Earnings Call Transcript - TLK Q4 2021

Operator, Operator

Thank you all for standing by, and welcome to Telkom's Full Year of 2021 Results. I'd now like to hand the conference over to your first speaker, Mr. Andi Setiawan. Thank you. Please go ahead. Thank you, Sara. Ladies and gentlemen, welcome to PT Telkom Indonesia Conference Call for the Full Year of 2021 Results. There will be an overview from our CEO and followed with 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 or estimates 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's Board of Directors who are joining with us today: Mr. Ririek Adriansyah as President Director and CEO; Heri Supriadi as Finance Director; Mr. Herlan Wijanarko as Network and IT Solutions Director; Mr. Bogi Witjaksono as Wholesale and International Service Director; Mr. Edi Witjara as Enterprise and Business Service Director; Ms. FM Venusiana as Consumer Service Director; Mr. Budi Setyawan Wijaya as Portfolio Director; Mr. Muhamad Fajrin Rasyid as Digital Business Director; and Mr. Afriwandi as Human Capital Management Director. Also present are the Board of Directors of Telkomsel: Mr. Adiwinahyu Basuki Sigit as Sales Director; Mr. Mohamad Ramzy as Finance and Risk Management Director; and Mr. Derek Hang as Marketing Director. I now hand over the call to our CEO, Mr. Ririek Adriansyah, for his overview. Please, Ririek.

Ririek Adriansyah, CEO

Thank you, Andi. Good afternoon, ladies and gentlemen. Welcome to our conference call for the full year of 2021 results. We appreciate your participation in this call, and we hope you are all in good health. First of all, we would like to express our appreciation to the government of Indonesia that has been successfully handling COVID-19 so that social and economic activities during the year are conducive and in full year of 2021 recorded positive GDP growth of 3.7% year-on-year. For the past 2 years, COVID has created new norms that make society turn into digital applications to cater to their social and economic activity while curbing the spread of the virus. The pandemic has changed consumer behavior and created the adoption of massive digital initiatives. Ladies and gentlemen, now let's move on to talk about the results. In the full year of 2021, Telkom secured positive growth in revenue, which increased by 4.9% year-on-year. We also successfully controlled expenses so that EBITDA grew by 5.1%. Supported by solid operational results and added with a higher valuation in diesel investment, our net income increased by 19.0%. IndiHome has been the main contributor to growth performance, having grown by 18.5% in 2021, along with a significant improvement in EBITDA margin. IndiHome served 8.6 million customers as of December 2021 with the ARPU of around IDR 270,000. In the mobile segment, competition and data pricing remain the main issues that Telkomsel had to address. However, Telkomsel successfully encouraged data users to consume more, so data traffic grew by 43.3%. As a result, Digital Business revenue increased by 9.5%, and its contribution to Telkomsel revenue increased from 72% to 78%. Following the industry consolidation that happened at the beginning of 2022, we are optimistic that the competitive environment will improve to a healthier industry. Furthermore, the Enterprise and Wholesale segments successfully captured the growth opportunity following the better situation of COVID-19. The growth drivers, among others, are Enterprise, IT Services, and Connectivity, Data Center, and Tower Business. Our subsidiary that recently went public, Mitratel, showed strong results in 2021. Its revenue grew by 11%, with EBITDA margin improved to 75.5% from 67.6% in the previous year. With more than 28,000 towers located across Indonesia, Mitratel confirms its position as one of the prominent tower providers in Indonesia. In an effort to strengthen our competitive advantage and leadership in the industry, we are pursuing what we call a 5-fold move strategy. After successfully bringing our subsidiary Mitratel public in November 2021, we are in the process to materialize another four initiatives: one, unlocking the data center business; two, accelerating investments in digital companies; three, strengthening B2B IT services; and four, enabling fixed mobile convergence. We are enhancing and consolidating our data center assets and already set up a subsidiary called Sigma Tata Sadaya to become the entity that will run the Data Center Business and be unlocked in the future. We also continue to strengthen capability in Indigo as an entity that invests in various digital companies for consumers. The capability enhancement will include partnerships with digital players and investors to avoid a cash-burning approach. We are also in the process to prepare an entity that will be the de facto provider for B2B IT services, which will be enhanced and unlocked in the future. And lastly, we recently signed an MOU with our partner in Telkomsel, Singtel, to explore the best business model to convert fixed and mobile business as well as an MOU to explore partnership in the development of regional scale data centers. We expect that all of the strategies can be materialized within 2 years and will create maximum value for all stakeholders. That concludes my remarks, and thank you for your kind attention. Back to you, Andi.

Operator, Operator

Thank you, Pak Ririek. We will now begin the Q&A session. Operator, may we have the first question, please? Our first question comes from Piyush Choudhary at HSBC.

Piyush Choudhary, Analyst

This is Piyush from HSBC. Congratulations to the management team on a great set of results. A couple of questions on your 4-point strategy which you have articulated. Firstly, could you elaborate what kind of incremental investments you are embarking on in the digital side? How much capital are you willing to allocate to such investments? Would it be in line with your investments in GoTo - or yes, some more color on those lines will be helpful. Secondly, on your strategy of fixed mobile convergence, can you share a timeline to launch such a product and what needs to be done? What preparation needs to be done to launch such a product internally? And what would be the economics because Telkom has different stakes in IndiHome versus Telkomsel, so how will the economics work?

Heri Supriadi, Finance Director

Thank you, Piyush, for your question on this one. On the investment in digital, our situation is this: we have the CapEx to revenue ratio around 25%, which we believe is going to remain the same for the medium term. We are doing investment in digital, not only by ourselves, but we also will have partners who will contribute to the ecosystem and funding for investments in this area. So at this moment, we can convey to you that our plan is to have the same ratio of investment, including continuing to grow our investment in digital in many ways. We are trying to avoid a cash-burning business model, which makes us more efficient, especially focusing on our current cost structure. And second, regarding the FMC strategy, concerning the timeline and what needs to be done to launch the product, our cooperation with Singtel is basically designed to collaborate on the go-to-market strategy, trying to address the market with a broadband solution that is a bit lighter compared to regular IndiHome. We utilize Telkomsel's capabilities to develop and market this product, ensuring the business model works operationally. The timeline is set to be as soon as possible, as we already have good cooperation with Singtel, and much of the groundwork has been laid. This will include asset management, workforce management, and the essential separation of assets. Therefore, we're quite optimistic with our experience and understanding that we can move quickly.

Piyush Choudhary, Analyst

So on this fixed mobile convergence, are your systems already geared up to do one billing from a customer perspective? And would there be one kind of marketing team? Like would Telkomsel be the front to do the mobile fixed convergence?

Heri Supriadi, Finance Director

Yes. The intention is to make Telkomsel focus on the B2C side early on. This is important for us in terms of investment because we have investment in IndiHome and also in Telkomsel from the Telkom side. In terms of billing and other systems, we have a lot of homework to do, including regulatory aspects. We'll leverage best practices from other markets to enhance customer experience, especially how we manage services and interact with them. I hope that answers your question.

Piyush Choudhary, Analyst

Sure, Pak Heri. Yes, I'll come back in queue. I have more questions, but I'll come back in queue.

Operator, Operator

Our next question comes from Ranjan Sharma at JPMorgan.

Ranjan Sharma, Analyst

A couple of questions from my side. Firstly, on the Data Center business, what is your current infrastructure? And what are the revenues that you're expecting from this business in the next 3 to 5 years? And then if you can just highlight also the investments that you're making. Second is on wireless competition, can you remind us what you're seeing on the ground now? Have you seen any further increases in tariffs or reductions in data allowances?

Heri Supriadi, Finance Director

Bogi, do you want to answer?

Unknown Executive, Executive

I would have to repeat, we already have details about the data center structure in place to support our data center initiative. In terms of our infrastructure, we have built multiple data centers located in 20 cities in Indonesia, and we are planning to build another edge data center to support the Hyperscale Data Center. In terms of the expected revenue from our consolidated data center business by 2025, we expect around IDR 14 trillion.

Ranjan Sharma, Analyst

Sorry, to interrupt, but we can barely hear you. I am not sure if it's on my side, but the voice is coming in very softly.

Unknown Executive, Executive

Okay. Can you hear me now?

Ranjan Sharma, Analyst

It's better.

Unknown Executive, Executive

For the product infrastructure, we have a test data center that is currently in operation and another infrastructure that we are developing to support this data center. We are preparing the connectivity of the edge data centers with the main data centers that have already been built, as well as preparing the concept of a single data center to improve connectivity for the entire data center ecosystem. That's the phase we have already prepared for the data center business. Now regarding revenue expectations for wireless competition, the market remains competitive, with aggressive initiatives from our competitors focused on both acquisitions and renewed packages to target lower-end market shares. As the market leader, we aim to drive a sustainable and healthy industry behavior by ensuring our pricing remains competitive without causing price wars. We remain focused on providing distinctive products and services that meet our customers' needs and defend our market leadership.

Ranjan Sharma, Analyst

Yes. But I think the line is still a bit soft for me, so. I'll take it off-line.

Operator, Operator

Our next question comes from Arthur Pineda from Citigroup.

Arthur Pineda, Analyst

Firstly, can I ask about the fixed mobile convergence? Are you actually looking to fold in IndiHome into Telkomsel? Or are you just looking to simply enhance the cooperation and product bundling between the two entities? I'm just wondering if Telkomsel actually plans to buy IndiHome or merely cooperate. And if I can just also clarify on the cost items, there seems to be a significant jump in a number of cost items Q-on-Q. Well, the D&A, O&M, and personnel costs have all grown double-digit levels. Are there any one-off bookings being recognized in this quarter?

Heri Supriadi, Finance Director

On the FMC, as mentioned before, we are going to restructure the company, where Telkomsel will focus on B2C. All operations from networking to market should be managed by Telkomsel. Therefore, we are working towards a consolidated approach that would enhance efficiency and output. The timeline cannot be definitively stated as there are regulatory realms to navigate, but we are working towards a high-speed effort to ensure this happens given the synergy present in this initiative which provides value to customers, shareholders and us all. Regarding costs, yes, the costs increased significantly, especially in operation and maintenance. However, the revenue growth has been higher than operational costs for the most part. In terms of one-offs, there haven’t been notable one-off expenses recognized this quarter, but depreciation and amortization costs saw increases due to prior network depreciation adjustments to improve the quality of our network. The total cost in this depreciation is around IDR 1.6 trillion.

Arthur Pineda, Analyst

Understood. And on the labor charges, were there MRP bookings? Or...

Heri Supriadi, Finance Director

In the labor charges, this is fundamentally a provision for bonuses and incentives based on company performance.

Operator, Operator

Our next question comes from Musani Sefi at UBS.

Unknown Analyst, Analyst

A couple of questions from me. Firstly, on guidance, can you provide what kind of growth and CapEx you are looking for in 2022? And in that context, what type of mobile growth do you expect in 2022 as well? Secondly, regarding IndiHome, I see that the revenue growth of IndiHome in the fourth quarter was quite slow, even declining on a quarter-on-quarter basis. I want to understand what caused this deceleration in growth.

Heri Supriadi, Finance Director

On the CapEx guidance, we expect it to remain around 25% of revenue. For Telkomsel, that should be similar to what we did last year, around 13%. Much of this will go towards improving the connectivity for IndiHome and enhancing our network and back-end systems. Regarding mobile growth expectations, I anticipate low to mid-single-digit growth similar to the last year.

Edi Witjara, Business Service Director

In terms of our expectation during 2022, we expect mobile growth to be in the low to mid-single-digit growth, aligned with the previous year's outcomes.

Heri Supriadi, Finance Director

On the IndiHome side, the revenue growth was lower during Q-on-Q because we applied certain accounting treatments concerning advanced payments for customers. This made the reported growth appear lower compared to the previous quarter.

Unknown Analyst, Analyst

Understood. Just going back to the previous question on guidance, what's the expected growth at the group level? And what kind of net additional subscriber additions are you targeting for IndiHome in 2022?

Heri Supriadi, Finance Director

For the group, we expect mid-single-digit revenue growth this year while aiming to stabilize our EBITDA and net income margins. Regarding IndiHome, we are focusing on enhancing and retaining our subscriber base initially before accelerating acquisition efforts in the latter half of the year. Thus, our target for subscriber net additions in 2022 is expected to be greater than last year’s number.

Operator, Operator

Our next question comes from Choong Chen Foong at CIMB.

Choong Chen Foong, Analyst

This is Foong from CIMB. A couple of questions from me. Firstly, I want to revisit the mobile competition. Have you seen the market becoming more competitive recently? Do you believe the market conditions remain favorable for pricing optimization soon? Secondly, regarding Pak Heri's comments on the stability of EBITDA margins, with inflation on the rise this year, do you foresee significant cost pressures throughout 2022 risking stable margins? Lastly, concerning the data center business under STS and the timeline for asset consolidation, why will it take so long? Does this mean the STS IPO will only happen post-consolidation, or are we still on track for 2023?

Unknown Executive, Executive

From an environment perspective, not only for Telkomsel but also for competitors, we are beginning to shift towards data monetization to support a healthier industry. The average market behavior is changing toward sustainable pricing strategies, ensuring that data monetization is crucial. Telkomsel has progressed towards fair usage initiatives, and we've consistently advocated for sustainable pricing, avoiding price wars. Our efforts focus on tailored packages relevant to our consumer needs and avoiding unsustainable competition.

Heri Supriadi, Finance Director

Inflation does pose some pressures, and we closely monitor its effects on our business. We anticipate a slight decrease in demand, but its impact on our telecom services remains minimal. Notably, we believe our digital and telco services are foundational necessities for consumers, keeping them relevant even amidst economic shifts. While increased operational and maintenance costs may arise, we remain confident that we can stabilize profitability given improvements in operational efficiency.

Budi Wijaya, Portfolio Director

The consolidation process is ongoing, and we have already put much groundwork into managing those transitions. Currently, some of the existing data centers are under construction and have been successfully introduced to the new management team, and we're in the process of implementing new operational strategies. We believe this consolidation will bolster our output and quality, leading us toward our goals in a timely manner.

Ririek Adriansyah, CEO

The 2 to 3 year timeline mentioned pertains to the completion stages of the overall project, including the expansion of the new infrastructure to their full capacities. Installation costs and partnerships will progress within this timeframe, with substantial portions of setup expected to be completed within the year.

Heri Supriadi, Finance Director

We aim to kick off the IPO process for the data center by the first or second quarter of 2023. Nonetheless, we are open to identifying strategic partners to calibrate the business's valuation while enhancing overall performance.

Choong Chen Foong, Analyst

Can I quickly follow up on the recent MOU signed with Singtel regarding the data center business? How does this MoU fit into Telkom's strategy for unlocking value?

Ririek Adriansyah, CEO

The MOU entails establishing a regional joint venture between Telkom and Singtel for data center operations, contributing to existing and new infrastructures. This partnership allows us to attract additional strategic global partners later, enhancing our overall offering and positioning.

Choong Chen Foong, Analyst

So just to clarify, the Hyperscale Data Centers and other assets will largely remain under Telkom's ownership rather than being shared with Singtel. Is that correct?

Ririek Adriansyah, CEO

Yes, that is correct. The company will retain majority ownership of Indonesia's data centers while Singtel holds the majority stake for operations handled in Singapore.

Operator, Operator

Our next question comes from Kresna Hutabarat at Mandiri Securities.

Kresna Hutabarat, Analyst

Congratulations again on the strong earnings growth in 2021 and also the successful corporate restructuring initiatives as well as the digital investments to date. My first question, I only have one question actually related to 5G CapEx. The guidance on CapEx to revenue being 25% implies a total CapEx of over IDR 35 trillion in 2022. My question is, how much of that would be associated with 5G network investments? Should we expect CapEx upside if the government kicks off some auctions in the next 12 to 24 months? How will management finance that CapEx growth going forward?

Heri Supriadi, Finance Director

On the CapEx revenue guidance, it is about 12% to 14% of our overall income. That does include previous year investments. However, we will execute the 5G investments in stages based on market capabilities. The majority of our investments this year still revolve around enhancing our existing 4G networks and expanding capacity, especially within Java.

Kresna Hutabarat, Analyst

Do we have any visibility on the potential for a spectrum auction related to 5G in the next 6 to 12 months? Is this something that Telkomsel has discussed with regulators?

Heri Supriadi, Finance Director

Yes, the government has plans for the rollout of the 700 megahertz frequency for 5G. We are awaiting an announcement regarding the auction process, and in preparation, we are evaluating our bidding requirements.

Operator, Operator

Our next question comes from Niko Margaronis at BRI Danareksa.

Niko Margaronis, Analyst

Congratulations on the good results. I just want to ask about Telkomsel down the line with these divestments and increased financial leases. What is the profitability going forward for Telkomsel standalone? What do you see the EBITDA margin going in the next 1 to 2 years?

Heri Supriadi, Finance Director

Regarding the margin outlook, we expect competition to be challenging, but we believe we can sustain an EBITDA margin at the high 50s through operational optimization strategies, especially in operational and maintenance areas.

Niko Margaronis, Analyst

Following up from a colleague's earlier question, in 2025, you mentioned estimating around IDR 14 trillion in revenue. What margins do you foresee developing by then? Additionally, could you elaborate on why you believe it's necessary to have foreign investors co-invest in the data center business?

Unknown Executive, Executive

First, on the data center margin, our target is to achieve 35% to 40% margins, aligning with international benchmarks. We believe that having foreign co-investors in the data center business will introduce advanced technology and customer networks, fostering synergies and enhancing our competitive edge.

Niko Margaronis, Analyst

Yes, may I have updates on your previously mentioned exploration of partnerships with Microsoft? What areas do you see as potential growth with Microsoft?

Unknown Executive, Executive

The cooperation with Microsoft is ongoing, focusing on data center services, offering cloud solutions, and providing customized data solutions for the Indonesian market. Our teams have been in regular conversations, and we anticipate announcing details soon.

Niko Margaronis, Analyst

Thank you, Pak Ririek. If I may squeeze one question on IndiHome and this potential fixed mobile convergence. I expect ARPU pressure if you offer double play or triple play services. Is this something you also foresee? I also noticed that in the fourth quarter, IndiHome's ARPU slowed down. Will this pick up again as we progress into 2022?

Heri Supriadi, Finance Director

Currently, we have an ARPU of around IDR 270,000, with most revenue coming from subscriber add-ons. Our strategy aims to improve the usage and overall experience, which we hope will stabilize the ARPU by attracting high-quality users. While there might be pressures from mobile or fixed broadband customers, we believe that enhanced customer experiences will foster sticking power and long-term customer loyalty.

Ririek Adriansyah, CEO

Just briefly adding to the ARPU discussion, while maintaining ARPU is crucial, the overriding objective is the overall revenue growth, which may see a modest ARPU decline. Our focus will be on adding quality subscribers that contribute additional revenue.

Operator, Operator

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

Unknown Executive, Executive

Thank you.

Operator, Operator

Thank you. This does conclude today's conference call. You may now disconnect.