Earnings Call Transcript - TLK Q4 2022

Edwin Sebayang, VP of Investor Relations

Thank you, Amber. Ladies and gentlemen, welcome to PT Telkom Indonesia's conference call for the audited results of 2022. We will begin with an overview from our CEO, followed by a Q&A session. Before we start, I want to remind you that today's call and the responses to questions may include forward-looking statements under the safe harbor provisions. Actual results may differ significantly from our projections or estimates and could involve risks and uncertainties that may lead to different outcomes than we discuss today. It is my pleasure to introduce the members of Telkom's Board of Directors who are with us today: Mr. Ririek Adriansyah, President Director and CEO; Mr. Heri Supriadi, Finance and Risk Management Director; Mr. Herlan Wijanarko, Network and IT Solutions Director; Mr. Bogi Witjaksono, Wholesale and International Service Director; Mrs. [indiscernible], Consumer Business Director and Acting Director for Enterprise and Business Services; Mr. Budi Setyawan Wijaya, Strategic Portfolio Director; Mr. Muhamad Fajrin Rasyid, Digital Business Director; and Mr. Afriwandi, Human Capital Management Director. We also have the Board of Directors from Telkomsel with us: Mr. Hendri Mulya Syam, President Director; Mr. Mohamad Ramzy, Finance and Risk Management Director; Mr. Derrik Heng, Marketing Director; and Mr. Adiwinahyu Basuki Sigi, Financial Director. I will now hand over the call to our CEO, Mr. Ririek Adriansyah, for his overview.

Ririek Adriansyah, CEO

Thank you, Edwin. Good afternoon, everyone. Welcome to our conference call discussing the audited full-year results for 2022. We appreciate your joining us today. The year 2022 was characterized by economic recovery following the pandemic that affected many globally. Indonesia managed to establish a healthier and more stable economy, achieving a growth rate of 5.3%, with inflationary pressures being controlled compared to other countries. This recovering economy has positively impacted Telkom's business initiatives, fostering breakthroughs and innovations. Our organic strategy, Five Bold Moves, aims to provide economic companies with a competitive edge while aligning overall company performance with our targets. Progress in the Five Bold Moves has accelerated the fixed mobile convergence (FMC), which is critical for us to capture opportunities more rapidly at PT Telkom. We are optimistic that the first initiative resulting from the Five Bold Moves will inspire the development of additional initiatives. In conjunction with the transfer of IndiHome, part of the B2C segment now managed by Telkomsel, Telkom is also focusing on enhancing B2B capabilities through both organic and inorganic growth. Our initiatives in InfraCo will support both B2B and B2C by delivering shared connectivity infrastructure to achieve efficiencies in capital and operating expenditures. Regarding our data center and cloud services, we currently have two Hyperscale Data Center projects, while our B2B and IDD services are focused on cybersecurity platforms and integrated IT services. Lastly, as we establish digital initiatives, we aim to attract more digital investment and create an equity story to draw in external funding while maximizing our ecosystem with technology giants. In 2022, Telkom maintained growth in revenue and EBITDA, with increases of 2.9% and 4.3%, respectively. However, net income declined by 16.2% due to unrealized losses from investments in GoTo and accelerated depreciation after tax. That said, operating net income still grew by 7.7%. The largest revenue contributions came from mobile and fixed broadband segments, supported by rational competition and effective cost leadership. Despite intense competition, Telkomsel achieved healthy revenue growth of 1.8% year-on-year, with a slight decline in EBITDA margin of 0.5% at 56.7%. The Digital Business continues to drive growth, maintaining its superiority in network supply. This segment saw a positive performance with 6.9% year-on-year growth, reaching IDR 72.9 trillion and increasing its contribution to total revenue from 78% to 81.9% year-on-year. In Indonesia's fixed broadband market, IndiHome remains dominant due to its vast network reach and ongoing expansion. IndiHome's contribution to the total consolidated revenue has steadily increased to IDR 28 trillion, growing by 6.4% year-on-year. By the fourth quarter of 2022, IndiHome’s blended ARPU held steady at IDR 268,000, with an additional 611,000 new customers, bringing the subscriber base to 9.2 million. The enterprise segment is undergoing a turnaround strategy aimed at more sustainable revenue growth. For the full year 2022, the Enterprise segment grew by 0.1% year-on-year, achieving revenue of IDR 19.2 trillion as we integrate data center management with our international business expansion. Following the implementation of the Five Bold Moves regarding data centers and cloud initiatives, we have consolidated the data center and cloud business into a single entity under wholesale. In terms of quarter-on-quarter growth, the Enterprise segment achieved significant growth of 9.3% in Q4 2022, with B2B IT Digital Services and Enterprise Connectivity solutions being the leading contributors. We continue to enhance our core business capabilities, including forming strategic partnerships with global tech players. Meanwhile, the wholesale and international business segment also grew in 2022, contributing IDR 15.4 trillion in revenue, representing an increase of 8.3% year-on-year. The growth in wholesale revenue was driven by an expanding international wholesale voice business and our digital infrastructure initiatives. Conservative spending and reinforcing infrastructure through participation in submarine cable projects are part of our Five Bold Moves strategy that focuses on positive developments. Key advancements include the transfer of the FMC business, the consolidation of the data center business, and investment in B2B IT services, alongside our preparedness to implement cloud business solutions. Our authorized strategy implementations include significant efforts in advancing the FMC initiative and transferring the IndiHome business to Telkomsel management from the B2C side. Accelerating the FMC initiative is a strategic move to dominate both mobile and fixed broadband sectors by merging separate markets in mobile competition and fixed broadband to target a more focused market for internet services. FMC will enhance customer convenience while achieving efficiencies in capital and operating expenditures at the group level. The convergence of fixed wireless and fixed broadband technology will enable Telkom to provide differentiated products and improved customer experiences to capture a larger market share within the lower-income segment. We anticipate that by the end of the first half of 2023, we will be able to execute our FMC initiative pending approval from all shareholders, including minority shareholders. We are heavily investing in data center and cloud projects. We have a new Hyperscale Data Center project underway in Batam in partnership with Singtel and Matco Energy. We recently completed the first campus of the ongoing Hyperscale Data Center in Cikarang Bekasi, which has a total capacity of 25 megawatts. This new facility in Batam aims to meet domestic demand and attract spillover demand from Singapore and other neighboring countries. Our competitive advantage lies in our capacity to cater to a diverse range of future business digitization needs, covering areas such as computing, 5G services, blockchain, and other digital solutions, which offer excellent options for enterprise customers. In line with our ESG strategy aimed at reducing carbon emissions, our Hyperscale Data Center in Cikarang is equipped with solar panels to provide electricity, especially for office and carbon areas within the complex. We are also acquiring renewable energy certification from PLN, a state-owned power company. The ESG framework is also being applied in constructing the Hyperscale Data Center in Batam, where we are inviting blue gas energy providers to collaborate on the project. This structure is intended to ensure a continuous supply of eco-friendly energy for the center's electricity needs. Our commitment to ESG is integral to our sustainability strategies, with further ESG initiatives detailed in Telkom's sustainability report. That concludes my remarks, and thank you for your attention.

Edwin Sebayang, VP of Investor Relations

Thank you, Pak Ririek. We will now begin the question-and-answer session. When raising your question, please speak clearly and state your name and your company. Amber, may we have the first question, please?

Kelsey Rochili Santoso, Analyst

This is Kelsey Santoso from Goldman Sachs. The first question for me is on guidance for full year 2023 when it comes to revenue, EBITDA margin, and CapEx for both Telkom Group as well as Telkomsel. And then my second question would be, in Q4, we saw prepaid subscriber decay less than what we saw in Q3, but what led to the weakness in postpaid? And my third question would be ARPU did see a healthy increase in Q4. So what led to this increase?

Heri Supriadi, Finance and Risk Management Director

Thank you, Kelsey. This is Heri Supriadi from Telkom. I will address your question regarding the EBITDA margin and CapEx for the group and 2023. First, on the revenue, we expect to achieve revenue growth around mid- to high single digits at the group level. We do expect that the margin, the EBITDA margin, is going to be the same as we did last year. On the CapEx side, we anticipate the CapEx to be around 22% to 25% of the revenue, with the distribution of CapEx: 40% to mobile, 35% to fixed broadband, and the balance to data centers and subsea cable. In total, that should compose our CapEx. For Telkomsel, please, Pak Ramzy, could you explain?

Mohamad Ramzy, Finance and Risk Management Director, Telkomsel

Yes. Thank you, Pak Heri. For our guidance on the revenue side, we expect low to mid-single-digit growth. Regarding the CapEx, we will allocate almost the same as the previous year, around 14% to 15% of the revenue. On the next question, Pak Ririek?

Ririek Adriansyah, CEO

On the decline in prepaid subscribers, we are actually in line with our strategy to protect our market position by offering healthier products. There is a natural shift happening in the market, and we are concentrating on attracting healthier subscribers. Additionally, we are seeing an increase in ARPU as well as improved or stable RPMB. This suggests that a healthier product in the market aligns with similar actions taken by others.

Unknown Executive, Executive

We need to add more color to the ARPU healthy increase. If you look at the positive performance, it's due to our right pricing implementation. We have promoted healthy conduct towards renewing customer behavior as well as customer value management, which we call CVM. This has led to the ARPU improvement. You can also see there was an increase in traffic. The RPMB is a main key driver, which we monitor closely, helping us indicate the productivity of the healthy subscribers. At the same time, we have managed to decline legacy revenue through personalized offers to make our offerings more relevant. We will continue to focus on market repair and nurture customer experiences, retention, and digitalization.

Heri Supriadi, Finance and Risk Management Director

Okay. I hope that answered your question.

Hussaini Saifee, Analyst

I have a few questions. First, Telkomsel's revenues have stabilized over the last two quarters, so I would like to know how we project market share for Telkomsel going forward. Second, are there any Orbit revenues included in Telkomsel's revenues? What were the Orbit revenues and subscriber numbers at the end of 2022? Lastly, do we have any updates on the spectrum auctions and their timing? Were there any one-time cost bookings in the fourth quarter?

Unknown Executive, Executive

Okay. Thank you for the questions, Hussaini. Regarding revenue, alongside increased people mobility post-COVID-19 and the potential for digital economic growth, we should expect to capture more opportunities supported by better economic conditions. We will also monitor the market development, including macroeconomic factors and inflation impacts. Regarding strategic actions, as I mentioned, we will maintain market relevance and protect our dominant market share position, which is currently around 50%. On the Orbit revenue, it is already included in broadband revenue recognition. Currently, our Orbit revenue serves areas requiring broadband but are not easily accessed by IndiHome coverage. I will provide an update on the spectrum auction. Last November, we were officially announced as the winner for the price mix that we currently use for 4G. Most importantly, we have just completed the refunding for 2.1. Regarding the 700 spectrum, we are still working on it, but we hope that the government will announce the auction for the 700 spectrum in either the first or second half of this year. That's all from my side.

Heri Supriadi, Finance and Risk Management Director

On the cost side, there's no one-off cost booked in the last quarter of 2022. That's, I think, our answer to your question.

Choong Chen Foong, Analyst

A couple of questions from me. Firstly, on the mobile subscriber decline of 11% in FY '22, can you help me understand the impact that it has had on your revenue and EBITDA for Telkomsel? Are these revenue-generating subscribers that we have lost? If so, what sort of ARPUs were they at? In terms of the impact on EBITDA, was it a net positive or net negative from losing these customers in FY '22? Secondly, for IndiHome, what are your thoughts on the outlook for net adds this year? Is there room to raise prices on the dual-play packages? And what is the average speed for IndiHome subscribers as of the fourth quarter? Lastly, how many staff retired in FY '22 and how many are expected to naturally retire? What are you budgeting for salary increments in FY '23?

Ririek Adriansyah, CEO

To address the decline in mobile subscribers, we have focused on acquiring healthier subscribers. This decline mainly affected those with low ARPU, which in turn positively impacts our overall ARPU as indicated by the results. Additionally, we’ve seen favorable effects on EBITDA from improved cost management, particularly in specific areas.

Mohamad Ramzy, Finance and Risk Management Director, Telkomsel

Yes. To add some color on the impact of EBITDA, we see it has a positive impact overall, and the acquisition costs are much lower than prior to this strategy to improve healthier market conduct. Thank you.

Heri Supriadi, Finance and Risk Management Director

Regarding IndiHome's outlook for net adds in 2023, assuming we complete the fixed mobile convergence by July 1st, we expect around 1 million additional subscribers for home broadband, essentially combining fixed wireless assets and fixed broadband. Regarding plans to raise prices on dual-play packages, we aim to enhance quality and stickiness to provide added value amid competition in some areas. As for the average speed of IndiHome subscribers, it is currently around 30 meg per subscriber. Regarding the number of staff retiring in 2022, there were around 300 normal retirements, and 2023 is expected to see a similar number.

Choong Chen Foong, Analyst

If I can just quickly follow up, what would you be budgeting for in terms of salary increments this year? Do we need to adjust the salaries upwards quite a bit given higher living costs? Additionally, will Telkom be proposing dividends based on the operating net income or on the reported net income?

Heri Supriadi, Finance and Risk Management Director

Concerning salaries, we typically have a natural increase based on inflation rates, and our salaries are competitive in the market. We also provide performance-based bonuses, which contribute to adjustments. Regarding dividends, we will propose dividends based on reported net income, calculating what yield is competitive for the investors. We're targeting to increase our dividend percentage this year compared to last year, proposing a dividend yield of about 75% to 80% of net income. This represents an increase compared to what we did last year.

Hussaini Saifee, Analyst

Just a follow-up on the recent partnership of Telkom with Ericsson on 5G, linked to fixed wireless access. Can management provide more details on priorities for 5G rollout and monetization? Will the focus be more on the mobile side or the fixed wireless sector?

Unknown Executive, Executive

I would like to reiterate that our collaboration with Ericsson for the 5G rollout is ongoing. We are working alongside Ericsson and other partners to leverage millimeter wave technology in high-frequency bands from 60 gigahertz in two cities. The rollout of 5G will depend on business viability and market conditions. We are also assessing post-spectrum developments as well as pertinent use cases and affordability of devices in urban areas. Currently, we have approximately 284 5G base transceiver stations in over 40 cities, concentrating on mid- to high-residential regions and the enterprise market. We have partnered with Freeport to create smart mining solutions using a standalone 5G network, and we are building a digital ecosystem with Java data while also deploying 5G in areas like Mandalika during the G20 Summit.

Hussaini Saifee, Analyst

To confirm, are trials being done on millimeter wave spectrum or 3.5 gigahertz spectrum? Is there a timeline for the 3.5 gigahertz spectrum auction?

Unknown Executive, Executive

Yes, we are using millimeter wave. For the 3.5 gigahertz spectrum, we are awaiting announcements from the government and from the ICT minister regarding the timeline for the auction.

Edwin Sebayang, VP of Investor Relations

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.

Operator, Operator

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