Earnings Call Transcript - TLK Q1 2024

Operator, Operator

A good day, and thank you for standing by. Welcome to Telkom Indonesia First Quarter of 2024 Results Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the call over to Pak Ahmad Reza, SVP, Corporate Communications and Investor Relations. Thank you, Pak. Please go ahead.

Ahmad Reza, SVP, Corporate Communications and Investor Relations

Thank you, Jason. Ladies and gentlemen, welcome to Telkom Indonesia conference call for the unaudited results of the first quarter of 2024. There will be an overview from our CEO followed by the Q&A after the session. Before we start, let me remind you that today's call and the responses to questions may contain forward-looking statements within the meaning of safe harbor. Actual results will differ materially from projections or estimations and may involve risks and uncertainties that may cause actual results to differ from what we discuss today. Ladies and gentlemen, it's my pleasure now to introduce the Telkom Board of Directors who are joining us today. First is Mr. Ririek Adriansyah, our President, Director and CEO; Mr. Heri Supriadi, our Finance and Risk Management Director; Mrs. Venusiana, our Enterprise and Business Service Director; Mr. Bogi Witjaksono, our Wholesale and International Service Director; Mr. Budi Setyawan Wijaya, our Strategic Portfolio Director; Mr. Honesti Basyir, our Group Business Deployment Director; Mr. Herlan Wijanarko, our Network and IT Solution Director; and Mr. Afriwandi, our Human Capital Management Director.

Ririek Adriansyah, CEO

Thank you, Reza. Good afternoon, ladies and gentlemen. Welcome to our conference call for the unaudited first quarter year of 2024 results. We appreciate your participation in this call. First quarter of the year 2024 will be considered an exciting and dynamic year that needs to be credited in terms of business and economic stability. We have witnessed the macroeconomic downturn and the direction towards higher inflation worsen by the geopolitical situation. The newly elected government and its administration in Indonesia post-election process will be considered by our investors as the key player, especially regarding our political, social, economic, and business stability. Amidst the potential recession and rising inflation, as well as the continuous increase of commodity prices, Telkom Group tried to improve the services by serving an even broader segment. This resulted in stable ARPU with an increase in traffic, indicating an improvement in customer productivity, supported by leading infrastructure to maintain our dominance in the telecommunication sector. Telkomsat is becoming a significant revenue contributor to the group, managing B2C business such as mobile and fixed broadband. Telkomsat captures future customers by adopting a strategic localized approach, aiming to maintain dominance and sustainable growth of convergence revenue share. With the integration of FMC, Telkomsel Lite and value have become more relevant, allowing better access for mass market segments through cross-selling and upselling. Telkomsel also maintains its dominance by implementing consumer value maximization or CVM, supported by network optimization and quality leadership. In the B2B business, Telkom consistently implements the right strategy, especially in data center monetization and InfraCo business investment. We plan to fully unlock our data center business within the year of 2024 by finding strategic partners who can contribute not only capital but also expertise, management, and access to the data center market. The growth of the B2B business, especially in the data center, is very high. We are fully aware that opportunities in DC amidst timely mark-to-market sizes can yield significant benefits. Meeting supply will create additional opportunities, while lagging supply will detract from them. We believe there is still an important opportunity for value creation in a competitive market environment. Telkom Group, nevertheless, will pursue organic and inorganic efforts to expand capacity to 400 megawatts by 2030. Infrastructure initiatives have also been progressing alongside our business cycles. PT Telkom Infrastruktur Indonesia is mandated to begin infrastructure asset-managed services in 2024 before assuming higher duties of asset ownership in 2025. On the B2B digital business, our performance and enhancement of business processes between our unit divisions and subsidiaries have yielded positive results. The synergy and efficiency generated have positioned us to revamp our product portfolio for home and enterprise segments. During the first quarter of 2024, the unaudited financial results indicate that Telkom Group's revenue grew by 3.7% year-on-year to IDR 37.4 trillion, with EBITDA standing at IDR 19.4 trillion, reflecting a 2.2% increase from the previous year. Our successful strategies in promoting data and Internet revenue, along with effective expense management, have bolstered our profitability line.

Ahmad Reza, SVP, Corporate Communications and Investor Relations

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

Operator, Operator

Our first question comes from Piyush Choudhary from HSBC.

Piyush Choudhary, Analyst

This is Piyush from HSBC. Three questions. Firstly, on mobile, how has the impact of the Telkomsel Lite plan been? And are there any changes in your mobile revenue outlook for 2024 post this plan launch? Secondly, any update on spectrum auction timelines? And thirdly, on IndiHome B2C, what is driving the revenue down quarter-on-quarter, and before that, IndiHome B2C ARPU is also down. So what are the reasons for this, and what’s the outlook for IndiHome B2C revenue?

Derrick Heng, Marketing Director

Your first question on the impact of the Telkomsel Lite plan. The traction of Telkomsel Lite is aligned to our internal plan. We have seen improvements in payloads and renewal trends in less than 1 month. However, we are cautiously monitoring progress and will adjust as necessary with regards to market movements. We all know that the prepaid market is highly dynamic. So we will always look at whether the impact remains manageable. But our focus is on targeted segments, predominantly Java with localized quota offerings.

Ririek Adriansyah, CEO

To add to Derrick's answer regarding the Telkomsel Lite plan, you can see the results today; both our traffic and traffic profiles are demonstrating positive progress.

Adiwinahyu Basuki Sigit, Sales Director

To add to the impacts of Telkomsel Lite, our results for Q1 show that our digital business for broadband is growing at about 8.6%. This reflects positive progress in our productivity of broadband messaging in mobile. Notably, we've seen that traffic growth is 14% compared to last year. Regarding the decline in revenue for IndiHome, the consumer’s revenue shows stability, yet we are currently undergoing alignment between consumer type businesses and enterprises, just as we needed alignment post our legal day one six months ago. While there's been a revenue down quarter-on-quarter in certain consumer segments, we've also made significant progress on the sales side, adding a net of IDR 222,000 within the quarterly basis in Q1. We also see potential for increasing penetration into mid- to low-segment markets across the nation.

Mohamad Ramzy, Finance and Risk Management Director

To add on the first question about the revenue outlook, we still maintain our outlook for mobile revenue growth to be in the low to mid-single digits. Regarding the spectrum auction, we await the official announcement from the government as they prepare the commutation and terms and conditions. We expect that the auction will take place, at the latest, in the second half of this year.

Kelsey Santoso, Analyst

This is Kelsey. My question is on mobile. Both prepaid and postpaid subscribers were flat Q-on-Q, but ARPU continued to contract. I wanted to understand what led to this decline and why it hasn't translated into subscriber growth. What are your observations on the ground regarding competition? Also, I'd like to ask about cost efficiency; could you elaborate on what led to the reduction in O&M expenses quarter-on-quarter?

Mohamad Ramzy, Finance and Risk Management Director

On the ARPU in mobile, it's comprised of digital connectivity revenue and revenue from our legacy voice and SMS services, which have also declined concurrently. If you look solely at ARPU from digital connectivity, it should exhibit a growth trajectory. The reduction we see is largely due to diminishing contributions from legacy services. Over time, we expect to see ARPU growth.

Ririek Adriansyah, CEO

In seasonal comparison, Q1 tends to impact mobile ARPU compared to Q4. We're also seeing competitive pressures. Our ARPU efforts are still above our peers, indicating our ability to monitor and maintain profitability relative to them. The competition isn't diminishing, especially as we offer live services and have maintained our portfolio.

Derrick Heng, Marketing Director

In response to your question regarding cost efficiency, in Q-on-Q, we experienced an O&M growth decline of minus 2.7%, noting this was one of the driest quarters last year. The previous quarter impacted by one-off costs concerning surface tower contracts, particularly related to inflation allowances. There's also the WSA contract with our parent accounts, specifically concerning our IndiHome operation.

Marissa Putri, Analyst

So my first question is a follow-up to previous queries on IndiHome. While ARPU has declined as you expanded your market target, the fall in ARPU hasn't been offset by accrued subscriber growth. Can management elaborate on this transition period? What actions are being taken on the IndiHome side? Additionally, the by.U quota seems unrestricted by areas. What is your group's strategy to prevent cannibalization from by.U to its primary Telkomsel brand?

Ririek Adriansyah, CEO

About IndiHome's market dynamics, as mentioned, the decline in ARPU is expected as we reach new segments. However, we are focusing on improving ARPU by steering customers toward higher-speed, premium products. We must ensure a balanced contribution from higher ARPU accounts alongside the general market alignment. Regarding by.U, we do not identify cannibalization issues; it's a strategy targeting the youth and digitally engaged demographics, bringing in new clientele without adversely impacting our existing customer base. Even if there are migrations from prepaid users to by.U, we find ARPU bottom line remains elevated within this segment. This youth demographic is critical, representing our future market, thus informing our engagement strategy.

Derrick Heng, Marketing Director

The branding chosen for by.U ensures we not only deliver compelling offerings but strategically limit access in certain regions to maintain stability in our core strength areas. For areas that may yield adverse pricing, we refrain from introducing such products, focusing on our stronghold regions.

Adiwinahyu Basuki Sigit, Sales Director

Our approach with by.U emphasizes household dynamics rather than standalone mobile lines, aligning with our FMC strategy. Hence, as we target families instead of individuals, it plays a vital role in household decisions.

Derrick Heng, Marketing Director

The youth segment is integral to our FMC strategy, comprising households encapsulating layers of diverse customer segments, which we will nuance into our offers moving forward.

Operator, Operator

Next question comes from the line of Arthur Pineda from Citi.

Arthur Pineda, Analyst

Three questions, please. Firstly, on mobile competition. Are you seeing any reactions from your competitors following the launch of Telkomsel Lite? It's been a few months since. Secondly, regarding cost optimization programs, could you elaborate on your targets for this year concerning fixed mobile convergence as well as shared network optimization? Lastly, if I can just clarify, I understand that we've seen a decline in B2C revenues. Is this merely a reclassification, and how does that impact transaction values related to Singtel?

Derrick Heng, Marketing Director

Arthur, could you repeat your third question, please? Your voice is quite soft.

Ririek Adriansyah, CEO

On Telkomsel Lite, we’d like to ensure our targeted product offerings are meeting market competitiveness while maintaining ARPU stability through productivity gains. The localized quota rolls out for targeted consumer base management to uphold subscriber growth while ensuring profitability is sustained.

Unknown Executive, Executive

With regards to cost optimization, we've continued programs from FMC integration, effectively achieving IDR 100 billion savings last year with an uplift of IDR 400 billion revenue. This year, we anticipate expanding our savings through aggregations on content costs and customer interaction management, aiming for overall improvements within operational budgets. While we don't disclose specific figures, overall efficiency lead to IDR 1.8 trillion uplift expected in the large scheme, spanning across both firm and parent companies' strategies. The final question about the reclassification relates to B2B revenue from B2C. The adjustments made were purely to clarify delineations within segments. This doesn't alter overall valuations existing from prior assessments.

Henry Tedja, Analyst

Two questions from me related to Telkomsel Lite. How do you see competitors in the market reacting to this product? Are there any price adjustments from Telkomsel anticipated? Also, data traffic growth reported is notably strong; can we expect this trend to sustain going forward?

Ririek Adriansyah, CEO

Telkomsel Lite was designed to increase market competitiveness without diminishing ARPU through structured productivity improvements, ensuring profitability while targeting the mass market. We anticipate strong activity in ex-Java, while pricing criteria will remain selective relative to our competitors.

Unknown Executive, Executive

The increase in data traffic was significant, driven by an impressive 11% increase in data users, combined with productivity improvements per subscriber. Maintaining this productivity would indicate persistently favorable projections.

Unknown Analyst, Analyst

Can you provide a breakdown of changes in mobile subscriber categories? What impact did Telkomsel Lite have on market share? Furthermore, what updates can you provide regarding the anticipated data center business rollout?

Ririek Adriansyah, CEO

To clarify customer profiles, the launch of Telkomsel Lite is showing promise, targeting youth and broader mass markets effectively, while reinforcing our stronghold particularly in Java. This is essential for fostering new consumer relationships and ensuring retention as part of our holistic FMC strategy.

Unknown Executive, Executive

Currently, our operational plans include expanding our data center capacity significantly, targeting an additional 18 megawatts and pushing our total capacity to 60 megawatts by the end of this year.

Ahmad Reza, SVP, Corporate Communications and Investor Relations

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

Operator, Operator

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