Earnings Call Transcript - TLK Q4 2020

Operator, Operator

Good day and thank you for standing by. Welcome to Telkom's Full Year of 2020 Results Conference Call. After this presentation, there will be a question-and-answer session. I would now like to hand the conference over to your first speaker today, Mr. Andi Setiawan. Please, go ahead. Thank you, Ririek. Gentlemen, welcome to PT Telkom Indonesia Conference Call for the Full Year of 2020 Results. We released our full year of 2020 results on April 29, 2021 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 seven 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.

Ririek Adriansyah, CEO

Thank you, Andi. Good afternoon, ladies and gentlemen, welcome to our conference call for the full year of 2020 results. We really appreciate your participation in this call. Amidst the challenges for business information due to the prolonged COVID-19 pandemic, Telkom has successfully managed business and financial performance. We recorded IDR136.5 trillion in consolidated revenue, increased 0.7% from the previous year. Our EBITDA grew by 11.2% with EBITDA margin increased from 47.8% to 52.8%. While at the bottom line, net income increased by 11.5% to 20.83% with a better net income margin at 15.2% from 13.8% last year. IndiHome continues to become the engine of growth as it contributed IDR22.2 trillion, grew by 21.2% with contribution to consolidated revenue increased to 16% from 14% last year. Our EBITDA margin of IndiHome reached 38.9%, a significant increase from 33.9% last year. The IndiHome revenue growth was a result of increasing subscribers coupled with improving ARPU. Total subscribers grew by 14.5% to reach IDR8 million, while ARPU in the first quarter improved to 262,000 compared to 253,000 in the previous quarter. The increasing ARPU was largely driven by revenues from add-ons that grew by 27.8%, contributing around 14.7% to IndiHome revenue compared to 13.6% in the same period last year.

Andi Setiawan, CEO

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

Operator, Operator

Thank you. Your first question is from Piyush Choudhary of HSBC. Please, ask your question.

Piyush Choudhary, Analyst

Yes, hi, good afternoon. Thanks for the call and congrats on the results. Two questions. Firstly, on mobile, can you talk about the competitive dynamics in the industry and outlook for 2021? And has Telkomsel achieved the desired objective after the rollout of unlimited plans last year? Secondly, as you mentioned that you have acquired 20 megahertz in 2.3, can you share the likely network rollout plans? And when do you intend to start offering 5G services using 2.3? Thank you.

Rachel Goh, Executive

Hi Piyush, Rachel here. I'll address your question on the competitive landscape. As you pointed out, in the last six months of 2020, our product and pricing strategy required corrections to impose discipline into the industry pricing practices back then; it was necessary for Telkom to protect our relative market position. Now we have achieved those objectives in those six to nine months of strategy. However, as the market leader, we always need to stay focused on driving sustainable growth behaviors in the industry. Telkomsel has already initiated price adjustments on the back of macroeconomic recovery. We see fiscal stimulation, businesses, and individuals adapting much better to COVID-19 with the COVID rollout. All this indicates a positive outlook. With this positive outlook, we felt that the timing was right for us to review our product and pricing, moving away from unlimited offerings and introducing more focused, simple, and easily understood offers for existing customers, along with more affordable packages. However, Telkomsel will continue to monitor closely the behaviors of other operators to avoid and prevent price wars while maintaining optimum premium gaps and protecting our relative market position. Moving forward, looking at other players in the market, we foresee healthy upward recoveries and positive growth across the industry. Overall, the industry is much more rational now, and we strive for sustainable growth for the whole industry. I hope that answers your question.

Piyush Choudhary, Analyst

Yes.

Setyanto Hantoro, Telkomsel Executive

Hi, this is Setyanto from Telkomsel. Regarding your question about network rollout plans with regard to the 2300 megahertz that we won from the auction a few weeks ago. By acquiring this additional 20 megahertz, Telkomsel now holds 50 megahertz in 2300, strengthening our network position in the market. We will utilize it both for enhancing our 4G leadership and also preparing for 5G implementation in Indonesia as soon as possible. As a company and as a leading digital player, we want to remain a leader in technology; therefore, we will maximize the usage of this new spectrum to strengthen both 4G and 5G.

Piyush Choudhary, Analyst

Sure. But is there any timeline when you're looking to launch 5G services?

Setyanto Hantoro, Telkomsel Executive

We will launch it this year. We have some plans, though I cannot reveal the specifics now, but in the upcoming few months, you will see the launch of 5G.

Piyush Choudhary, Analyst

Okay. Thanks a lot. I'll come back in the queue.

Operator, Operator

The next question comes from the line of Arthur Pineda from Citigroup. Please ask your question.

Arthur Pineda, Analyst

Hi, thanks for the opportunity. Two questions, please. First, can you get a better understanding of the growth of Telkomsel into the fourth quarter? You've posted a 4% Q-on-Q growth for Telkomsel as a group. But the new breakdown shows voice and data were down Q-on-Q; so it means that other revenues are driving this. What is exactly classified on this side? Second question I had is regarding the outlook for 2021. Are you able to flush out your mid-single digit growth guidance across the business lines between fixed, mobile, and enterprise? Thank you.

Heri Supriadi, Executive

Okay. Arthur, Heri speaking here. Let me try to answer your second question. On the guidance for 2021; we have a diversified portfolio, and of course, the home segment will continue to grow. I believe in the enterprise area, regarding the current COVID situation, which we don’t really know where it’s heading, it may provide us with vertical digital growth, but our focus is to ensure more quality, particularly in terms of customer portfolio and profitability in this area. In the cellular segment, we anticipate pressure in the industry, hence, we take a more conservative outlook, expecting low single-digit growth in mobile as well. With that combination, as my CEO mentioned earlier, we project low to mid-single-digit growth in overall revenue for our company. This is my brief explanation regarding your second question.

Ririek Adriansyah, CEO

Regarding your first question, the impact for Q4 actually stems from the implementation of PSAK 72, which is related to IFRS 15. We are analyzing the delegated revenue on a quarter-on-quarter basis. Based on the last accounting report, it normatively would have been around 5.6%. Looking at digital revenue, if it had been normalized, it should have shown an increase of 7.3% instead of the decline of 7.1% related to digital business revenue. Thank you.

Arthur Pineda, Analyst

Okay. So the difference is mainly because of accounting changes, not because of value-added services being booked?

Heri Supriadi, Executive

Actually, it relates to IFRS 15 and how we handle corresponding discounts. In the last quarter, we did a reclassification and proportionate allocation for the legacy revenue and digital business revenue. Thank you.

Arthur Pineda, Analyst

Got it, thank you.

Operator, Operator

Your next question comes from the line of Shong Chenfgfu of CIMB. Please ask your question.

Unidentified Analyst, Analyst

Hi, thanks for the call. This is a phone call from CIMB. First, on IndiHome; can you talk a bit about the competition in this space? Do you see that potentially posing some risks to your ARPU and subscriber targets for 2021? That’s the first question. Secondly, for the enterprise business. You mentioned there are still uncertainties regarding the impact of COVID-19. But I wanted to find out if you expect the enterprise business to remain loss-making this year, or do you see a turnaround? My third question regarding Telkomsel; how do you see OPEX trending this year, excluding depreciation? Yes, those are my two questions. Thank you.

Setyanto Hantoro, Telkomsel Executive

Thank you, Shong. Let me start by addressing your question on the IndiHome competitive landscape. Today, even in the same footprint as our competitors, we do not observe very aggressive movements; the competition is relatively profitable for us, as we possess a stronger end-to-end fiber network compared to our competitors. Regarding ARPU, we do not foresee corrections at this moment because, with the ongoing digital acceleration, many more people are working and studying from home, which is driving demand for higher IndiHome speeds. This, along with the additional content we offer, will likely result in a profitable scenario regarding ARPU trends this year.

Ririek Adriansyah, CEO

As for the company cost trends for this year, we foresee a slight decrease in the combination of OpEx and depreciation. For 2021, some costs related to revenue and the spectrum we acquired will necessitate additional investments, impacting our network and power costs. This indicates that OpEx related to revenue may slightly increase with network investment, while costs related to digitalization may decline. We are also monitoring our network costs as we have a program to simplify our network, ensuring it remains manageable and aligned with our revenue and network value.

Unidentified Analyst, Analyst

Thank you so much, everyone.

Operator, Operator

Next question comes from the line of Niko Margaronis of BRI Danareksa. Please ask your question.

Niko Margaronis, Analyst

Thank you. Thank you to the management and congratulations on the first quarter. Three straightforward questions. First, you mentioned EBITDA margins and guidance for 2021 to be stable. Can you break it down by business pillar, mobile, fixed home, and enterprise business? That’s my first question. Secondly, how should we think about the consequences from PSAK 72 regarding data revenue? Should we understand that going forward, some data revenue will be allocated under legacy revenue? Is that a fair understanding? That’s question number two. And number three; concerning your 5G rollouts, you've mentioned that will be within 2021. Is that going to be for the retail segment, or will it be selective rollouts? How do you plan to approach this, whether it will primarily focus on business segments? Thank you.

Setyanto Hantoro, Telkomsel Executive

Thank you, Niko, for your questions. Regarding the EBITDA margin guidance, as mentioned previously, we are aiming for a stable EBITDA margin. However, I cannot disclose detailed information at the parent company level concerning EBITDA margin for each business pillar. Overall, I can say that the highest EBITDA margin will come from IndiHome, followed by Telkomsel. We are currently in the process of improving the enterprise segment, which, as previously noted, has the smallest margin.

Unidentified Company Representative, Representative

For the second question about PSAK 72, we implemented this in the fourth quarter. Consequently, fiscal usage previously allocated to legacy revenue has changed, and we will adjust allocations for legacy and digital revenue going forward. Thus, the impact will not be as significant as in the fourth quarter going forward.

Setyanto Hantoro, Telkomsel Executive

On the topic of 5G, this differs from 4G, which is for mixed usage. This year, Telkomsel will implement 5G selectively, not as a mass rollout across Indonesia. The implementation will be selective, depending on specific areas and conditions. It will serve both B2B and B2C customers. As leaders in technology, Telkomsel will always ensure high quality service delivery to its customers.

Niko Margaronis, Analyst

Thank you.

Operator, Operator

You have another question from the line of Piyush Choudhary of HSBC. Please ask your question.

Piyush Choudhary, Analyst

Yes, thanks a lot. Three more questions. Firstly, on IndiHome, can you share what is the current home penetration as of fiscal 2020? And what are the network rollout objectives and subscriber addition targets for 2021? Secondly, you mentioned synergy benefits with Gojek. Can you give us some examples of how you're able to derive such benefits? And thirdly, regarding Mitratel, what is the expectation for organic tower and tenancy growth for 2021? Thank you.

Rachel Goh, Executive

For number one, the current home penetration for IndiHome as of 2020 is about IDR20.7 million, and for the Quad service, it's about IDR12.7 million. There's still significant potential for household connectivity. In 2021, we will be more selective in our approach, but we believe we can add at least another 1 million subscribers, along with some potential additions from fixed wireless assets.

Heri Supriadi, Executive

To add to this, we expect to have additional over 1 million IndiHome subscribers as well as 500,000 from fixed wireless assets, amounting to approximately 1.5 million additional broadband users in our portfolio.

Setyanto Hantoro, Telkomsel Executive

Regarding your question about the synergy with Telkomsel and Gojek, during our first investment, we initiated several synergy programs. In the first quarter, we launched five collaboration programs. The results of these initiatives have exceeded our expectations. One example includes a special data package we created for the Gojek-Drapper project, specifically a data package for Gojek drivers. Furthermore, our My-App and Go-Biz integration allows merchants from Gojek and Telkomsel outlets to advertise together. We see that the collaboration with Gojek is currently growing, and we anticipate that the synergy value will exceed 100% this year.

Piyush Choudhary, Analyst

Thank you.

Heri Supriadi, Executive

Regarding your third question about Mitratel, as previously mentioned, we are preparing for an IPO for this company. I cannot provide too much detail due to compliance reasons, but our plan is to have Mitratel IPO ready by the end of the year, depending on market conditions.

Piyush Choudhary, Analyst

Thank you, Heri. Understood.

Operator, Operator

Another question from the line of Arthur Pineda of Citigroup. Please ask.

Arthur Pineda, Analyst

Hi, yes. Sorry, two follow-up questions, please. I'm not sure if you can answer this, but can you share your thoughts on the remaining Telkomsel towers? Are there any plans for any further asset transfers in the long run? Second question is on the Telkomsel proceeds. Prior to the sale, do you have any thoughts on deploying that capital? Would you look at recycling it through dividends to shareholders, whether to Telkom or Syntel, or is it likely to be retained at the Telkomsel level? Thank you.

Unidentified Company Representative, Telkomsel Representative

Thank you very much for the question about the towers. One of our key strategies is to look for ways to optimize our capital structure and unlock value. We have done so with our towers, and in response to your question about future opportunities: as long as there is potential to unlock more value, we will pursue it, considering market conditions as well.

Arthur Pineda, Analyst

Yes. And on the capital that you received, is that just going to stay on Telkomsel?

Leonardus Wahyu Wasono, Executive

Yes, the capital from the sale of the towers is indeed directed to the cellular network. Telkomsel's balance sheet remains strong.

Ririek Adriansyah, CEO

I would like to add to Wasono's explanation. We see the profit from the tower sale from Telkomsel being paid as dividends to Telkom. We are investing it in Mitratel, so that's how we manage the funds obtained from the tower sales.

Arthur Pineda, Analyst

Okay, so there has already been a dividend paid out by Telkomsel?

Ririek Adriansyah, CEO

Yes.

Arthur Pineda, Analyst

Okay, got it. Thank you.

Operator, Operator

We have another question from Niko Margaronis of BRI Danareksa. Please ask your question.

Niko Margaronis, Analyst

Yes, thank you. I would like to pick up on the Gojek collaboration and some news that you are considering increasing your investment in Gojek. Could you provide some more color on this? What do you expect to achieve by increasing your stake in Gojek? Thank you.

Setyanto Hantoro, Telkomsel Executive

Niko, this is Setyanto. Yes, as you are aware, we have invested in Gojek and we plan to continue investing and collaborating with them. As a strategic investor, one of the main goals is to achieve synergy value from our investment. Thus, we hope that as we deepen our collaboration, both parties will benefit from this synergy. Additionally, we also anticipate capital gains from our investment. So, we seek both operational synergy and capital appreciation.

Niko Margaronis, Analyst

Right, right. Thank you, Setyanto. If I may, I also have a second question regarding corporate actions. You mentioned the Mitratel timeline towards the end of the year for going public. I also came across news about the data center business going IPO by the Telkom Group. Could you provide some insights on this? Thank you.

Ririek Adriansyah, CEO

For the data center, we are in the process of constructing our first data center in Jakarta, which should be ready by the fourth quarter of this year. Additionally, we are expanding by deploying ex-data centers throughout the country; we currently have 22 locations and plan to add more to support the latest data center operations.

Heri Supriadi, Executive

As for the IPO, I think we still need quite some time. We plan to consolidate the data centers first, and then we will look at the appeal, probably sometime in early 2022.

Niko Margaronis, Analyst

Sorry, can you confirm? Did you mention late 2023?

Heri Supriadi, Executive

No, early 2022. We have some data centers operated by our subsidiary Six Sigma, as well as by Telkom International and the parent company. We aim to consolidate all our data centers, including potential future developments. As mentioned by Ririek, we plan to go public in early 2023.

Niko Margaronis, Analyst

Thank you. Very clear. Thank you, Heri.

Heri Supriadi, Executive

Thank you.

Operator, Operator

There are no further questions from the line at this time. This concludes today's conference call. Thank you for participating. You may now all disconnect.