross-sell and upsell, thereby increasing the number of subscribers. So we have secured a stable customer base and delivered improved customer quality, demonstrating a strong 11.4% year-on-year growth in terms of ARPU. Although there is a decline quarter-on-quarter, this is purely due to seasonality, aligned with our strategy of promoting ethical market practices and industry pricing rationalization. If I may add on the second question regarding how we are managing the FMC, including Telkomsel One, we've seen that Telkomsel One has addressed some of the cross-sell initiatives as well as new sales by combining fixed and mobile offerings. However, the cross-sell is not only reliant on Telkomsel One; we've also integrated the sales channels. One of the results is we have maintained subscribers while simultaneously enhancing the cross-sell opportunities between Mobile and Fixed services.

Sure. But can I ask, while I understand that 3Q ARPU was impacted by seasonality, how should we look at the outlook for mobile ARPU? Is the competitive environment stable, and should we continue to expect improvement in mobile ARPU?

We've observed that the competitive environment for mobile ARPU is relatively stable. Some price adjustments have been realized in Q3 and even recently have been evident. Moving forward, we expect that the ARPU will continue to stabilize on our end. Looking at the movement, of course, considering the competitors in mobile, we are selectively adjusting our pricing and seeing prospects for improving our ARPU across our portfolio. Just to add, we will continue to further apply the right pricing and offerings. We want to keep it simple, differentiate via personalization, and scale up content through customer behavior management. We intend to provide similar services to remain relevant to our customers' needs, considering affordability as well as customer preferences.

Our next question comes from the line of Kelsey Santoso from Goldman Sachs.

Congratulations on the results. I have a few questions. First, regarding mobile, we've observed an increase in prepaid subscribers quarter-on-quarter compared to Q2. Would you say that we have moved past the lowest point in subscriber churn due to the strategy of focusing on quality users? Second, can you provide any updates on your full year guidance for group and Telkomsel revenue growth, EBITDA margin, and CapEx? Lastly, what opportunities do you foresee with the new entry in Indonesia, especially considering their partnership with you for B2B and plans for B2C? Are you concerned about any significant churn or risks of cannibalization affecting your core offerings?

Yes, I'd like to answer your question on subscriber growth and churn management. Our objective has focused on acquiring productive customers. We have examined our low-value customers, categorized as bonus seekers who prioritize promotions and temporary offers. This focus has stabilized our overall subscriber churn, which has decreased from 6% to 7% to below 5% since we adopted our initiatives. Regarding guidance for the group, we will not change our previous guidance. We believe revenue growth will reach mid-single digits and we will maintain our EBITDA margin which previously was stated as above 50%. Currently, we are observing around 53%, and we will strive to maintain that margin alongside net income margin around 17% plus. Additionally, we anticipate CapEx spending will constitute around 22% to 24% of revenue, with our goal to see a lower ratio while maintaining the necessary capacity to enhance efficiency. For the partnership, as we've already integrated, we've updated the guidance. Previously we projected low single digits, but now we forecast mid-teens revenue growth. EBITDA margin remains in the mid-50% range while the CapEx now ranges around 15% to 16% due to additional requirements to support our FMC initiatives. We continuously monitor developments in technology substitutions, particularly in Indonesia. We see potential here depending on the target and addressable market. Overall, our current average revenue per user continues to compare favorably to what is anticipated for IndiHome. It's important to consider the price consumers pay for customer premise equipment, especially based on our experiences during the early days of 5G Fixed Wireless Access. We don’t view this as an immediate threat to consumer bases.

Our next question comes from the line of Marissa Putri from UBS.

Just a follow-up question. If my calculation is correct, this is the first time where I see data volume or data subscribers actually down Q-on-Q. You mentioned something about your new subscribers being product-based, but if it also correlates strongly with a large expansion in the number of staff, indicating that most of the subscriber growth came from the acquisition market. That's number one. Secondly, in terms of your mobile growth, excluding IndiHome, I think it's a large competitor. Would you say that more of the market share loss is actually coming from ex-Java or Java? Some color on competition would be helpful as well. Lastly, on cost, can you elaborate whether there was some kind of one-off element on the G&A costs or if the decline is purely coming from FMC synergy?

With respect to ARPU from our new subscribers, we emphasize customer value management as a core strategy to personalize offerings, targeting individual customers. I believe our position remains stable with potential for ARPU improvements in the future, contingent on macroeconomic conditions and competitive pressures. We're calibrating our pricing to customer willingness to pay; we've tailored plans that appeal to diverse customer segments. Regarding market share, on Java, our markets remain stable under current conditions. However, in ex-Java, we actively leverage our customer value management, achieving a penetration rate exceeding 65%. This has helped maintain our momentum in ex-Java, though we remain cautious about competitive pricing impacts. We are also optimistic about using FMC to lock in customers with multiple attractive offers. On G&A costs, the primary reason for the decline is our enhanced collection fee efficiency, particularly from enterprise customers. The trends indicate progress in our collection capacity. Additionally, while we see some cost efficiency from synergy in closing redundant outlets, particularly those within short distances, the current trend in G&A is largely attributed to better collection and consultancy fee management. Moreover, to expand on the synergy realization, a significant optimization was achieved by aggregating content contracts that previously operated separately for fixed broadband and cellular services. This economical leveraging has enabled considerable cost optimization in our initial implementation quarter of FMC.

Our next question comes from the line of Arthur Pineda from Citi.

Several questions, please. Firstly, on the mobile business. Can you clarify the significant improvement in net adds, maybe 5 million, yet ARPU has declined even though you're focusing on quality users? What's driving the decline in ARPU which offsets the subscriber gains on revenue? Second, regarding IndiHome consumer momentum, has it improved enough to be maintained as the baseline level moving forward, or do you foresee further improvements in subsequent quarters? Lastly, concerning the synergies, I recall you targeted around IDR 0.5 trillion in synergies for the second half of the year. Can you detail any cost reductions recognized in Q3 and how much will be realized in Q4?

Thanks, Arthur. In response to the first question regarding mobile, the ARPU has started to decline quarter-on-quarter, but this is primarily contextually linked to seasonality. We anticipate stability and increased ARPU correlating with usage and festive seasons in Q4 2023. Indonesia's data prices are notably low, necessitating various market rationalizations to remain competitive while satisfying customer demands. On the IndiHome expectation, Q3 demonstrates a solid baseline today, with the potential for further improvements as we integrate and elevate our market penetration through various initiatives. We are exploring additional to enhance home broadband penetration, especially in segments beyond the traditional A, B, and C categories. We've established that first movers typically yield significant market advantages. In terms of synergy realization, as Pak Ririek highlighted earlier, we expect realization to approach IDR 500 billion, aligned with our initial implementation goals. Costs and revenue adjustments should align across quarters as synergies materialize. This includes consolidation of outlet operations and cross-sell activities which have already yielded positive results. Concerning InfraCo, as previously noted, it aligns with global telecom strategies and aims to enhance our fiber network revenue. Given the low penetration of home broadband in Indonesia, we expect InfraCo to present substantial opportunities for revenue generation, not only for Telkom but also for other service providers via wholesale offerings.

If I could just have one follow-up on InfraCo. It was mentioned earlier that it's expected to be formed by the end of this year. How do you envision this benefiting Telkom? Is it due to additional revenues from wholesaling, or do you expect to realize higher asset multiples upon spinning off?

The InfraCo strategy is indeed part of a broader global telecom strategy. Its goal is to increase the revenue derived from our fiber network while also optimizing utilization rates. Given the low home broadband penetration, we see considerable revenue potential for Telkom and other service providers by leveraging our fiber assets.

This should be ready for commercial operations by 1Q '24, is that correct?

Yes, we aim to start commercial operations through our gross sale division in early next year.

The company is expected to be established by the end of this year, and operations will begin in early 2024. However, we won't witness immediate impacts, as most of the assets are still with intercom; thus, the full effect will be seen gradually.

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

Two quick questions from my side. There are a bunch of moving parts. Could you quantify what your underlying clean net profits are excluding any one-off gains and losses? Secondly, you've seen a significant improvement in certain costs like G&A, but also O&M costs. Can you explain what some of the other drivers are and if they are sustainable?

Regarding net income, it's essential to consider two perspectives. Inside the profit, we have unrealized losses or gains contingent on our broadband investments. We expect operational net income to remain predictable based on our results so far in 2023. This trend should be sustainable up to the year-end, offering no surprises in operational net income. We've proven resilient last year through dividends while managing investment returns effectively. On G&A costs, the primary contributors to improvements are collection costs and consultancy fees. We anticipate these trends being sustainable, alongside additional cost efficiencies from operational streamlining and synergies from closing redundant outlets.

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

My first question, could you confirm if there's been an uptick in the enterprise segment revenue? If this is correct, what’s driving it, and what’s the outlook for that segment? Additionally, regarding the InfraCo comments earlier, is it expected to close by the end of this year? How many kilometers of fiber will be transferred to this new unit? Is this only backbone fiber or does it include FTTH or FTTT?

The enterprise segment has recorded a revenue growth of 6.6%, with enterprise connectivity and IT services as the biggest contributors. Regarding InfraCo, we will set up FTTH this year, and we have already begun selling fiber assets through our wholesale division. We're still analyzing an optimum strategy for transferring the assets to InfraCo.

From the 158 million subscribers for Telkomsel, there's also 8.5 million IndiHome. How much of the 158 million is coming from the new IndiHome product?

Currently, about 30% of our base consists of multiproduct holders who hold both mobile and IndiHome services. Our strategy is to increase this percentage through cross-selling and upselling. To clarify, the Telkomsel One initiative is a portion of our broader strategy to integrate mobile and fixed services. We've seen positive results from existing IndiHome customers as well, ensuring that these customers contribute to our overall base. Regarding the EBITDA margin, currently at 53.1%, we anticipate maintaining this figure, though new synergies may yield further increases. We've seen favorable contributions from investments as well.

In the interest of time, we will only take one final question before hitting an hour mark. Certainly. Our final question comes from the line of Piyush Choudhary from HSBC.

Could you share your thoughts on the outlook for the timing of spectrum auction in the 700 and 3,500 megahertz bands? When is the most likely time for these auctions?

In August this year, the ICT Ministry sent a letter to operators concerning their interest in participating in upcoming spectrum auctions for the 700 and 2.6 bands. Operators are actively studying and analyzing policies applicable to this selection process, which is expected to take place in the first quarter of next year. To clarify, while some spectrum will be released in the first quarter of next year, further discussions concerning auction structures and guiding principles are ongoing. The government is mindful of the operators' interests in these spectrum assets. Thank you, Piyush. We're nearing the hour mark. I think it's time to conclude the call. I appreciate everyone's participation. We apologize for any unanswered questions. Please reach out to us directly if you have further inquiries. Thank you again, everyone.

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