Earnings Call Transcript - TLK Q2 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the Telkom's First Half of 2020 Results Conference Call. Today's conference is being recorded. I would now like to hand the call over to first speaker today, Mr. Andi Setiawan. Thank you. Please go ahead. Thank you, Rachel. Ladies and gentlemen, welcome to PT Telkom Indonesia Conference Call for the First Half of 2020 Results. We released our first half of 2020 results on the 7th of August, and the reports are available on our website, www.telkom.co.id. Today's presentation is available on the webcast and an audio recording will be provided after the call for the next 7 days. There will be an overview from our CEO and after that, all participants are given the opportunity to participate in a Q&A session. Before we start, let me remind you that today's call and response to the questions may contain forward-looking statements within the meaning of safe harbor. Actual results could differ materially from projections, estimations, or expectations voiced during today's call. These may involve risk and uncertainty and may cause actual results to differ substantially from what we discuss today. Telkom Indonesia does not guarantee any actions that may have been taken in reliance of the discussion held 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 Chief Executive Officer; Mr. Heri Supriadi as Finance Director; Mr. Herlan Wijanarko as Network and IT Solutions Director; Mr. Dian Rachmawan as Wholesale and International Service Director; Mr. Edi Witjara as Enterprise and Business Service Director; Ms. Venusiana as Consumer Service Director; Mr. Budi Setyawan Wijaya as Strategic Portfolio Director; and Mr. Muhamad Fajrin Rasyid as Digital Business Director. Also present is the Board of Director of Telkomsel, Mr. Setyanto Hantoro as President Director; Mr. Leonardus Wahyu Wasono as Finance Director; and Ms. Rachel Goh as Marketing Director. I now hand over the call to our CEO, Mr. Ririek Adriansyah, for his overview. Please, Par-Ririek.

Ririek Adriansyah, CEO

Thank you, Andi. Good afternoon, everyone. Welcome to our conference call discussing the results for the first half of 2020. We appreciate your participation. The COVID-19 pandemic has continued to affect the economy, limiting social and economic activities due to concerns about the virus. Consequently, we, like many countries, have experienced GDP contraction, with the initial GDP in the second quarter of 2020 declining by 5.3% compared to the same period last year. For Telkom Group, the pandemic's impact was particularly evident in the enterprise segment. Nevertheless, our fixed broadband and wholesale business showed strong growth, which mitigated a more significant revenue decline for the group. Despite an overall revenue drop of 3.6% year-on-year to IDR 66.9 trillion, we managed to control expenses, leading to improved profitability. The EBITDA margin increased to 51.1% in the first half of 2020 from 47.8% during the same period last year. Moreover, the normalized net income margin rose to 17.3% from 16.0% last year. In the mobile segment, we continue transforming our digital business, benefiting from growth in the digital segment and our cost leadership initiatives. The Digital Business revenue grew by 13.5% year-on-year to IDR 31.9 trillion, now representing 72.4% of total revenue, up from 62.2% a year ago. This growth is attributed to our 105.1 million data users, who generated around 4,200 petabytes of data traffic, reflecting a 40.3% increase year-on-year. Data user consumption also increased by 42.8% to 7 gigabytes per user. IndiHome continued its positive trend, posting revenue of IDR 10.4 trillion in the first half of 2020, a growth of 19.1% year-on-year, mainly due to adding 48,000 new subscribers, bringing our total to 7.45 million by the end of June 2020. Revenue from add-ons grew by 32%, contributing 13.4% to IndiHome's revenue. IndiHome's EBITDA margin improved from 35.9% in the first quarter to 38.6% in the second quarter, driven by economic recovery and better operating leverage. ARPU for IndiHome remained stable at IDR 241,000, with 55.7% of customers on Dual Play packages and the rest on Triple Play packages. We continue to encourage customers to upgrade their subscriptions or purchase additional features to enhance ARPU. In the enterprise segment, our strategy focuses on improving business fundamentals by phasing out low-margin businesses and prioritizing more profitable lines while enhancing revenue quality. In the first half of 2020, the enterprise segment generated IDR 7.7 trillion in revenue, affected by reduced income from low-margin device credit business, declining enterprise fixed voice services, and various challenges in project-based businesses. However, we observed growth in data center and cloud services boosting the enterprise segment's performance. In the enterprise area, we are concentrating on data centers and currently operate in 22 locations with a combined capacity of 30,000 square meters. To reinforce our data center and cloud offerings, we are developing a new facility in the Jakarta outskirts with an additional capacity of up to 10,000 square meters, expected to begin operations in the first half of 2021. Revenue from the data centers in the enterprise segment grew by 36.4% to IDR 329 billion. The Wholesale and International Business segment's revenue rose by 13.9% year-on-year to IDR 6.8 trillion, primarily due to growth in core businesses, international wholesale voice, SMS ATP, and data centers. Our healthy performance stems from an effective strategy implemented in 2019, leading to a significant revenue increase of 61% in tower business to IDR 916 billion. Furthermore, the data center and cloud business under WIB experienced significant revenue growth of 39.2% to IDR 311 billion, mainly attributed to our data center in Singapore. We continue to act as an enabler for both our internal divisions and external customers, contributing to better overall business performance. Despite the pandemic, we remain committed to investing in network quality and capacity preparation. In the first half of 2020, we allocated around IDR 12 billion in CapEx, primarily for deploying 4G BTS in core business, fiber-based access to enhance IndiHome services, fiber-based backups, IT upgrades, and other necessary infrastructure like towers and data centers. That concludes my remarks. Thank you.

Operator, Operator

Thank you, Par-Ririek. We will now begin the Q&A session. Please speak clearly and state your name and company when asking your questions. Operator, could we have the first question, please?

Operator, Operator

Your first question comes from the line of Piyush Choudhary of HSBC.

Piyush Choudhary, Analyst

This is Piyush from HSBC. I have two questions, both regarding mobile. First, could you explain your strategy for launching unlimited plans in over 60 cities? What is the likelihood of these plans being introduced nationwide? Additionally, how do you evaluate the risk of increased competitive intensity? Second, in mobile, the revenue from legacy services has decreased to 26%. When do you anticipate the decline in legacy revenue to begin to slow down, and can data revenue growth contribute to overall growth? Any insights on this would be appreciated.

Rachel Goh, Marketing Director

Piyush, I'm Rachel and I'll take your questions. I'm with Telkomsel. Regarding the unlimited plans we've launched, we've observed a decline in market share in both Java and outside Java due to competition and the effects of COVID-19 on consumer purchasing power. Consumer spending has been notably restrained in the mass market as a result of the ongoing impact from COVID. In this situation, we recognize that affordability plays a crucial role in consumers' decisions, including the brands they choose. We noticed significant market share changes in Java, particularly where our competitors have strong network coverage, making it easier and cheaper for customers to switch. We still believe in maintaining our premium pricing, which is set at 50% above XL and 70% above Indosat per megabyte. You asked why we launched the unlimited product in 65 cities. Our decision was deliberate and based on three key customer considerations: the affordability index, competitors' offerings in markets where we're losing market share, and Telkomsel's significant advantage, which is our strong network and capacity. This strategic focus remains in place. We will continue to concentrate on these three factors: customer affordability, competitor movements, and leveraging our network capacity to offer competitive products. Now, addressing your second point about legacy revenue, it will keep declining. Our aim is to extend its use as much as possible. The shift from voice to data is unavoidable. We anticipate this decline will persist at the current rate of 25% to 30% year-on-year until contributions drop to 20% to 25%, based on our internal analysis and regional comparisons. However, current conditions could affect this. For instance, Indosat's non-data revenue fell by 32% year-on-year. To reiterate, legacy revenue will continue to decline, and Telkomsel is focused on maximizing our network strength in the data sector as our competitive edge. I hope that addresses your questions, Piyush.

Piyush Choudhary, Analyst

Yes. Rachel, just on the pricing premium. So what kind of pricing premium are you, like, on a sustainable basis, you think is feasible for the competitive strengths that Telkomsel has?

Rachel Goh, Marketing Director

Right. Okay. So I think as a market leader, we really do not wish to destroy the market price premium because we need to make sure this industry stays very healthy. Right now, I believe the price is max about 50% above XL and 70% Indosat. This is almost like a product of what we do. I think our focus will really be on making share affordable. We maintain our market share, and we fill up our network. So the price gap would be a consequence of those other important factors, strategic factors.

Operator, Operator

Your next question comes from the line of Colin McCallum of Credit Suisse.

Colin McCallum, Analyst

I have two questions. First, regarding the IndiHome business, which has performed well, have you noticed an increase in churn since the COVID-19 lockdowns have eased? Or do you find that customers who have enjoyed broadband at home are likely to continue using it? Are you considering any revisions to your guidance for IndiHome subscribers for the full year? My second question pertains to the cellular side, directly for Heri. Based on what Rachel mentioned, it seems that the core issue is the very low pricing of competitors, which restricts your ability to charge a premium. Has Telkom's stance changed regarding support for any regulatory changes that would allow smaller players to retain their spectrum if there was consolidation? I ask this because it's been an important consideration in the past, and I would assume Telkom was previously cautious about this. However, given the industry's need for consolidation, would you be more open to the idea of supporting the retention of spectrum for players after consolidation? I am interested in your perspective on this matter.

Heri Supriadi, Finance Director

Hi, Colin. This is Heri Supriadi from Telkom. I try to answer your first question on the IndiHome, which is growing very well so far. And what is the impact of the COVID on this business? As you may see, the growth of the revenue is around 19%. And then the customer base around 25% year-on-year. That reflects a healthy market. People really want IndiHome because most people still work from home and learn from home. So the demand is pretty strong. In terms of churn, what I can basically say to you is that we have now implemented deposits for customers when they first become our subscribers. This is going to pre-fund churn, and we aim for a better quality of subscriber base. We do expect this to contribute positively to revenue and also margin for our interim business. I think the second question you addressed today regarding the industry consolidation. I would like to ask Hantoro to answer that one.

Setyanto Hantoro, President Director Telkomsel

Okay. On this point, this is Setyanto from Telkomsel. So Telkomsel believes that any M&A and consolidation will lead to a healthier industry as the number of players will decrease, the intensity of the competition will be reduced, and operators will tend to be more rational in terms of pricing. We believe that it will take quite some time for the consolidation to happen. We believe that the government already put some effort into regulations to support this, and Telkomsel as one of the players is supporting this and is very much in favor of this as long as it helps the industry to become healthier.

Operator, Operator

Your next question comes from the line of Arthur Pineda of Citigroup.

Arthur Pineda, Analyst

Three questions, please. Firstly, on the sales and marketing costs, it seems to be rising when your competitors are actually seeing declines. In fact, other end markets are also seeing declines in 2Q. What's driving this uptick? And do you see this as sustaining into the next few quarters? Second question I had is with regard to Telkomsel and the unlimited offers. How do you see this impacting competition? Are you seeing any reactions from the smaller players? And what happens next if the smaller players cut prices or allow rates? Or do you think that's simply not likely? Last question I had is on the regulation side. I'm just wondering what your expectations are on the Omnibus Law? What provisions do you think could impact the sector?

Heri Supriadi, Finance Director

Hi Arthur, I try to answer your first question on the marketing costs or expenses. I think we have quite a good cost position in which we can see the decline over time. This is because of fewer events that we can do in the field or on marketing activities. More people purchase our products or services online. We utilize more digital ways through our own channels and also our partner channels. So this has led to a more efficient marketing cost. If there's any bit of increase, it was during Ramadan festive period when we promote more usage. In general, I think we're going to see the marketing expenses this year going to lower compared to last year. This trend will continue until the end of the year. And second question may from Rachel, again, can...

Rachel Goh, Marketing Director

Okay. Fine, Heri. I'll take the second question. So your questions regarding reactions from smaller players after unlimited offers. Well, I just want to reinforce that Telkomsel is probably the last player in the market to launch anything related to unlimited because we've been holding back for a long time. Of course, the smaller players respond, but I want to highlight again the points I shared earlier. The reason why we're launching unlimited is because we have a network advantage. We do have a lot of capacity out there. And these are costs that really incur CapEx. We have capacity out there. There's customer demand for Telkomsel's network and the key factor here is affordability. So we continue to focus on what is affordable for a customer who uses Telkomsel's network. Those will be the key considerations of how we respond to competition after this. I hope that addresses your question.

Arthur Pineda, Analyst

Understood.

Heri Supriadi, Finance Director

I may add to this but, Arthur, I think we don't have any objective to create any price war. We do have capacity. We try to retain our customer base to make them more productive with the ARPU that we targeted. At the same time, we also expect that our competitors remain rational, as the prices they apply today may not even generate a return for their business. I do expect they will remain slightly rational in this.

Rachel Goh, Marketing Director

Yes, yes. And to add on to Heri, even with our unlimited pricing, we remain rational and as an average, still a premium above the others.

Heri Supriadi, Finance Director

On the Omnibus, it's not yet decided by the parliament, but we don't see any direct impact on us as a group. But if there is something that can support or endorse consolidation in the cellular industry, it will be good. Another thing is with regard to network sharing. If there's something that supports next 5G network development, I think it will be good for the industry. But until now, we don't see any results from the discussions in parliament.

Operator, Operator

Your next question comes from the line of Niko Margaronis of Danareksa Sekuritas.

Niko Margaronis, Analyst

Yes, this is Niko from PT. Danareksa. My first question is about the margins. The second quarter margins are above 50% for the group and 60% for Telkomsel. Are these sustainable? Is there any delayed booking or is this due to cost savings? That's my first question. Secondly, regarding the launch of Disney+ and Hotstar in Indonesia, is there a special partnership developing with Telkom? Is this partnership solely for mobile, or does it also include home services? Could you provide more details about the terms of this agreement?

Heri Supriadi, Finance Director

Okay. Thank you, Niko. On the first question, the margin now for the group is about 54%. Our guideline in the previous quarter was about 50% plus, and we mentioned at that time that we still hold that up for several reasons. The first, we still don't know how far this profit is going to impact us, how long it's going to impact us because some purchasing power from our customers is also being affected. So on the revenue side, despite we tried to maximize any potential from cellular and also from the fixed-line business, I think there's some risk coming from the demand side. Anyway, the second thing on the cost side, of course, we always try to maintain our cost at a manageable level. Operation and maintenance costs have been quite good; we already cover about 95% of our population. Most of the capacity is collocated, so this will only add slightly incremental costs despite the speed of additional BTSs or network elements remaining the same as before. In fixed-line, we have already made significant investments. Home-passed is quite extensive, and some additional expenses for last mile are already captured in our costs. Plus additional costs that we can manage. For example, in marketing, we tried to ensure we are more digitalized, reaching customers effectively using our data, plus promotional activities or even in the field. This in the end, we expect to maintain a margin above 50%. So that's what we can share with you, Niko.

Rachel Goh, Marketing Director

Yes, we do, Heri. I'll take one on this on Disney. To your question, actually, Disney has had a longer relationship with IndiHome than Telkom because over IndiHome, they have been offering Disney TV channels, as well as Fox Sports channels. However, those on IndiHome so far have been focused on more of the English-speaking community and at higher prices. In the partnership with Telkomsel because this is mobile-based and has much wider mass appeal, the collaboration we have with Disney Hotstar is to bring quality entertainment to the masses. Hence, the difference is at number one, it's dubbed and subbed in Bahasa Indonesia. The selling price that we agreed with Disney Hotstar was at a much lower price point to make it affordable for mass adoption. It will also include local Indonesian productions as well as all Marvel, Disney movies, Disney animated movies, Pixar, general entertainment shows, and they are also including a lot of very popular Indian content in this. The reason why Telkomsel has launched here with IndiHome is due to the technical integration challenges between mobile and wired connection that are done quite differently, but discussions have already commenced between IndiHome and Telkom for now. I hope that addresses your question.

Unknown Executive, Unknown Title

Maybe I can add an answer for the IndiHome. As Rachel said, actually, with the Disney Kid channel, National Geographic, and Fox Sports, we already have on linear bases. With the current business strategy, IndiHome still needs to maintain those linear channels while also preparing new products as Heri said that we will have with Disney, but now on preparing to avoid the offer conflicts in linear channels and on-demand services.

Operator, Operator

Your next question comes from the line of Choong Chen Foong of CIMB.

Choong Chen Foong, Analyst

A couple of questions from me. For Telkomsel, with the Unlimited Max having launched for about 3 weeks now, what have we seen in terms of the subscriber and revenue traction so far? And then my second question, for the 2,300 megahertz auction, I think the regulator is trying to put in place for the second half. Does Telkomsel have an interest, and will it be allowed to join the auction? And then my third question, I wanted to ask about, on the cost side, were there any one-off cost items for Telkomsel in the second quarter? And for IndiHome, as you have reported, EBITDA margin further improved Q-on-Q. Can you provide some color as to what cost decline and whether this is structural in nature? Those are my three questions.

Rachel Goh, Marketing Director

Okay. I'm Rachel from Telkomsel, I think your first question regarding how we have seen the market respond with regards to Unlimited Max program. So in the 65 cities that we have launched, in just the last 17 days or 20 days, we are seeing acquisitions improve double digits. We are seeing even existing customer base revenue is positive, and from an ARPU point of view is also satisfactory. So it's too early for us to tell. Let us monitor this. Perhaps for the next earnings call, we can give you a more comprehensive report.

Choong Chen Foong, Analyst

Yes, Rachel, if I can just follow up, when you say ARPU was also satisfactory, you mean to say that there was some enhancement or uplift to the ARPU?

Rachel Goh, Marketing Director

Yes, because in these cities, we do have existing customers. We have also been able to push out personalized combo subsidy unlimited plans to existing customers, which then is a product that encourages them to make a top-up on top of what they're already paying for as the base package. So with that, we're able to encourage an uplift in ARPU.

Setyanto Hantoro, President Director Telkomsel

Foong, this is Setyanto from Telkomsel, about the 2,300 megahertz auction. Spectrum is always considered a limited resource, and it is in the government's purview, including any auction plans or potential pricing of the spectrum. But Telkomsel values the opportunity to gain additional spectrum, therefore, we will always participate in that opportunity with careful consideration of its business value. Flexibility and the importance of cost avoidance will be the major considerations for us to set or propose the price for that auction.

Choong Chen Foong, Analyst

Okay. Just to follow up on the 2,300 megahertz, do you see this block of spectrum as an opportunity to combine it with what you already have and use it for 5G?

Setyanto Hantoro, President Director Telkomsel

That is also one of the main considerations when we propose for this auction.

Leonardus Wasono, Director of Finance

Okay. On point three, I'm Leonardus from Telkomsel. If you look at the quarter-over-quarter comparison, our costs in Telkomsel are somewhat elevated because we allocated funds for marketing in preparation for the Lebaran festive season. Additionally, our operation and maintenance costs increased from Q2 to Q1 due to the addition of our 4G base transceiver stations, which raised our transmission costs. We also experienced a rise in depreciation expenses due to the extra network for 4G. Importantly, there were no one-off costs in Q2.

Heri Supriadi, Finance Director

Okay. On the last question from you, Foong, on the margin of IndiHome, yes, it has improved over time as we continue to increase our size in terms of having more economic advantage. At the same time, we can also reduce marketing costs during this period. So that's also contributed to the improvement of margins. We do expect this to continue improving over time. So that's about the margin in IndiHome.

Choong Chen Foong, Analyst

Okay. And if I can just throw in one more question from what I can see from the info memo. You mentioned that Mitratel's tower acquisitions will become a strong foundation for the tower value unlocking that you said is planned to be materialized in the foreseeable future. Can you provide more specifics on this?

Heri Supriadi, Finance Director

Okay. Thank you for that one. The main reason is by unlocking this tower from Telkomsel to bring to Mitratel, Mitratel can become more of an independent tower company rather than, let's say, our competitors trying to lease from us directly. By transferring these towers to them, we enable Mitratel to attract new business opportunities for co-location. This will enhance the value of Mitratel as they build a better tower portfolio. We expect that this will be a good value driver for Mitratel, as they will become one of the biggest tower firms in the country. This strategy will create better monetary returns for our group and re-establish the valuation story for, I think, the components of our group.

Choong Chen Foong, Analyst

Has Mitratel acquired towers from Telkomsel or is that planned for the future?

Heri Supriadi, Finance Director

Today, we are utilizing Mitratel to lease out over 2,000 towers from Telkomsel to other operators. This is the current situation. By identifying additional opportunities and balancing our internal needs and competitiveness, we can unlock more value from the approximately 17,000 towers currently with Telkomsel, some of which will be transferred to Mitratel, adding value for the group.

Operator, Operator

Your next question comes from the line of Kresna Hutabarat of Mandiri.

Kresna Hutabarat, Analyst

Kresna from Mandiri. I have two questions. First, can you provide some insight into the strong growth of interconnection income in the first half of 2020? Is this growth expected to continue in the second half of the year? My second question is about the mobile side. Can the company counter pressures in the mass segment by encouraging higher spending in the high-value segment? What initiatives is Telkomsel implementing to drive ARPU growth in this high-value segment during the COVID-19 pandemic? Additionally, how do you view mobile video usage as a potential driver for traffic and ARPU growth at Telkomsel? Could you share details on mobile video user penetration at Telkomsel and the data consumption patterns compared to users who do not regularly use mobile video?

Heri Supriadi, Finance Director

Kresna, on the first question of the interconnection strong growth in 2020, I think mostly because our subsidiary Telkom Indonesia International is doing wholesale for their employees, and we have seen that it has created more traffic to their business. We do expect this trend to continue until the end of the year. Of course, if we think about year-on-year, it will vary on how the traffic of the voice itself. I think this comes quite healthy at this time. So we do expect this to continue until the end.

Rachel Goh, Marketing Director

Okay. Thank you, Heri. Yes, Krishna. So that's a great question on HPC. So how we will grow ARPU? This is precisely what we're doing, encouraging higher spending in the higher-value segment. There are two methods we are using; one focuses on our existing network. We are pushing unlimited boosters as well as personalized below-the-line combo packages to our high-value segment customers. In our past couple of months pushing this, we have seen increases in ARPU compared to average. So this is one way of increasing ARPU from our existing HPC base. More importantly, what we are doing is we are accelerating engagements with digital partners. Digital partnerships are crucial because they bring Telkomsel closer to respondents using quality data networks. You will see us working with more global and local entertainment creators and owners in areas of video entertainment, gaming, and even essential services platforms, for example, education, work-from-home solutions, and global social media content creation platforms. These are the other segments we have already started working on, and you'll see them unfold in the months ahead of us. The users of these types of video, gaming, and social media platforms have multifold data consumption compared to those who are not using them. This is basically our strategy for growth. In terms of specific numbers, we can follow up with you to provide more detail. I hope that answers your question? Thank you.

Operator, Operator

Your next question comes from the line of Chad Summer of Fidelity.

Unknown Analyst, Analyst

I'm Chad from Fidelity. Just two questions. The first one is, what is your most important KPI for your mobile business, especially in terms of top line? So if I say, if you have to choose revenue, market share, or year-over-year mobile service revenue growth, which one is more important for you? That's my first question.

Unknown Executive, Unknown Title

So I think the most important one is about our revenue share in the industry and also the better revenue growth. That is crucial for the future of our business.

Unknown Analyst, Analyst

Yes. If I may follow up on that, I understand that both aspects are very important. However, as long as you maintain your revenue market share, unless smaller competitors stop investing in their networks, it seems that competition may decline in the future. Therefore, I would like to know if you are satisfied with achieving year-on-year growth in mobile service revenue, even if you are slightly losing market share, or if you prefer to avoid any further loss in revenue market share.

Unknown Executive, Unknown Title

Let me put it this way. In our core revenue, it is legacy and broadband revenue, content data revenue. We'd like to maintain it as it is; we do defend it, not necessarily increase it, but we will defend it. But on the digital side, our plan is to make our digital revenue as our growth driver. So basically, if you divide it, it is core and digital. In the core, we want to defend it, and in the digital, we want to increase it.

Unknown Analyst, Analyst

Okay. And then my next question is what is the key difference between By.U, which you introduced about eight months ago, if I'm not mistaken, and today's new unlimited plans? I guess the biggest difference is By.U is not unlimited but much cheaper regarding unit price, and unlimited is unlimited, right? But even after you introduced By.U, you couldn't defend your market share, and your mobile service revenue growth slowed down significantly, right? So is there any difference? Why do you think this time is different in terms of, let's say, marketing strategy to better defend your market share?

Unknown Executive, Unknown Title

By.U is a product that we segmented for the youth. The main difference of By.U with our other product is that all provisioning is completed online. We have been quite successful on that because the absorption of this product in the youth market is good, and the ARPU of this product is considerably higher than the average ARPU of our customers. For the Unlimited MAX, I think Rachel can add on that.

Rachel Goh, Marketing Director

Yes, so to reinforce By.U's point of view is that it is purely digital and targets millennial customers, everything is done online, right? You don't see By.U packages or products in traditional physical outlets. So whereas for unlimited, it is focused much more on the mass segment. You can find the unlimited packages in traditional stores. So that's the key difference between By.U play and our key unlimited play stores.

Operator, Operator

Your next question comes from the line of Vangana Letra of HSBC.

Unknown Analyst, Analyst

My question relates to Telkomsel's dividend payment for 2019. I see that your dividend has cut down quite significantly from last year to this. Can you help me understand what was the thought process behind this fall in dividend? And I'm talking only Telkomsel dividend.

Heri Supriadi, Finance Director

Okay. I think like this. First, the baseline of their revenue also quite big in the previous year. We have provided a special dividend to the shareholders. So this time, I think, especially dividend, we don't have that special dividend. So the dividend we pay is quite normal, about 95%. So the difference is the dividend payout ratio.

Unknown Analyst, Analyst

Okay. Let me ask this again. So I'm looking at it from a perspective of total dividend without really getting into the breakup between ordinary and special. And I guess the total dividend is the function of the total balance sheet size. And I see that on Telkomsel, your net debt number is very low. It's a very healthy balance sheet. So I am still struggling to understand why would the dividend...

Heri Supriadi, Finance Director

The reason is like this: any dividend paid above 100% of the net income in the particular year is considered a special dividend. Whenever we see that the EBITDA cash position is strong and also efficient to get some external financing to our balance sheet, we return cash to the shareholders. That's the reason why in a particular year, it can be higher than compared to another year.

Unknown Analyst, Analyst

But I see that your payout ratio has come down very sharply compared to 90% or 100% in the past four years. This year was just 58%. So what do you plan to do with all the excess cash that's sitting on the Telkomsel balance sheet?

Heri Supriadi, Finance Director

Okay. Maybe my colleague later on will provide detailed information on this. But generally, our policy is to maintain the level of investment necessary for Telkomsel to maintain its competitiveness and sustainability. We expect to maintain the payout ratio at about 90% to 95% of net income to distribute to the shareholders as dividend. Therefore, if we have good cash positions, we tend to share that with our shareholders.

Unknown Analyst, Analyst

Okay. Just one last question from my side. So could you tell me what was the CapEx at the Telkomsel level for 2019? And what is your expected CapEx for 2020?

Heri Supriadi, Finance Director

Okay. The CapEx in 2019 was around IDR 13.5 trillion, which is about 13% to 14% of our revenue. We maintain the CapEx because we need to expand our 4G coverage, so it is enough for us to spend and see what revenue we can achieve. Our spending in CapEx for 2020 will be similar to 2019.

Operator, Operator

Your next question comes from the line of Schroders.

Unknown Analyst, Analyst

I have three questions. Can you elaborate on the recent news regarding the government's plan to provide very affordable data to the public? What will be the impact on Telkomsel? Secondly, your latest subscriber count stands at 160 million, which appears to be declining. How concerned are you about this trend, and what is the company's strategy regarding subscribers? I observed that another company is experiencing significant growth in subscriber numbers, which could enhance their revenue in the future. Lastly, could you share your latest guidance for both the top line and bottom line for this year?

Setyanto Hantoro, President Director Telkomsel

Okay. This is Setyanto from Telkomsel. Yes, we heard about the government plan to provide very cheap data for people, specifically for students and college students. From our point of view, as long as it is approved by the government and the data consumption is for specific educational content, it will be good for operators like us because we can add more load to our network. It means our network utilization will improve without cannibalizing regular data consumption. Yes, regarding the subscriber growth, Rachel, please.

Rachel Goh, Marketing Director

In terms of our subscriber base, we are experiencing a consolidation in the market that is overall contracting due to competition and SIM card registration. We are also observing that our customers who typically use multiple SIM cards are reducing their usage. As the market leader, our numbers will likely decrease. However, we remain focused on the average revenue per user of our customer base, which is healthy and growing in terms of payload and data revenue. This will be our main focus, rather than just the subscriber base.

Heri Supriadi, Finance Director

Okay. On the guidance for top line and bottom line, with respect to the uncertain COVID-19 situation, we find it challenging to predict how deep this will impact our business. However, in the top line, we remain opportunistic, for example, in IndiHome, trying to capture as many quality subscribers as possible available in the market. In the middle line, we try to manage our costs in marketing as well and find more efficiency in operation and maintenance. That should lead us to maintain a healthy business in both top line and bottom line metrics while aiming for our desired margins.

Unknown Analyst, Analyst

Okay. And can I have one more follow-up questions on your unlimited plan? So I understand there's only like 65 cities. But can I confirm how much of that total area contribute to your revenue? Is this very small? And if I hear correctly, you think the impact of the cheap education data will be positive to your ARPU?

Rachel Goh, Marketing Director

Okay. I think the first question regarding unlimited. For unlimited in those 65 cities, the revenue contribution from those 65 cities at this point is double digit, but very low compared to the rest of the country. And that's why we have the capacity to provide unlimited in those places.

Unknown Analyst, Analyst

And sorry, if successful, are you going to roll it up to more cities?

Rachel Goh, Marketing Director

We will revert to the same three principles: we continue to evaluate the market's dynamics due to the ongoing effects of COVID on what customers can afford. We will consider customer affordability, our network capacity and availability in specific areas, and the offers from competitors. Based on these considerations, we will decide if we can expand to additional cities. To emphasize, engaging in a price war is not our goal; our focus is on delivering data to our customers and increasing our data revenues.

Operator, Operator

Your last question comes from the line of Norman Choong of CLSA.

Norman Choong, Analyst

I have two questions, both also on mobile. So I just want to go back to the focus on affordability and subscriber share. Can I check how was the traction of the new bundles because this bundle is being launched, I think, right in the middle of COVID as I think it's supposed to be quite attractive? Or is there any chance that this quota has kind of grown your traffic by 13% quarter-to-quarter, but kind of drags down your EBITDA yield quite significantly? Or how does this compare to the unlimited plan that we see a few weeks ago? My second question is there's another product being launched, this is called Orbit. This is supposed to be a data point between IndiHome and mobile. Can I check how has that product been received? These are my two questions.

Rachel Goh, Marketing Director

Okay. I will take your first question about the new bundles. So the bundle was launched actually back in February before COVID impacted Indonesia. For this particular product, we were targeting segments from the very low ARPU brackets where affordability is a concern, so that it has short validity but high quota. At this point, the uptake from this product is less than 10% of our total data revenue base. However, we see more than half of this revenue coming from those who are previously known data users or customers who had extremely low data ARPU. So on a net basis, it is still an accretive ARPU for us. Thus, it has indeed been a successful product to reach out to wallet-sensitive customer segments, and it does not dilute our yield. The segment we are targeting is very different from the unlimited segment.

Norman Choong, Analyst

Rachel, can I follow up on this? Is there any chance you could provide a rough estimate of the user distribution for that new product? Specifically, are we seeing a shift from existing data plans to daily and weekly options, or is this mainly due to users migrating from SMS and Voice to data?

Rachel Goh, Marketing Director

We have a mixture of those customers who were previously non-data users and those who are absolutely new, meaning new cards. We can see that we are gaining through all these segments, resulting in a net overall gain in ARPU for our base of customers using this new product.

Heri Supriadi, Finance Director

Yes. Actually, Orbit is meant as a fixed LTE product. It is targeted for customers who want to use a wireless WiFi model, but are unable to be covered by IndiHome, so they use the wireless product. We call that wireless Orbit. So far, if we look at our performance, Orbit has actually performed quite well, with strong market reception. We are providing the product where wired connections are not available. There are some synergies with IndiHome, as this new product segments the WiFi offerings that are not extended by IndiHome. Regarding our 2,300 megahertz spectrum limitation, we only offer from the 2,300 LTE spectrum. Currently, we have coverage for fixed LTE with the existing infrastructure.

Operator, Operator

As there are no more further questions, I would now like to hand the conference back to the presenters for the closing remarks. Please go ahead.

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.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you for participating. You may now disconnect.