Earnings Call Transcript - TLK Q2 2022

Andi Setiawan, Vice President of Investor Relations

Thank you, Amber. Ladies and gentlemen, welcome to PT Telkom Indonesia Conference Call for the First Half of 2022 Results. There will be an overview from our CEO followed with the Q&A after the 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 or estimation and may involve risk and uncertainty that may cause actual results to be different from what we discuss today. Ladies and gentlemen, it's my pleasure now to introduce Telkom Board of Directors who are joining with us today: Mr. Ririek Adriansyah, President Director and CEO; Mr. Heri Supriadi, Finance and Risk Management Director; Mr. Herlan Wijanarko, Network & IT Solution Director; Mr. Bogi Witjaksono, Wholesale & International Service Director; Ms. Venusiana, Consumer Business Director and Enterprise & Business Service Acting Director; Mr. Budi Setyawan Wijaya, Strategic Portfolio Director; Mr. Muhamad Fajrin Rasyid, Digital Business Director; and Mr. Afriwandi, Human Capital Management Director. Also present are the Board of Directors of Telkomsel: Mr. Hendri Mulya Syam, President Director; Mr. Mohamad Ramzy, Finance and Risk Management Director; and Mr. Derrick Heng, Marketing Director. I now hand over the call to our CEO, Mr. Ririek Adriansyah, for his overview. Please, Ririek.

Ririek Adriansyah, President Director and CEO

Thank you, Andi. Good afternoon, ladies and gentlemen. Welcome to our conference call for the first half of 2022 results. We appreciate your participation in this call. Currently, Telkomsel continues its transformation journey from a telco into a digital telco company, materializing important projects as implementation of our five bold moves strategy. We strive to enhance our competitive advantages, increase value creation for stakeholders and satisfy customer experience and needs. Telkom just launched a second international communication gateway in Manado, connecting the eastern part of Indonesia directly with North America. Such a gateway enables the people from the eastern part of the nation, including the new Indonesian capital city, to enjoy wider Internet access as well as better connectivity quality. Moreover, we successfully completed Phase 1 of the HyperScale Data Center, or HDC, and further tower consolidation within the group. In the first half of 2022, Telkom still maintained growth in revenue, EBITDA, and net income, which increased respectively by 3.6%, 4.5%, and 6.9% year-on-year. The digital business continues to become our engine of growth and significantly offsets the legacy revenue decline. We are of the view that we are on the right track in our digitalization journey to become a digital telco company. During the first half of 2022, Telkomsel enjoyed a data price increase supported by the holy month of Ramadan and Eid al-Fitr traffic. Telkomsel has maintained a healthy EBITDA margin of 57.1% while net income margin stayed at 26.2%. With regard to equity investment in GoTo shares, we scored an unrealized gain of IDR 305 billion. IndiHome's contribution to consolidated Telkom's revenue has been steadily increasing, supported by an additional 288,000 customers, bringing the total to 8.9 million customers. IndiHome revenue reached IDR 13.8 trillion with a wireless ARPU of IDR 270,000. The enterprise segment contributed IDR 8.7 trillion in revenue with B2B IT services and Enterprise Connectivity solutions as the biggest contributors. White opportunities, especially in the cloud business, could be entered by making strategic partnerships with global tech players to grow and leverage our capability to deliver digital solutions to our customers. The wholesale segment posted IDR 7.9 trillion in revenue, significantly increasing by 14.6% year-on-year. We continue to strengthen our network infrastructure as we launched the second gateway for Indonesia in Manado that was launched on July 20, 2022. We are also in the process of developing submarine cables, namely Bifrost and SEA-ME-WE 6, which are expected to be completed in 2024 and 2025, respectively. This will strengthen international traffic data to give better experiences for our customers and to support future business digitization needs. Our five bold moves strategy continued to intensify its effect with some material improvement actions. Telkom is enhancing its data center business with the completion of the first phase of the HyperScale Data Center. Our competitive advantage over competitors is that our main data centers are similarly integrated with the neuCentrIX data center and are also connected to the global submarine cable network. With our integrated network, we can accommodate various customer future business digitization needs, such as edge computing, 5G services, blockchain, and other digital solutions. In an effort to foster our ESG strategy, such as reducing carbon dioxide emissions, our HyperScale Data Center is equipped with a gas-fired power plant and solar panels for public areas and office complex. The fixed-mobile convergence, or FMC, continues to be explored to provide better customer experience, more efficient CapEx and also to create data integration. In the FMC products and features, we currently have Orbit and Smooa, with Orbit positioned as IndiHome's complementary product using fixed wireless technology. Orbit has a very fast-deployed Internet connection to cater to densely populated areas where fiber optic connection is difficult and costly to penetrate. Orbit could also be used in remote areas with good future prospects. Currently, Orbit has 464,000 users and continues to serve and grow nationwide. Meanwhile, Smooa features showcase our capabilities in integrating fixed and mobile networks. We continued our consolidation whereby Mitratel acquired another 6,000 towers from Telkomsel. Following the acquisition, we expect Mitratel to strengthen its position as the largest tower provider in Indonesia, and Telkomsel, on the other hand, can focus on its core services and continue its dominance in the mobile business. That concludes my remarks, and thank you for your kind attention.

Andi Setiawan, Vice President of 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 the line of Luis Hilado from Citi.

Arthur Pineda, Analyst

This is Arthur from Citi. Two questions, please. Firstly, on the mobile side, can you clarify what's driving the reduction in the mobile base? It seems to have contracted quite a bit. It appears that you lost some market share and revenue share here. What's driving this divergence, and what can be done to close the gap? The second question I had is regarding the broadband momentum. It seems to be slowing down quite a bit in terms of growth. Why is this the case? Is there a structural issue now with competition or industry saturation? Can we expect CapEx to be throttled down given this lower growth?

Unknown Executive, Unknown Title

Yes, I can take this question. Your view on market share, right? From the decline in subscriber base quarter-on-quarter, it's primarily due to rotational churn, and we were consolidating numbers in the prepaid post-festive season and increased mobility. Telkomsel's initiative is to maintain our leadership and high-value customers. I want to ensure that there is healthy conduct, and we want to focus on renewal and initiatives for price rationalization to drive healthier growth and to lead data monetization. On the CapEx side, I will address it from the mobile perspective. Actually, Telkomsel remains at a CapEx ratio of around 13% to 14% of revenue, which includes network deployment and supporting some of the 5G deployments in certain areas. So that's regarding our CapEx targets.

Heri Supriadi, Finance and Risk Management Director

Luis, Heri of Telkom here. Regarding the IndiHome customer base, yes, competition is present. However, the reason we've been slowing down in terms of additional customer base is actually more due to our strategy to focus on high-value customers, ensuring the quality of sales and also to defend against future churn. This involves some initiatives, such as requiring new subscribers to commit to at least a year on contract, among other strategies. This indeed positions our base to become healthier. More price competition has emerged in the lower end of the market, targeting potential customers with speeds below 20 Mbps of service. As mentioned by our CEO, we have complementary products for that segment. Essentially, we see our position as still very strong, and we expect to continue our investment to ensure that we maintain these healthier business practices, ensuring profitability remains intact.

Arthur Pineda, Analyst

Understood. So just if I...

Operator, Operator

All right, while waiting for Luis, we'll take the next question from Choong Chen Foong from CGS-CIMB.

Choong Chen Foong, Analyst

Three questions from me. Firstly, I wanted to ask about the moderation in the O&M costs due to lower content costs. Can you share with us what is the total content cost, especially at Telkomsel? What drove the cost lower? And what would be the content strategy going forward? That's question number one. Number two, I did see quite a big increase in your staff costs quarter-on-quarter. Were there any one-offs there? And my third question, also related to cost, is with relation to the inflation that we are seeing in Indonesia right now. Do we see any cost pressures going into the second half of the year? Yes, those are my three questions.

Unknown Executive, Unknown Title

I will take the question about costs. Actually, our growth in O&M costs is mostly related to the cost of services, as we provide content to our customers such as Disney content, Netflix, and solutions from Zoom that we already have with our partners. So that's the cost. However, we still manage O&M costs, which increased only by about 2.3%, most of which is related to the spectrum we acquired last year. That's the cost side. For the second half, we still plan on managing our cost transformations to ensure we provide a better customer experience and support our strategy to foster a healthier industry and improve our service quality.

Heri Supriadi, Finance and Risk Management Director

Yes. Regarding the second half of cost pressures, relating to our network, especially in power costs, we are utilizing power primarily from the electrical company, and the impact of this is quite minimal. We are also managing inflation and other costs through various initiatives. We project that the costs we have as of the first half will continue similarly throughout the year.

Unknown Executive, Unknown Title

To add on the staff costs, it's also related to the establishment of our new company, IndiCo. That relates to the additional activity to operate the company, which includes their subsidiaries.

Derrick Heng, Marketing Director

Yes, this is Derrick from Telkomsel. I will take the question on inflation. From our perspective, the competition in Indonesia is starting to become more rational. We see healthier conduct, and we are all aiming for profitability and long-term sustainability. We will continue to lead this healthy conduct and consistently drive the ideal state for our industry with the right pricing strategies. We will keep our eyes and ears on the ground to ensure we remain relevant to our customers in terms of needs as well as network capacity. Our product portfolio ranges from sachet packages to weekly offerings to even 30-day packages, ensuring we cater to the varied needs of our customers. Hence, our next strategy will focus on creating value for customers and engaging them with more relevant digital lifestyle solutions.

Operator, Operator

Our next question comes from Hussaini Saifee from UBS.

Hussaini Saifee, Analyst

A few questions from me. First, on Telkomsel. How should we perceive Telkomsel's mobile growth going forward given the multiple price increases the industry has undertaken? Is it still a low single-digit growth outlook, or can we expect to see it accelerate to mid-single-digit growth in the coming quarters? That's question number one. Second question is about the data center. Any update on the data center revenue growth? And what is the time line for the data center IPO? Is it still set for the first half of next year?

Derrick Heng, Marketing Director

Okay. I will take the question on mobile growth going forward. From our strategy, we aim to defend market share both in Java and outside Java. We want to focus on targeted CDN to maintain competitiveness. We aim to drive personalized offerings and protect high-value customers to maximize productivity from our existing base. Our goal is to prioritize and deliver a differentiated experience for our most valuable customers, both from a service and network perspective. For example, they will enjoy superior service at our touchpoints, be it at our GraPARI stores or the digital channels. We also want to maximize our digital services to support and complement all forms of connectivity, including big games, video, and music. This summarizes our approach.

Heri Supriadi, Finance and Risk Management Director

Regarding data center growth, we currently experience a revenue growth of about 4.5% year-on-year. The growth appears low because our capacity has nearly been fully utilized compared to last year. Our HyperScale Data Center was just completed last month, which means we expect a surge in additional subscribers for our data center in the third and fourth quarters of the year. Concerning the IPO timeline, we are planning to establish additional data centers in cooperation with Singtel, and we expect to complete two more HyperScale Data Centers by the end of next year. Whether to pursue an IPO or a strategic investor will depend on when we reach the scale we've set for our exit strategy.

Hussaini Saifee, Analyst

Understood. If I can ask one more follow-up question on IndiHome. With the first half total net adds of around 288,000, what should we expect for the full year? If I understand correctly, it was around 600,000 to 700,000. Is the target still achievable?

Heri Supriadi, Finance and Risk Management Director

Based on the current situation, we have added around 288,000 new subscribers. With the remaining time and improved environmental conditions, we believe we can achieve our target of around 600,000 to 700,000 new additional lines this year.

Operator, Operator

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

Ranjan Sharma, Analyst

Two questions from my side. Firstly, can you provide some color on the tariff hikes that you've seen in the market both from yourself and peers? What impact are you seeing on industry revenues? Secondly, how should we consider industry revenue growth over the next few quarters?

Ririek Adriansyah, President Director and CEO

Yes.

Derrick Heng, Marketing Director

Yes, in response to your inquiry on tariff, we aim for improvement in usage, consumption, and productivity of customers, which will help stabilize ARPU. We want to optimize our monetization efforts to counteract the declining rates in RPMB. Our approach to tariffs is to balance profitability with market share. Regarding competition, we realize the competition in Java continues to be intense as we all try to defend our share in that area. Telkomsel's strategy is to remain competitive with diverse products and offerings while maintaining network quality. Outside of Java, we will ensure that we continue to dominate by protecting our existing customers through optimized CDN offerings, distribution channels, and network quality. Overall, we aim for stability both in Java and outside Java. Thank you.

Ranjan Sharma, Analyst

And on the wireless revenue trend for the industry?

Derrick Heng, Marketing Director

Sorry, could you clarify?

Ranjan Sharma, Analyst

With the changes we see in the competitive environment, how do you think the industry will shape up?

Derrick Heng, Marketing Director

I think competition is becoming more rational. Yes, we have observed healthier conduct, and we are driving for profitability. For example, XL has stopped offering true unlimited plans and is now adopting a more measured approach. We have also classified competing companies like Indosat, who are increasing prices. These actions represent a concerted effort to push the right pricing within our industry. From Telkomsel's perspective, we will ensure we remain relevant to our customers by prioritizing their experiences at our touch points as well as from a network perspective.

Ranjan Sharma, Analyst

My question is regarding the expected industry revenue growth over the next few quarters.

Unknown Executive, Unknown Title

Over the next two quarters.

Derrick Heng, Marketing Director

From the industry perspective, we see an opportunity for recovery momentum due to improved competition along with our agenda for appropriate pricing strategies. However, we'll be monitoring market developments, including macro conditions and inflation rates.

Operator, Operator

Our next follow-up question comes from Hussaini Saifee.

Hussaini Saifee, Analyst

Sorry, all my questions have been answered.

Operator, Operator

Our next question is a follow-up from the line of Choong Chen Foong from CGS-CIMB.

Choong Chen Foong, Analyst

Two follow-up questions. Firstly, for Pak Heri, you mentioned that you will be building two additional HyperScale Data Centers to be completed by the end of next year. Are you referring to Phase 2 and Phase 3 of the Cikarang HyperScale Data Center, or are you talking about new data centers entirely? Also, can you clarify if the plan with Singtel involves greenfield projects or just an injection of data centers from their side?

Heri Supriadi, Finance and Risk Management Director

Actually, first on the Singtel collaboration, it will be a greenfield project where we plan to have a new data center in Batam using more environmentally friendly technologies. We are currently in discussions to gear up for the market in Singapore. As for the second data center, we are referring to the second and third data centers in Cikarang, as we still have land banking there and some infrastructure relating to power already in place. We expect this will optimize our capacity and help manage our existing costs effectively.

Choong Chen Foong, Analyst

Understood. For the greenfield data center in Batam, can you share the megawatt capacity and expected timeline for completion?

Heri Supriadi, Finance and Risk Management Director

Bogi?

Bogi Witjaksono, Wholesale & International Service Director

For the first phase, we will build 10 megawatts. The maximum capacity will be 80 megawatts, and the timeline for completion is projected to start at the beginning of next year.

Choong Chen Foong, Analyst

Got it. And regarding phase 1, when is that expected to be completed?

Bogi Witjaksono, Wholesale & International Service Director

Phase 1 is estimated to take about 1.5 years to complete.

Heri Supriadi, Finance and Risk Management Director

Yes.

Ririek Adriansyah, President Director and CEO

And to complete that logically, it would take some time.

Choong Chen Foong, Analyst

Understood. And could you provide an update on the fixed-mobile convergence strategy that you talked about earlier in the year regarding consolidating IndiHome assets within Telkomsel? Any progress on that front and what the expected outcome might look like once we complete that exercise?

Heri Supriadi, Finance and Risk Management Director

Budi, can you address the progress on FMC?

Budi Wijaya, Strategic Portfolio Director

For the FMC, we've completed what we call Speed-1. Speed-1 elaborated on customer demand, the operational model, and product suitability. That phase is completed, and we've also set up a team to implement the results of Speed-1. We are now preparing to initiate Speed-2, which considers the possibility of integrating IndiHome with Telkomsel in partnership with Singtel. We are already in the discussion process. The initial results from Speed-1 have been quite good based on our benchmarks and customer feedback, which exceeds the average benchmark.

Choong Chen Foong, Analyst

When it comes to the integration of IndiHome into Telkomsel, does that involve any fiber assets, the last mile, or perhaps even trunk networks, or just the customer base?

Heri Supriadi, Finance and Risk Management Director

That is currently under discussion.

Budi Wijaya, Strategic Portfolio Director

We are in discussions about this asset because it presents an opportunity for us to monetize in the future. Hence, we are in the process of evaluating these assets.

Heri Supriadi, Finance and Risk Management Director

What we are doing is determining the right operating model regarding how we run the FMC. This includes defining who will manage the assets and where we will allocate them. Additionally, we recognize that the fiber we possess can substantially serve the industry in the future, which may unlock significant value and help us establish a leading position.

Operator, Operator

We are currently working on determining the appropriate operating model for managing the FMC. This involves deciding who will oversee the assets and where they will be allocated. We also understand that the fiber we have could greatly benefit the industry in the future, potentially unlocking significant value and enabling us to establish a strong position.

Andi Setiawan, Vice President of Investor Relations

With that, I think there are no more questions. You can conclude the discussion, yes.

Operator, Operator

There are no more questions, so I'll now turn the call back to Mr. Andi for closing remarks.

Andi Setiawan, Vice President of Investor Relations

Well, 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

All right, thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.