Earnings Call Transcript - TLK Q4 2023

Ahmad Reza, SVP, Corporate Communications and Investor Relations

Thank you. Ladies and gentlemen, welcome to Telkom Indonesia conference call for the audited results of full year 2023. There will be an overview from our CEO and 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 the 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's my pleasure now to introduce Telkom's Board of Directors who are joining us today. First is Mr. Ririek Adriansyah, as the President, Director and CEO; Mr. Heri Supriadi, as Finance and Risk Managing Director; Mrs. Venusiana, as Enterprise and Business Service Director; Mr. Bogi Witjaksono, as Wholesale and International Service Director; Mr. Budi Setyawan Wijaya, as Strategic Portfolio Director; Mr. Honesti Basyir, as the Group Business Development Director; Mr. Herlan Wijanarko as Network and IT Solution Director; Mr. Muhamad Fajrin Rasyid as Digital Business Director; Mr. Afriwandi as Human Capital Management Director. Also, we present the Board of Directors of Telkomsel, Mr. Nugroho, as the President, Director; Mr. Mohamad Ramzy as Finance and Risk Management Director; Mr. Derrick Heng as Marketing Director; Mr. Adiwinahyu Basuki Sigit as Sales Director. And now I hand over the call to our CEO, Mr. Ririek Adriansyah, for his overview. Please go ahead.

Ririek Adriansyah, President, Director and CEO

Thank you, Reza. Good afternoon, ladies and gentlemen. Welcome to our conference call for the updated full year of 2023 results. We appreciate your participation in this call. The competition in the telecommunication business in Indonesia during 2023 showed improvement and consolidation among mobile telco players and moved towards positive NBLs. As mobile and fixed broadband are still our revenue contributors, the more rational pricing vehicle in 2023 was also reflected in our financial performance by still growing both in revenue and net income. Moving along to year 2024, the political tension in Indonesia is expected to be less in the second quarter of 2024. This situation will be the catalyst for the telco industry to grow more aggressively and also an opportunity for Telkom to increase its financial performance. Telkom Group is consistently implementing fixed mobile convergence and, in the meantime, is preparing for data center modernization and InfraCo value creation to take the policy in 2024. After the spin-off, IndiHome to Telkomsel known as the FMC initiative. Telkomsel has been performing quite well in synergizing the mobile and fixed broadband products through some brilliant initiatives such as effective cross-selling, customer value maximization through pricing, product revision, and substitution, as well as action in CapEx and OpEx disbursement. This could be seen from the mobile customer subscriber take-up, acceleration in fixed broadband customer growth, and enhanced customer loyalty. On the data center monetization, we are in the process of assisting and finding the best potential partner that could bring energy and capital. As of the first quarter of 2024, PT Telkom Data Ekosistem has successfully become the only entity that manages the Telkom Group data center business after several assets transfers from other business units and subsidiaries. Overall, in the whole year of 2023, Telkom Group revenue grew by 1.3% year-on-year to IDR 149.2 trillion, with the EBITDA at IDR 77.6 trillion and EBITDA margin of 52%, decreased slightly from the previous year due to the allocation of capital costs and electricity expenses. Net income grew by 18.3% year-on-year to IDR 24.6 trillion due to acceleration in efficiency and less mark-to-market concerns impacted by the market dynamics in 2023. In the full year of 2023, Telkomsel recorded positive consolidated revenue growth compared to the previous year with good profitability levels supported by the growth of the digital business, both in mobile and fixed broadband. The results showed that Telkomsel's mobile and fixed broadband revenue increased by 15% year-on-year to IDR 102.4 trillion, consisting of 13.23% in fixed broadband and IDR 59.1 trillion from mobile business. Digital business revenue of Telkomsel grew by 7.6% year-on-year to IDR 28.5 trillion, and became the most significant contributor to the top line while legacy business for SMS in 2023 decreased sharply by 10.7%, a sharp decline from the previous year at minus 33.8%. We are committed to delivering a diversified portfolio of services and innovative products, including digital lifestyle enhancements, advertising, retail enterprise, and sourcing IoT business. Telkomsel has successfully increased its mobile customer base to 159.3 million in 2023 compared to 156.8 million in the previous year with improved productivity and quality of customers. We are also initiating strategies to regain dominance in mobile competition, especially in the Java area, where the Telkomsel Lite and value product strategies are focused on retaining youth customers and encouraging them to use their numbers consistently until they become productive and spend more budget to utilize the services. In the full year of 2023, the Wholesale and International Business segment contributed to revenue growth with IDR 16.9 trillion or grew by 9.6%. Our data center and core business booked IDR 1.9 trillion of revenue, growing by 13.8% year-on-year. We plan to unlock more growth in the data center business by looking for preferred global data center partners to improve capacity and utilization. As of December 2023, we have a total of 22 data center facilities domestically and abroad, spread across our four countries, namely Indonesia, Singapore, Hong Kong, and Timor Leste. The current market demand for our data centers is relatively small compared to our consolidated revenue, but we are confident this will change with time.

Ahmad Reza, SVP, Corporate Communications and Investor Relations

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

Operator, Operator

Our first question comes from Kelsey Santoso from Goldman Sachs.

Kelsey Santoso, Analyst

This is Kelsey from Goldman Sachs. A few questions from my side. Firstly, could you provide some color on full year '24 guidance, including your group and Telkomsel revenue growth targets and EBITDA margin as well as the CapEx for this year? Secondly, what led to the ARPU weakness in Q4? It would be great if you could give the latest update on the mobile competition? Lastly, on the cost side, we saw personnel and G&A expenses spike in Q4. For personnel costs, is this related to any one-off items at the year-end? For G&A, in the info memo, you mentioned that it's due to transformation costs. So, to assume that it's referring to the FMC, how should this trend in 2024?

Heri Supriadi, Finance and Risk Managing Director

Okay. Thank you, Kelsey. This is Heri. First, regarding your question on the guidance for the full year 2024 for the group and Telkomsel. For the group, the revenue is expected to grow in the mid-single digits, and then we're looking at an EBITDA margin around 50% to 52%. On the CapEx, we're planning to spend around 22% to 24% of the revenue. Ramzy, would you like to add color on the Telkomsel guideline?

Mohamad Ramzy, Finance and Risk Management Director, Telkomsel

Yes. Thank you, Kelsey. This is Ramzy from Telkomsel. In Telkomsel, our guidance for revenue growth would be in the mid- to high teens post-IndiHome integration. On the EBITDA margin, we're expecting around 46% to 48% as we implement an asset-light approach adoption. As for the CapEx to revenue ratio, we will have around 14% to 15% revenue.

Heri Supriadi, Finance and Risk Managing Director

I think the guidance for 2024 for both the company and Telkomsel is clear. In terms of CapEx, we're spending around 22% to 24% of revenue, with mobile getting around 40% and fixed broadband about 25%, while the balance goes to data centers and other businesses.

Derrick Heng, Marketing Director, Telkomsel

Okay. Kelsey, this is Derrick from Telkomsel. I'll address your question on mobile ARPU. We are accelerating penetration and maintaining competitiveness by acquiring new households, particularly by addressing affordability concerns with lower ARPU products while also providing high-quality services. Our focus is on profitability. Therefore, our future growth will be driven by customer productivity. We want to optimize our network to enhance customer loyalty and stickiness. Ultimately, this will help us to drive ARPU uplifts while maintaining our leadership position in market share.

Heri Supriadi, Finance and Risk Managing Director

Okay. Regarding the third question about personnel and G&A costs, the increase in personnel costs is primarily due to several factors. First, it's a natural adjustment over time, needing to accommodate inflation in basic salaries. Second, there are tax policy changes from the government regarding employee benefits. Finally, we also grant certain benefits based on employee tenure, such as allowances after 7, 15, and 20 years of service. I think that explains most of the increase in personnel costs. Regarding G&A costs, as stated, this is related to transformation costs, largely due to the corporate actions taken in the past year. We anticipate costs related to professional fees will decrease this year as most of the corporate actions have been completed.

Operator, Operator

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

Marissa Putri, Analyst

So I have three questions. Firstly, can you provide some details on why the group booked a negative IDR 1 trillion revenue from the IndiHome Enterprise business in Q4? Does this relate to the transfer of IndiHome to Telkomsel or maybe the InfraCo establishment? How significantly is this impacting your EBITDA net profit numbers in general? Secondly, you've launched Telkomsel Lite this year alongside the push of the by.U product. Given the two consecutive declines in both ARPU and data volume, would it be fair to assume there's been some change in your mobile strategy, indicating potentially more intense competition, especially in the lower end of the market? Lastly, your guidance indicates mid-single-digit growth compared to the current 1% growth. Which part of the business do you expect to drive top-line growth? And your margin guidance would also imply some decline to flattish margins with such a top-line growth target. What cost items do you anticipate will increase in 2024?

Heri Supriadi, Finance and Risk Managing Director

Regarding revenue from the enterprise, the decline was influenced by the transfer of IndiHome to Telkomsel, particularly in how we accounted for enterprise connectivity under the IndiHome brand. This led to an intercompany transaction where we booked gross revenue in Telkomsel, which made it appear that enterprise revenue declined. However, IndiHome still grew around 2.7%. We are being more selective with some subsidiaries, focusing on conservative business acquisitions, leading to the decline in enterprise revenue. Regarding the growth drivers, 75% of our business comes from the consumer side managed by Telkomsel. Both mobile and fixed broadband can contribute to mid-single-digit growth. The wholesale business, particularly tower and international services, is expected to improve as well.

Mohamad Ramzy, Finance and Risk Management Director, Telkomsel

From Telkomsel’s perspective, we are addressing various market segments with both Telkomsel and by.U to maintain affordability while ensuring productivity. While ARPU may decline, the focus is on maintaining overall market share and profitability.

Operator, Operator

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

Arthur Pineda, Analyst

Several questions, please. Firstly, on Telkomsel. What’s causing the quarter-on-quarter drop in external mobile revenues when your peers are growing by mid-single-digit levels on a Q-on-Q basis? In the past, you mentioned legacy revenues were a factor, but that ratio now appears aligned with your peers. So, why the drop in ARPU and revenues? Secondly, can you quantify what the transformation-related expenses on the FMC are? Last year, you expected around IDR 0.5 trillion in synergies, yet costs expanded, and margins dropped in the second half. Are there any one-off bookings or related targets for FY '24? Finally, regarding asset spin-off plans, what are the timelines for potential strategic investors for data centers and possibly the fiber business?

Derrick Heng, Marketing Director, Telkomsel

Arthur, this is Derrick. I'll address your questions. Regarding the Q-on-Q drop in external mobile revenues, the drop of 52.2% in legacy revenues was impacted by a continued natural decline and a one-time adjustment from the IFRS implementation on legacy business post-integration. This adjustment applies only to Q4 2023 and will not be reflected in the next quarter. We anticipate it to stabilize over the next couple of years. Regarding ARPU decline of 4.3%, it stems from our strategy to invest in securing future growth while balancing customer quality and profitability. We believe this will help us enhance profitability over time.

Heri Supriadi, Finance and Risk Managing Director

On the synergy targets from FMC, we aim at around IDR 1.5 trillion this year from revenue uplift and cost efficiency. Additionally, we have faced new one-off costs in 2023 from spectrum payments and rising electricity prices, totaling about IDR 868 billion and IDR 300 billion, respectively. Acknowledging this, we do not expect one-off costs to continue into 2024.

Unknown Executive, Executive

Thank you. Regarding our timeline to unlock the data centers, we are currently in the process of hiring business consultants and financial advisors. We hope to start this in the first semester and aim to close by the end of the year. For the fiber business, we have set up our subsidiary to transfer assets but are looking at potential partners to invest alongside us going forward.

Arthur Pineda, Analyst

Sorry, but could you elaborate on the IFRS adjustment that led to the decrease in revenues and provide guidance on what the actual growth would look like on a like-for-like basis compared to prior quarters?

Mohamad Ramzy, Finance and Risk Management Director, Telkomsel

Yes, Arthur. As noticed, the Q-on-Q legacy decline of around 52% occurred due to the implementation of IFRS 15, especially affecting legacy revenues from postpaid services. This will be a one-off adjustment and will normalize throughout 2024, anticipating a 28% to 30% decline on an annual basis.

Operator, Operator

Our next question comes from the line of Henry Tedja from Mandiri.

Henry Tedja, Analyst

I have two questions. Firstly, regarding the IndiHome business, you mentioned a turnaround and being selective with enterprise segments. However, the B2C IndiHome business seems to have booked more than 200,000 net subscribers in the last two quarters, yet this growth isn’t reflected in revenue on a QoQ basis. Can you provide clarity on the slow growth in IndiHome revenue? Secondly, about Telkom, it appears the company has recorded over IDR 500 billion in unrealized losses in Q4, attributed to MDI investments. Can you provide more details?

Heri Supriadi, Finance and Risk Managing Director

On IndiHome's consumer side, while we added about 245,000 subscribers in the first half of last year, we’ve only seen a 0.3% revenue growth QoQ. Factors contributing to this include marketing promotions and bonuses to attract customers. So while we’re growing our customer base, immediate revenue impacts are moderated by these promotional costs. As for the unrealized loss, we recorded about IDR 118 billion related to our investment in GoTo, with total losses around IDR 700 billion due to lower valuations from other investees. These fair value adjustments were mandated by our auditors.

Ririek Adriansyah, President, Director and CEO

As we mentioned, we booked a strong increase in IndiHome’s subscriber base, but there were discounts given out to new users to drive growth, impacting revenue. However, we believe this strategy will reflect positively on revenue in the long term.

Operator, Operator

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

Piyush Choudhary, Analyst

I have several questions. Firstly, in mobile, subscriber additions have been high in the last two quarters, but service revenue in Q4 was flat sequentially. What’s happening here? Is it cannibalization of existing subscriber plans or a decline in older subscriber base? What is the outlook for mobile ARPU? Lastly, on the Telkomsel Lite plan, what percentage of your customer base overlaps with this new initiative? Also, regarding IndiHome, you had expected cost synergies in the second half of 2023, but margins actually decreased in Q4. What is the reason for this?

Ririek Adriansyah, President, Director and CEO

The declining ARPU on a Q-on-Q basis can primarily be traced to strategic pricing initiatives aimed at stimulating customer productivity. We're focusing on segments like youth and the mass market. Moving forward, I expect ARPU to stabilize as we improve customer productivity. Our initiatives, like Telkomsel Lite, aim to expand our market share in targeted areas, particularly where our offering provides stronger relevance. As for overlaps, we’re strategically targeting families with bundled services through our FMC efforts alongside telco Lite and by.U, ensuring a broader penetration.

Derrick Heng, Marketing Director, Telkomsel

About the spawning of existing customers to the new offerings, we have selectively maintained price points while incentivizing new subscription plans. This will drive ARPU uplift as new subscribers come on board. The decline in total ARPU for Q4, at around 4.3%, is an interim result of optimizing subscription plans for strategic growth.

Unknown Executive, Executive

On the cost synergies from the FMC initiatives, we have realized some improvements already. We achieved a minimum of IDR 100 billion through various optimizations and the closure of redundant services. However, the enhancements in our operations have also involved substantial initial costs. We believe this will yield benefits over time.

Ririek Adriansyah, President, Director and CEO

Our margin guidance for the coming period is conservative as we expect to manage costs prudently and to offset additional pressures while focusing on improving service delivery across our platforms.

Operator, Operator

We'll take our next question from the line of Sukriti Bansal from Bank of America.

Sukriti Bansal, Analyst

I have three questions. First, on the transformation-related costs, why have large expenses appeared in Q4 rather than in Q3 when the IndiHome spin-off occurred? What accounted for the significant increases in marketing and sales expenses for Telkomsel and also G&A expenses at the Telkom level? Secondly, can you share progress on cross-sell targets regarding the FMC? You mentioned around 3 million households with only IndiHome and 8 million with mobile services only. How are those numbers changing? Lastly, can you provide any clarity on 5G auctions? Are they still expected this year?

Heri Supriadi, Finance and Risk Managing Director

The significant costs in Q4 were tied to the ongoing consultancy for the transformation project and adjustments following the IndiHome transfer to Telkomsel. The timing also aligns with efforts to enhance business processes, especially as we aimed to realize operational efficiencies post-spin-off.

Ririek Adriansyah, President, Director and CEO

Our cross-sell targets post-IndiHome integration have yielded positive outcomes, increasing from 37.4% to 44% penetration in relevant markets. This indicates a smooth integration process and enhanced customer engagement across our portfolio.

Unknown Executive, Executive

Regarding the 5G auctions, we anticipate these to be tentatively scheduled for Q2 or Q3 this year, accompanied by several industry incentives, which we believe will strengthen market engagement.

Operator, Operator

Our next question comes from the line of Ranjan Sharma from JP Morgan.

Ranjan Sharma, Analyst

I have a couple of questions. Firstly, can you provide more detail on how you'll roll out your new plans targeted at the mass market segment? How do you anticipate this affecting the competitive landscape?

Ririek Adriansyah, President, Director and CEO

As we roll out Telkomsel Lite, we're focusing on optimizing our offerings to capture market share, particularly in competitive regions. Our plans are aimed at maintaining profitability by simultaneously engaging new segments while ensuring our existing customers' satisfaction and retention.

Unknown Executive, Executive

The selection of our rollout areas is based on competitive analysis and growth opportunity evaluations, allowing us to leverage strengths and weaknesses in the current market landscape.

Ranjan Sharma, Analyst

Given the growth in customer numbers, can we expect any adjustments to dividend policies or payments any different from the previous year?

Heri Supriadi, Finance and Risk Managing Director

As we typically share, our dividends are based on 60% to 80% of net income, which has seen an 18.3% increase this year. We expect to maintain this dividend payout ratio, aiming for a higher dividend per share compared to last year.

Ahmad Reza, SVP, Corporate Communications and Investor Relations

Thank you, everyone, for participating in today's call. For those whose questions have not been addressed yet, please don't hesitate to contact us directly. Thank you.

Operator, Operator

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