Earnings Call Transcript - TLK Q3 2022

Operator, Operator

Good day, and thank you for standing by. Welcome to Telkom Earnings Call 9 Months of 2022. Please be advised that today's conference is being recorded. And now I'd like to hand the conference over to Mr. Ahmad Reza, SVP of Corporate Communications and Investor Relations. Thank you. Please go ahead, sir.

Ahmad Reza, SVP of Corporate Communications and Investor Relations

Okay. Thank you, Amber. Good afternoon, ladies and gentlemen. Welcome to PT Telkom Indonesia conference call for the 9 months of 2022 results. 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 response to questions may contain forward-looking statements within the meaning of safe harbor. Actual results could differ materially from projections or estimation and may involve risks and uncertainties that may cause actual results to be different from what we discuss today. Ladies and gentlemen, it's my pleasure now to introduce Telkom Board of Directors who are joining us today. First is 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 and International Service Director; Mr. Budi Setyawan Wijaya as Strategic Portfolio Director; Mr. Muhamad Fajrin Rasyid as Digital Business Director; Mr. Afriwandi as the Human Capital Management Director; and also present the Board of Director of Telkomsel, Mr. Mohamad Ramzy as Finance and Risk Management Director; and Mr. Derrick Heng as Marketing Director. I now hand over the call to our CEO, Mr. Ririek Adriansyah, for his overview. Please welcome Pak Ririek.

Ririek Adriansyah, President, Director and CEO

Thank you, Reza. Good afternoon, ladies and gentlemen. Welcome to our conference call for 9 months of 2022 results. We appreciate your participation in this call. Ladies and gentlemen, the challenging macroeconomic situation after the COVID-19 pandemic easing keeps Telkom to create breakthroughs and innovations to keep the overall company's performance in line with the budget. Increasing competition in the B2C telco market is anticipated by altering the FMC timeline to select the best business model that will fit both operational and financial aspects for Telkom and Telkomsel. To foster the competitive advantage of B2B digital, IT, telco, we anticipate diminishing returns on B2C business. We are seriously exploring collaboration in data center and cloud business with Microsoft and Singtel as well as with world-class cloud providers. Our initiative in InfraCo will support B2B and B2C business by providing common connectivity infrastructure, both for B2B and B2C, to achieve CapEx and OpEx efficiency. Lastly, on our B2B and IT digital services and establishment of digital initiatives, we'll also diversify our business to capture other opportunities in retail platform and various retail services. In the 9 months of 2022, Telkom's revenue continued to grow at 2.7% with the EBITDA and net income margin at 54.6% and 15.2%, respectively. The performance contributed mostly by mobile and fixed broadband businesses, which grew healthily amidst the unaffordable macroeconomic condition in Indonesia due to higher inflation and interest rate hikes. The more rational competition in the mobile industry, supported by the domination of IndiHome as the main player in the fixed broadband business, contributed to our revenue growth. Our mobile segment, Telkomsel's strategy to focus on maintaining customers' value and needs has resulted in a better productive customer profile. Telkomsel's effort to identify the personalization of its customer needs is a competitive advantage and proven to be the right strategy. Telkomsel still maintained healthy growth in revenue by 1.6% year-on-year with EBITDA margin of 37.1% and net income margin stayed at 25.4%. At the same time, our fixed broadband business, IndiHome, has successfully added 138,000 customers to become 9 million subscribers with the highest intake among our competition. With this achievement, IndiHome's revenue contributed to the consolidated Telkom's revenue rates IDR 20.9 trillion with a growth of 6.4% and relatively stable blended ARPU at IDR 269,000. In terms of the Enterprise Segment, digital IT services and enterprise connectivity were major contributors to enterprise segment growth in 9 months of 2022. Enterprise contributed IDR 13.7 trillion in revenue, slightly declined by 0.8% year-on-year due to the transfer of data center business to wholesale and international business. However, the enterprise segment still managed to show significant growth in Q-on-Q by 10.5%. While our wholesale and international business segment posted IDR 11.3 trillion in revenue and significantly increased by 7.6% year-on-year, mainly driven by the growing international wholesale voice business as well as digital business, including both domestic and international A2P. One of the parts of this segment is Mitratel, our tower business, the biggest towerco in Indonesia. Currently, it manages more than 35,000 towers with a 1.44 tenancy ratio and enjoys site diversification as around 58% of the towers are located in ex-Java. Mitratel is also expanding to fiber to the tower business as part of a strategy to strengthen its product portfolio to become a digital infrastructure company. We believe that the tower business has the opportunity to grow, driven by increasing demand for cellular data and the upcoming implementation of 5G technology. To maximize the opportunities and value creation, we implemented 5 Bold Moves strategy. The strategy continued to intensify its effect with some material progress, particularly in FMC, DC Co, and InfraCo as follows. In FMC initiatives, Telkom and Telkomsel are now in the process of finding the best business model that can bring the maximum value to our business, assisted by reputable advisers. We already have features, such as Orbit, our fixed wireless product, and Smooa features that show our capability in integrating our fixed and mobile network. Smooa allows IndiHome subscribers to buy Telkomsel internet quota under a single billing system. Our Data Center and Cloud also remain as one of the areas that become our focus. Currently, we have more than 28 data center facilities, including both HyperScale Data Center and Edge Data Center, which are located both in Indonesia and overseas. We are in the process of restructuring our data center business by consolidating the businesses and assets under one entity called PT Telkom Data Ekosistem with NeutraDC as the brand. The consolidation process is executed in stages and we expect that the process will be completed in 2024. Our data center business provides several products and solutions, such as shared colocation, dedicated colocation, working room, cross connect, and smart hand, including DC interconnect. The competitive advantage of our data centers is that they are integrated with the Telkom network and the global submarine cable network so that we are able to accommodate our customers' future digital business needs, such as edge computing, 5G services, blockchain, and other digital solutions. We are also pursuing infrastructure value unlock, starting from tower. We will continue to expand our fiber optic connection, explore new InfraCo business models, and infra-sharing potentials that will keep our B2C and B2B growth in harmony. This initiative aims at optimizing the consolidated Telkom's CapEx efficiency, quality improvement, and coverage of service. We expect carving out Telco infrastructure assets can maximize the valuation as well as achieve strategic differentiation. By having InfraCo, we believe Telkom can optimize asset utility and market penetration to cater to the telco business challenge and create business value that meets our investor expectations. Besides these three initiatives above, we also continue our initiatives in B2B Digital IT Services and DigiCo. That’s the end of my remarks, thank you very much.

Ahmad Reza, SVP of Corporate Communications and Investor Relations

Thank you, Pak Ririek. We will now begin the Q&A session. When raising your questions, please speak clearly and state your name and your company.

Operator, Operator

Our first question comes from the line of Piyush Choudhary.

Piyush Choudhary, Analyst

Yes. This is Piyush from HSBC. A few questions. Firstly, on mobile, could you help us understand what is constantly driving subscriber decline? In the third quarter, we have seen almost 9.8 million subs decline. And has the subs decline stabilized in the month of October? And why are the trends divergent from peers like Indosat? That's the first question. Secondly, on InfraCo, could you elaborate on what is the strategic intent to form InfraCo? What assets would be injected? Would you lease such assets to other operators apart from Telkomsel as well? And if I may ask one last question, on dividends, can we confirm that dividends would be paid from normalized net profit?

Ririek Adriansyah, President, Director and CEO

All right. I'll answer the first question on mobile from Telkomsel. With regards to the declining subscriber base Q-on-Q, it's really an effort for us in terms of consolidation. We have number consolidation, and our main objective is to push healthy conduct and to secure more quality customers. We need to maintain a healthy state and consistently focus on renewal initiatives through our CVM approach to drive the productivity of the customers by providing the right pricing and product to customers. So this is really our push to have better quality customers. Maybe to add, from an ARPU perspective, that resulted in a Q-on-Q improvement of our ARPU. That's a lift of 3.8%. So clearly, it validated our strategy to have better customers.

Piyush Choudhary, Analyst

May I clarify if the subscriber consolidation process is likely to continue for some time? What factors will drive changes in subscriber stability? Additionally, could you discuss the outlook for ARPU?

Ririek Adriansyah, President, Director and CEO

No, we will continue to make sure that we will consolidate and really drive up the quality of customers. And what we are trying to address is really the proportion of value seekers. And so we will continue our efforts in terms of the number consolidation in the months to come.

Ahmad Reza, SVP of Corporate Communications and Investor Relations

Second question.

Budi Setyawan Wijaya, Strategic Portfolio Director

Piyush, this is Budi Setyawan for the second question in terms of InfraCo setup. Actually, there are several intentions why we set up InfraCo. The first time, because the new regulation on the investment and also infra sharing, it's already established since last year. So there is a regulation that also already supports infra sharing. Then, if we look at the industry, the Indonesian industry actually requires infra sharing because it can create more efficiency for the operator also. And then we don't want to miss this momentum also by monetizing our infrastructure. And then we can leverage better financial results from the investment in infrastructure. It is the second. And then the third actually is when we talk about our current infrastructure, there are many potential infrastructures that can be leveraged and shared to get more value from our investment. So it is very important for us to optimize our investment to get the maximum benefit from our investment. And it is very important also for us to lead this competitive advantage in infrastructure that's currently already happening. Telkom is one of the leaders in the infrastructure. So it's better for us to lead this competitive advantage by setting up the InfraCo.

Heri Supriadi, Finance and Risk Management Director

Piyush, Heri speaking here. On the question on dividend. Of course, we will consider the interests of the shareholders, which is to get, I think, capital gain and also dividend yield. On this dividend, we are going to propose the dividend that is comparable to what actually happened in the industry. So we are considering that from the normalized profit.

Piyush Choudhary, Analyst

Thanks, Pak Heri for the clarification.

Operator, Operator

Our next question comes from the line of Arthur Pineda.

Arthur Pineda, Analyst

Several questions. First, on mobile. Can you talk about your outlook on mobile price increases? It seems like there's been a pause in this quarter, contrary to what a lot of the operators have been expecting. Is this owing to the weaker economy? Or do you think this is actually going to continue into the fourth quarter? Second question I had is with regard to broadband. If we look at the growth momentum, it's been slowing to around mid-single digits on a year-on-year basis, which seems fairly low considering the low penetration level in this market. Are you seeing increased competition evolve in this stage given the efforts from your competitors? Or is this just conservatism in terms of rollouts? Last question I had is with regard to housekeeping. I just wanted to check, were there any one-off items outside of the GoTo impairment, which was booked in this quarter?

Derrick Heng, Marketing Director

Okay. This is Derrick from Telkomsel. I'll handle the first question on mobile. With regards to what we see in mobile pricing trend, if you look at the last few months, we have really been leading the healthier market direction. We have implemented the right pricing and market repair initiatives. And that has also encouraged the market to stop the unlimited package by our competitors. So if you look at this, the current space, the mobile pricing adjustment, it is in status quo. We are, of course, on the search for an optimal level in terms of pricing. We are mindful of the macro conditions and the pricing to maintain competitiveness through potential opportunistic as well as aggressive initiatives.

Ririek Adriansyah, President, Director and CEO

Thank you, Pak Derrick. I will continue with your question, Pak Arthur, on the decreasing growth of the IndiHome today. We can say to you, yes, as you may be aware, competition becoming, I think, more intense in the fixed broadband. And then I think most of our competitors come with the same or the lower, I think, offer compared to what we do offer. But we do believe this offering is not really healthy. So we are in our awareness and our strategy to not follow such trend to keep our performance still healthy for the sustainability of the business in the short run and long run as well. So we are becoming more, I think, selective in choosing the potential subscriber by asking them for, I think, one year of subscription and so on. This answers us with a good quality customer. So you can see the growth of the, I think, revenue in line with the growth of the customer. And also the collection still very good, and then also churn becoming much better compared to people. So it is in our strategy to see this softening of growth with the current situation. We believe in the future, as we are also pursuing fixed mobile convergence, this is going to give us another, I think, way of more efficiency in providing solutions for this broadband. This is going to answer us to be more competitive with good quality and good, I think, quality of subscriber as well. So we still believe that the potential market for home broadband is still very big as we know now, I think, the penetration is only about 15% of the household. We still believe there is, I think, at least the same percentage of the market share we can affect. But we are going to do it, I think, with more efficient solutions to get, I think, quality of business in terms of profitability and sustainability. So that is what we can explain today. On the transaction, one-off transaction, I think as we also explained here, we have one accelerated depreciation of all technology of Amazon, which is basically technology based on copper that we had in the past. This I think goes back to investment before 2010, on investment that's not really competitive right now to provide, I think, solutions for the broadband. So we do the accelerated depreciation with the amount in IDR 1.584 trillion, almost similar to what we did last year. But this year, we did actually in the second quarter of this year. So the impact up to right now as compared to last year, but I think all the Amazon based technology has already been accelerated depreciated. So I think that's one of the transactions only that we have as of now.

Arthur Pineda, Analyst

So nothing else in 3Q. Is that the case?

Heri Supriadi, Finance and Risk Management Director

No, no, no, but more to comparison to last year. But in last year, we had in the fourth quarter. So there's no additional in this year.

Operator, Operator

Our next question comes from the line of Choong Chen Foong.

Choong Chen Foong, Analyst

Good afternoon. Thank you for this conference call. I have three questions. First, regarding the mobile business, do you believe there are still opportunities to optimize mobile pricing levels in Indonesia? Additionally, have you observed any recent weakness in subscriber purchasing power due to inflation that might prompt further pricing initiatives in the coming months? Second, concerning personnel costs, do you anticipate any upward pressure to increase salaries in response to rising inflation in Indonesia? Are there also upward pressures in other cost areas? Finally, regarding the new InfraCo, could you provide an estimate of the value of the assets that might be included in InfraCo? Do you have any plans to list InfraCo, and if so, what would the potential timeline be? Those are my three questions.

Derrick Heng, Marketing Director

This is Derrick from Telkomsel. I'll address your question about optimal pricing for mobile. Telkomsel will continue to promote healthy practices and strive for an ideal situation that ensures sustainable profitability for the industry. We consider the competition, customer needs, their willingness and ability to pay, and our network capacity. We have implemented several strategies that have been validated through the growth in ARPU and RPMB on a quarter-to-quarter basis. We have focused on attracting and supporting high-value customer segments through our CVM initiatives and have optimized monetization of traffic to enhance productivity. Additionally, we offer a diverse range of packages to meet customer requirements, ensuring we cater to their needs effectively. In a broader context, within the telecom industry, there remains a significant opportunity to capture, as cellular revenue's contribution to overall GDP is currently below 1%, compared to over 1% in 2007, which was bolstered by improved economic conditions. We will continue to seek the best pricing strategy to provide outstanding experiences for our customers.

Heri Supriadi, Finance and Risk Management Director

Thank you, Derrick. I'll try to answer you on the personnel costs. There is some part of the, I think, salary of our employees related to the inflation, but it is base salary, I think, a small part of the total salary. There's going to be an impact, but the impact is quite limited based on the, I think, percentage of the base salary that's going to be calculated based on the inflation rate as well. So that's the explanation for the, I think, personnel costs. There is not going to be any, let's say, spike up that's quite higher on this front. And then in marketing, actually the marketing slightly increased this year compared to last year, because I think with relaxation of the COVID situation, activities that previously could not be done now can be carried out. So this makes the marketing costs slightly increased. But as a whole, this marketing increase, as long as general and administrative increase related to, for example, for tripling and so on within our, I think budget within the growth that we can manage. So you can see from the overall, I think ratio of our margin and EBITDA or operating income and so on, still very much, I think, manageable. So that's what we can explain about some of these costs.

Budi Setyawan Wijaya, Strategic Portfolio Director

Thank you. Regarding InfraCo, as I mentioned earlier, it is subject to regulations, aimed at optimizing our investment and unlocking potential. The EBITDA multiple for InfraCo is superior to that of traditional telecoms. As for the assets and timeline, we are still evaluating the best strategy, as this InfraCo initiative will influence other aspects of our business and needs to be balanced. Additionally, InfraCo must be sustainable and capable of growth to attract potential investors. Currently, we do not have plans for an IPO, despite considering various exit scenarios, including private equity. We plan to engage with private and strategic investors first.

Choong Chen Foong, Analyst

Understood. And is the plan to list the data center assets still on track for next year?

Budi Setyawan Wijaya, Strategic Portfolio Director

Yes. Data center, we are still on track in terms of the consolidation, also in the new development. So we have good progress also in terms of the consolidation and also in the new development. Thank you.

Operator, Operator

Our next question comes from the line of Hussaini Saifee.

Hussaini Saifee, Analyst

This is Hussaini Saifee from UBS. I have a few questions. Most of my questions have been answered. First, can you provide information on how many of your subscribers, possibly from IndiHome or Telkomsel, are included in the Smooa base with combined billing? Second, regarding Orbit, how are the revenues for Orbit accounted for? Are they recorded at the Telkomsel level or the IndiHome level? Lastly, for fixed mobile convergence, I want to understand if marketing it as a product will require offering bundling discounts to encourage customer uptake.

Afriwandi, Human Capital Management Director

This is Afriwandi. Currently, all revenue from the Orbit is recorded under Telkomsel, and there is no other revenue recorded on the Telkom side. Regarding the bundling discounts, the actual plan for fixed mobile convergence is not to offer more discounts to customers but rather to focus on value creation by combining users of both fixed broadband and mobile broadband. The aim of the fixed mobile convergence is to enhance the value offered to customers rather than just providing additional discounts. As for the Smooa, we do not have the figures at the moment, but we will follow up with the numbers for you, Hussaini. Thank you.

Hussaini Saifee, Analyst

Sure. I would like to ask a follow-up regarding the InfraCo initiatives. I recognize the advantages of these initiatives. However, if you open your assets, such as fiber, could that also provide your competitors with the opportunity to utilize those assets and potentially expand their networks? Do you view this as a risk? Alternatively, do you think the infrastructure, including fiber, is so commoditized that now is the appropriate time to open this aspect of the business?

Ririek Adriansyah, President, Director and CEO

Thank you. On this one, of course, one of the objectives of separating the fiber is because we see the multiple is different when you see integrated operator with FiberCo only. But FiberCo is supposed to also serve the market. That was the reason to get higher, I think, valuation multiple on this one. So with this regard, of course, we're going to address the market as explained before by my colleague. I think the regulation already allows us to do this one. And also, we have the capacity much, I think, advanced compared to our competitors on this one. And then, of course, there's a kind of risk for us whenever we open too fast, I think, in a very massive way of all the fiber that we have, that's going to increase our wholesale revenues. But at the same time, that's going to also provide some risk to our, I think, mostly consumer side of our business. Of course, we need to balance both of, I think, businesses to get the maximum valuation on this one. So we're going to be very selective as well on this one to consider all the aspects in order to get the maximum value. That's, I think, the kind of initial thing that we can share with you.

Operator, Operator

Next question is a follow-up question from the line of therapy Arthur Pineda.

Arthur Pineda, Analyst

Sorry, just one follow-up, please. With regard to product bundling between mobile and fixed, how can you go about this considering that the majority of your mobile users are prepaid in nature? What can you do to actually tie them in together?

Heri Supriadi, Finance and Risk Management Director

Okay. Thank you. Maybe before Pak Derrick answers you on that one, we have so-called high-value customers, which are customers that are quite loyal to us, providing, I think, the biggest chunk of the revenue to us. There, we call basically high-value users, and we have quite a complete, I think, profile of them. So we know them, how to address them. With, I think, fixed mobile convergence, we can provide them with a seamless solution technology to get them to become more loyal to us. So we pretend for long-term value of the company as well as the potential to increase, I think, fairly also coming from, I think, combined services. In the same time, we also can provide a solution as we see, but I think fixed mobile convergence and cellular can be run in one hand. So this also can provide some potential of course saving. So we address both sides to get the maximum value from this one. I think for Arthur, Derrick can have some more, I think, explanation on this.

Derrick Heng, Marketing Director

This is Derrick and I'll continue. I'll just add one to Harry's perspective. We truly believe the benefits of FMC are really the room for synergy and strengthening our position. Just from our high-value customers, we want to drive loyalty and really an integrated approach to serving them both at home and on the move. So to us, the value of the mobile segment is really an ability to cross-sell to the IndiHome base and capturing more share of the household. And that, in turn, would reduce the mobile churn due to the capture from a total household perspective. Then from value from a fixed segment, we want to really increase the cross-sell for broadband to the Telkomsel base. And then, again, we will be able to drive customer stickiness. So all in all, we see this as a win-win for owning the customer both at home and on the move.

Arthur Pineda, Analyst

Sorry. So can this be cross-sold into the prepaid user as well? Or is it mainly on the postpaid high-value users that you expect to do the bundling?

Ririek Adriansyah, President, Director and CEO

Yes. Even for the prepaid segment, we are also looking at a high-value group of customers. So clearly, their needs are very aligned to the fixed broadband customer profile.

Operator, Operator

Our next follow-up question comes from the line of Piyush Choudhary.

Piyush Choudhary, Analyst

Just 2 follow-ups. Firstly, on FMC, could you tell us if you have kind of worked out what are the cost synergies, which could come once you integrate IndiHome with Telkomsel? And secondly, on the data center business, can you quantify what is the invested capital in the business right now? And what's the revenue EBITDA or profit profile for the data center portfolio?

Heri Supriadi, Finance and Risk Management Director

So on the cost synergy side, we actually identified several cost synergies which come from the go-to-market activities that currently go in each of the segments from Telkomsel and Telkom. The other part is also the agency of the marketing campaign as well as how we can optimize our resellers in Telkomsel as well as the sales force in Telkomsel. So actually, on that point, we identified several synergy scenarios that can also benefit the group. The other part is also on the CapEx potential reduction and duplication amongst Telkom and Telkomsel.

Piyush Choudhary, Analyst

Can you quantify this? Like what is the amount or as a percentage of revenues of the enlarged mobile and IndiHome?

Ririek Adriansyah, President, Director and CEO

Okay. So currently, we're in the process of our identification and also calculating more clearly on the numbers, both on the OpEx and CapEx side. But of course, these numbers can be used as the basis of this transaction and also the value add from the FMC itself.

Heri Supriadi, Finance and Risk Management Director

Piyush, on the question on the invested capital, revenue, EBITDA, and profit for the data center business. I think what we see is that the data center business is supposed to be, I think, similar to what is the benchmark that we see in the market. Currently, in Southeast Asia, I think the investment needed for 1 megawatt of data center capacity is around USD 12 million, and EBITDA is supposed to be around 40% to 50% of EBITDA, whenever we reach the optimum, I think, utilization. So I think accordingly, it's going to be also profitable in the bottom line for us. So for example, our data center in HyperScale, we are not using all the capacity yet. Of course, if we compare to what we have the benchmark globally, it is supposed to be lower. But whenever the capacity already is utilized fully, I think, it is supposed to be comparable to those in the benchmark. So that's, I think, what we believe in the data center. We also see the potential of the market. This can be coming from the HyperScale, coming from, I think, some digital company, government and so on, their businesses are very promising. So that we can give you, I think, a figure of how a data center business is supposed to look like in the upcoming years.

Piyush Choudhary, Analyst

Like, is it possible to quantify what is the current revenue contribution of the data center to your business?

Heri Supriadi, Finance and Risk Management Director

Current revenue contribution of our data center right now around IDR 1.2 trillion as of 9 months.

Operator, Operator

Thank you, Amber. Thank you, everyone, for participating in today's call. We apologize for those whose questions could not be addressed yet. So if you have any further questions, please ask directly. Thank you very much. Thank you, sir. This concludes today's conference call. Thank you for participating. You may now disconnect.