Earnings Call Transcript - TLK Q1 2020

Operator, Operator

Ladies and gentlemen, thank you for joining us, and welcome to Telkom's First Quarter of 2020 Results Conference Call. I want to inform you that this conference is being recorded today. I will now turn the call over to our first speaker, Mr. Andi Setiawan. Thank you. Please proceed, sir.

Andi Setiawan, Director

Thank you, Rachel. Ladies and gentlemen, welcome to PT Telkom Indonesia Conference Call for the First Quarter of 2020 Results. We released our first quarter of year 2020 results on 30th of June 2020, 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 the Q&A session. Before we start, let me remind you that today's call and the responses to the questions may contain forward-looking statements within the meaning of safe harbor. Actual results could differ materially from projections, estimations or expectations made 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, which may have been taken in reliance on the discussions held today. Ladies and gentlemen, we conducted our Annual General Meeting on 19th of June 2020 for our audited financial results, and the new Board of Directors of Telkom who are joining us today are Mr. Ririek Adriansyah as President, Director and Chief Executive Officer; Mr. Heri Supriadi as Finance Director; Mr. Herlan Wijanarko as Network and IT Service Director; Mr. Edi Witjara as Enterprise Business Service Director; Ms. Venusiana as Consumer Service Director; Mr. Budi Setyawan Wijaya as Strategic Portfolio Director; Mr. Fajrin Rasyid as Digital Business Director; and Mr. Afriwandi as Human Capital Management Director. Also present are the new Board of Directors of Telkomsel, Mr. Setyanto Hantoro as President and 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, ladies and gentlemen. Welcome to our conference call for the first quarter of 2020 results. We really appreciate your participation in this call. COVID-19 pandemic has impacted overall economies and all sectors are slowing down, including the telecommunication sector. For Telkom, the degree of impact for each segment is different. Fixed broadband IndiHome, mobile digital business, and wholesale continue to grow well and become our engine of growth as we continue to strengthen our broadband infrastructure. While the Enterprise segment was more severely impacted in line with declining business volume in various sectors such as hospitality, tourism, and transportation. Our well-diversified revenue portfolio allows us to be less dependent on one particular segment, and weakening segments can be balanced by others. Ladies and gentlemen, in the mobile segment, the provision of high-quality mobile broadband and a range of digital services become the main growth driver. Digital business increased significantly by 16.3%, driven by a 16.7% increase in data and a 13.6% increase in digital services. In the first quarter of 2020, digital business accounted for 70.6% of total Telkomsel's revenue, significantly up from 61.4% in the same period a year ago. Meanwhile, Telkomsel's legacy business continued to decline. Overall, Telkomsel revenue grew by 1.1%. Amid declining legacy business, EBITDA margin improved by 6.9 percentage points to 61.6%. Another growth driver was fixed broadband IndiHome, which continued its positive momentum. IndiHome posted an additional 252,000 new subscribers during the first quarter of 2020, maintaining its track with the full-year target of 700,000 customers. In terms of revenue, IndiHome recorded IDR 5.1 trillion or a 19.7% year-on-year increase. IndiHome's EBITDA margin continued to improve to 35.9% in the first quarter of 2020, supported by economies of scale and better operating levers. The Enterprise segment continued its focus on improving the fundamentals. We prioritized business lines that have higher profitability with various efforts to achieve better quality revenues. In the first quarter of 2020, the Enterprise segment recorded IDR 4.3 trillion in revenue. Meanwhile, the wholesale and international business segment recorded IDR 3.4 trillion in revenue, growing by 15.1% compared to the same period last year. Our revenues from total business grew healthily, and we also successfully seized opportunities from wholesale funds. Acting as an integral component for other segments, the wholesale segment also serves external customers. The pandemic situation has created opportunities for digital accelerations. Telkom sees this as an opportunity to provide solutions through various digital services underpinned by strong digital performance and digital connectivity. Therefore, we continue to invest in the first quarter of 2020, spending around IDR 3.7 trillion in capital expenditures. In mobile services, CapEx is utilized to further enhance 4G network quality and capacity as well as IT system enhancements. In fixed line business, CapEx was primarily utilized to deploy fiber-based access and backbone infrastructure, data centers, and a small percentage for other project sizes. Starting in the first quarter of 2020, we adopted a new Indonesian accounting standard for PSAK 71, 72, and 73, which align with the IFRS standards 9, 15, and 16 that we already adopted in our IFRS reporting. The adoption of the new standards mainly impacts our operation and maintenance costs, as well as increases in assets and liabilities, depreciation, and interest charges. On 19th of June 2020, Telkom conducted an Annual General Meeting for our shareholders, making two key decisions: dividend distribution and the change in the Board of Commissioner and Board of Directors. Regarding the dividend, the AGM approved a dividend distribution of IDR 15.3 trillion or an 81.78% payout ratio. The dividend amount equals IDR 154.1 per share. That concludes my remarks. Thank you.

Andi Setiawan, Director

Thank you, Par-Ririek. We will now begin the Q&A session.

Operator, Operator

Your first question comes from the line of Colin McCallum of Crédit Suisse.

Colin McCallum, Analyst

Thanks for the opportunity and congrats on a good set of numbers. Two questions from me related to IndiHome for Pak-Heri. First of all, I think in the previous call, you implied, and your guidance suggests that despite quite a strong start to the year and a strong April, you believed that the demand for IndiHome would dissipate or maybe reverse a little bit given your relatively modest full-year targets. Is that still your view? Or are you maybe more optimistic that some of these new customers will stick with the service? That's the first question. My second question is somewhat related. What's the current status of operations with Netflix and negotiations with Netflix? If you could update us on that, that would be helpful as well.

Heri Supriadi, Finance Director

Thank you, Par-Colin. Regarding IndiHome, yes, I think our guidance remains the same; we are focusing on trying to meet the demand that we have. We are optimizing the home connections that we have to benefit from that. But at this time, we do need to be quite conservative, although the first quarter already showed a very good result. We know the COVID pandemic started in Indonesia at the end of March, and we have encountered some obstacles in the field requiring us to be careful. On the other hand, we remain optimistic, trying to maximize our assets that are already in place. But it's important for us to share our perspective on the current situation we are facing as well. Regarding the negotiations with Netflix, we are very close to reaching an agreement. Our first priority is to protect our customers and also to ensure Netflix complies with all regulations, encouraging local participation in this partnership. We expect to finalize a mutually beneficial agreement with Netflix soon.

Operator, Operator

Your next question comes from the line of Ranjan Sharma of JPMorgan.

Ranjan Sharma, Analyst

Hi. It's Ranjan from JPMorgan. A couple of questions from my side. Firstly, there has been a change of Board members. How should we consider the change in strategy of Telkom as a group? And how does your capital allocation change with that strategy? If you can share some details on that, that would be helpful. The second question is, I noticed a significant drop in customers in the first quarter. Can you explain what happened? I see in the info memo that you mentioned a reinforcement in prepaid SIM registration policy. Can you share some details on that as well?

Ririek Adriansyah, CEO

Thank you, Ranjan. Let me address your first question. Basically, we have three pillars: digital connectivity, digital platform, and digital services. Our strategy remains intact. As an essential part of the core business, we will enhance broadband connectivity. We will also expand into the digital platform and additional digital services, but in a selective manner. One of the new Board members comes from the digital sector, which will help us move faster in that direction. We believe that while digital is disrupting traditional services, it also provides significant new opportunities, both for the company and the country. As for capital allocation, we are open to investments but will be very selective in our spending — it will not mirror the spending patterns seen in other OTT companies.

Heri Supriadi, Finance Director

To add to Par-Ririek's explanation, we believe our customer base is under performance in term of our channels. We see our network as a significant asset for the digital business rather than just spending as much as possible. Our commitment to CapEx remains steady for infrastructure. Regarding our customer base, we are focusing on maintaining high-value customers rather than pursuing lower-value new subscriptions.

Unknown Executive, Telkomsel Executive

Regarding the customer base in Telkomsel, the drop in Q1 2020 is due to a focused decision to concentrate on high-value customers. Additionally, this reflects a natural cleansing as a result of the SIM card registration process. We are strategically prioritizing higher-value customers over low-value new customers.

Ranjan Sharma, Analyst

Sorry, can I have a quick follow-up? In terms of prepaid registration, has anything changed recently that has led to the customer drop?

Heri Supriadi, Finance Director

No.

Unknown Executive, Telkomsel Executive

No.

Heri Supriadi, Finance Director

No, nothing has changed.

Unknown Executive, Telkomsel Executive

I think nothing major changed. However, the customer base is always being refined as we focus on higher-value subscribers. Our unique customer base remains steady, particularly within high-value segments.

Operator, Operator

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

Piyush Choudhary, Analyst

Two questions. Firstly, on the CapEx outlook, are there any changes for 2020? And any changes in your capital allocation strategy for going forward? The reason for asking is that CapEx in the first quarter is down 50% year-on-year. So I want to hear your thoughts on that. Secondly, in the mobile business, can you provide an update on the competitive environment and pricing landscape in the latest quarter?

Heri Supriadi, Finance Director

Hi, Par-Piyush, Heri here. Regarding the CapEx outlook, yes, if you compare it to the previous year, it is slightly lower. But overall, for 2020, we will still allocate about 25% of our revenue to CapEx. This percentage remains indexed. The slow spending in the first quarter is because we utilized a lot of our capacity and quality improvements that were established in 2019 to meet the demand during this period. Despite this slow start, we expect the second quarter and the rest of the year to align with the planned 25% of revenue allocated to CapEx to ensure we meet market demand.

Rachel Goh, CMO

On the competitive situation, it remains highly competitive. We are observing escalated competitive intensity, especially in correlation with our competitors' network expansion. This competitiveness involves pricing strategies focused on price-sensitive segments for quick customer acquisition. However, in Q1, even amidst this competitive environment, we did not see significant monetization of data revenues from competitors. We noted that Telkomsel captured 70% of the incremental data revenue growth in Q1. Given the pressures from COVID and broader economic challenges, we anticipate a rise in price sensitivity, prompting us to implement a multipronged strategy that focuses on high-value customers while also adjusting our pricing and offerings to remain competitive across market segments. You'll notice we're continuing with our sachet products, which include our Kuota Ketengan. We also plan to adjust our combo packages to ensure we maintain relevance with our customers.

Piyush Choudhary, Analyst

Rachel, if I may follow up, last year you initiated strategies to improve your market share within the youth segment. How has that fared internally? What market share gains have you witnessed?

Rachel Goh, CMO

In terms of the youth market share, I think it's important to look at the digital segment. We've seen substantial growth in terms of the pick-up rates and active usage of the My Telkomsel app, which has become the second largest in terms of active users in Indonesia. Additionally, we've experienced significant growth in our gaming community, Dunia Games, which exceeded 15 million members recently. These figures indicate our strong movement toward capturing the youth and millennial demographic.

Operator, Operator

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

Arthur Pineda, Analyst

Several questions, please. Firstly, on mobile. Can you discuss the consumption trends into the second quarter? I'm curious about how April, May, and June are performing, especially given the impact of quarantines. Are you seeing normalization toward the latter part of the quarter? Secondly, regarding the Enterprise segment and margins, previously you indicated there was a pivot away from low-margin segments that affected revenues but now the margins appear worse year-on-year. What accounts for this disparity? Lastly, regarding Colin's earlier question on Netflix, could you elaborate on what you mean by it being mutually beneficial? Are you seeking compensation from Netflix? What needs to be resolved for this deal to finalize?

Unknown Executive, Telkomsel Executive

On the mobile side, the consumption trend impacted by quarantine. In Indonesia, the quarantine started in the second week of March. Thus, the impact is beginning to reflect in Q2 rather than Q1. We've seen traffic and payload increasing overall.

Arthur Pineda, Analyst

But are you seeing reductions in terms of pop-ups? I'm wondering how we should view this as impacting the company.

Operator, Operator

Ladies and gentlemen, the speaker is currently experiencing some technical difficulties with their line. Please stand by while we address the situation. Your line will be placed on hold until the conference resumes. Thank you for your patience.

Heri Supriadi, Finance Director

Hello, can you hear us?

Operator, Operator

Speakers, you are now back in the main room.

Setyanto Hantoro, Telkomsel Executive

Sorry for the drop. This is Setyanto from Telkomsel. Regarding your question, Arthur, on mobile consumption during the quarantine, we entered quarantine around the second week of March, so the complete impact will be realized in Q2. To this point, we've seen a substantial increase in traffic on our platforms, more than a 40% increase year-on-year. Furthermore, we've noticed a shift in consumer behavior, with traffic migrating from business locales to residential areas.

Ririek Adriansyah, CEO

The second question regarding why we are focusing on more profitable enterprise segments, while margins didn't improve as expected? We believe our strategy is intact, but it will require time to reach a turning point. We firmly believe that over time, we can demonstrate margin improvements for the enterprise.

Unknown Executive, Telkomsel Executive

Regarding the mutually beneficial relationship with Netflix, we are looking for more than just financial compensation. We need to ensure our role as the largest operator while also establishing clear guidelines on the management of content that may affect our reputation and ensuring that adequate agreements are in place to address any sensitive content.

Operator, Operator

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

Norman Choong, Analyst

Two questions from me. First, back to IndiHome. In the last call, there was a mention of the run rate for April and May, which was around 5,000 to 6,000 additional lines per day, and then subsequently increased to 8,000 to 10,000 daily. Is this run rate of 5,000 to 6,000 still applicable based on your latest data? Moreover, are there any receivable risks for IndiHome due to its postpaid model? My second question pertains to the Enterprise segment. In the last results call, you mentioned you couldn't quantify the potential earnings challenges from the Enterprise segment. Do you now have a projection for the revenue growth rate at least for that segment? Additionally, should we model some provisions for receivables?

Heri Supriadi, Finance Director

Regarding your first question on IndiHome, our daily new line addition during the second quarter is still influenced by the ongoing COVID situation. We must take a more conservative approach, staying guarded against fluctuations, while optimizing potential subscriber growth within the current constraints. As for the receivable risks, the pandemic has caused us to be cautious, reflecting broader uncertainties in our customer payment behavior.

Unknown Executive, Telkomsel Executive

In terms of earnings potential from the enterprise, we believe as long as we continue with our strategy, leveraging our competitive advantages and capabilities in B2B digital solutions and platform developments, we can expect stronger revenue growth in the long run. However, the current economic conditions put pressure on the segment, requiring us to apply a cautious approach regarding provision levels for receivables.

Operator, Operator

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

Kresna Hutabarat, Analyst

Firstly, congratulations to everyone on the appointment of the new directors at Telkom Group and Telkomsel. I have two questions. Firstly, with respect to leverage. How should we understand the trend in leverage at both Telkomsel and non-Telkomsel levels over the next 1 to 2 years? Particularly, I noted the net debt to EBITDA at the non-Telkomsel level is already at 2x if we exclude finance leases. Can I get some color on the level of leverage where management would target or be comfortable over the next 1 to 2 years? My second question pertains to taxes. The effective tax rate in the first quarter of 2020 was at 24% at the group level. Could you confirm whether the effective tax rate should converge to the statutory rate of 22% for the full year 2020 or remain higher? Historically, the effective tax rates have consistently outperformed the statutory rate. Can you provide insight on the tax rate trajectory moving forward?

Heri Supriadi, Finance Director

Regarding the tax rate, as you know, the tax rate applied to each entity for Telkomsel is lower than past rates at 22%, compared to 35% last year. We've based these calculations on current data and expect the effective rate to align closely with 22%. For the parent company, we also assume a tax rate near this at 22%. However, there are special base calculations which allow us to achieve a lower rate based on specific conditions.

Ririek Adriansyah, CEO

Looking at the leverage trend, while Q1 did show a lower trend, the net leverage for Telkomsel should remain steady over the next 2 years. However, our capital allocation will continue to reflect required investments, the dividends, and overall management goals.

Heri Supriadi, Finance Director

Most of our leverage at the parent company and subsidiaries like Mitratel relates to our incremental assets. Our current debt-to-equity ratio stands at around 44%, which is conservative compared to industry standards. We aim to maintain these ratios while ensuring any debts we incur reflect sound business viability.

Operator, Operator

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

Niko Margaronis, Analyst

Two questions essentially echoing earlier discussions. First, regarding the Enterprise segment, what do you expect the trend in results to be over the next couple of quarters? Second, is there increased competition coming from foreign players in terms of data center services? On the second question, regarding IndiHome, can you project ARPU trends going forward?

Unknown Executive, Telkomsel Executive

In the Enterprise segment, we are optimistic about margin improvements moving forward while remaining selective in our customer acquisition strategy. However, the COVID impact has made it challenging for many of our clients in the hospitality industry, which is a potential drag on revenue. We currently have several data centers, with a 75% utilization rate. We are in the process of expanding our capacity, ensuring more robust offerings while exploring potential partnerships. Our goal is to enhance the overall benefits from our data center services.

Heri Supriadi, Finance Director

With regard to IndiHome, we are optimistic about ARPU improvements as a result of add-on services we provide, which enhance user value. Thus, we anticipate demand growth influencing ARPU positively going forward.

Unknown Executive, Enterprise Executive

In terms of the Enterprise business outlook, we foresee potential for positive revenue growth this year, especially as we capitalize on opportunities in both the government and corporate sectors.

Operator, Operator

Your next question comes from the line of Sebastian Deebob from Citi International.

Unknown Analyst, Analyst

I would like to clarify one thing, following up from a previous Danareksa question regarding Enterprise business. Can you please refresh me on what has caused the significant decline in Enterprise business performance in the first quarter? Additionally, what type of trend should we expect for the Enterprise business? Is it going to resemble the legacy business, or how should we assess this?

Unknown Executive, Telkomsel Executive

As previously mentioned, the market for Enterprise can be very promising in both the government and corporate sectors. The cyclical nature of the business means that early-year demand often relates to planning cycles. Hence, we expect demand to pick up as we progress further into the fiscal year. While we focus on enhancing quality margins, revenue adjustments for lower-margin segments were necessary. However, we continue to explore higher-margin services and products within this space for improved profitability. In terms of competition within the Enterprise realm, we face many competitors, including global players. However, we are aiming to secure our competitive differentiators through tech investments and capabilities.

Operator, Operator

There are no further questions at this time. Presenters, please continue.

Andi Setiawan, Director

Thank you, everyone, for participating in today's call. We apologize for the questions we could not address. Should you have any further inquiries, please don't hesitate to contact us directly. Thank you, everyone.

Operator, Operator

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