Earnings Call Transcript - TLK Q2 2024

Operator, Operator

Good day, and thank you for standing by. Welcome to Telkom Earnings Call for First Half of 2024 Results. Please be advised that today's conference is being recorded. I'd now like to hand the call over to Oki, VP Investor Relations. Thank you. Please go ahead.

Unknown Executive, Unknown

Thank you, gentlemen. Ladies and gentlemen, welcome to PT Telkom Indonesia conference call for the unaudited results of the first semester of 2024. There'll be an overview from our CEO Ririek Adriansyah of Telkom Group followed by 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 estimations and may involve risks and uncertainties that may cause actual results to be different from what we discussed today. Ladies and gentlemen, it is my pleasure today to introduce Telkom's Board of Directors, who are joining us today: Mr. Ririek Adriansyah, as President, Director and CEO; Mr. Heri Supriadi as Finance and Risk Management Director; Mrs. Venusiana, as Enterprise and Business Service Director; Mr. Bogi Witjaksono, as Wholesale and International Service Director; Mr. Budi Setyawan Wijaya, as Strategic Portfolio Director; Mr. Honesti Basyir, as Group Business Development Director; Mr. Herlan Wijanarko, as Network & IT Solutions Director; and Mr. Afriwandi as Human Capital Management Director. Also present are the Board Directors of Telkomsel, Mr. Nugroho, as President, Director; Mr. Daru Mulyawan, as Finance and Risk Management Director; Mr. Derrick Heng as Marketing Director; and Mr. Adiwinahyu Basuki Sigit as Sales Director. I now hand over the call to our President, Director and CEO, Mr. Ririek Adriansyah for his overview.

Ririek Adriansyah, President, Director and CEO

Thank you, Oki. Good afternoon, ladies and gentlemen. Welcome to our conference call for the unaudited first semester financial results. We appreciate your participation in this call. Ladies and gentlemen, we have seen 2024 as the year of better economic stability and growth compared to the year of 2023. The initial target of 5.2% economic growth rate in 2024 as compared to 5.05% growth in the previous year, despite challenges such as declining commodity prices and global economic conditions. Domestic consumption is predicted to contribute more than half of Indonesian economic growth supported by stable inflation at 2.5% plus or minus 1%. Indonesia has the highest employment rate among G20 nations with an employment level of almost 70%, although the employment comes predominantly from the informal sector. Now, the elected president Prabowo Subianto and his administration have committed to several current policies signaling a stable investment climate and reduced political instability. Energy and food price volatility along with a strong U.S. dollar to Indonesian Rupiah should be managed. Our growth remains a significant potential for continued development as expanding rates of high-tech products and maximizing their impact on employment could help boost our economy amid external financial pressures. The telecommunication industry contributes to the growth of high-tech products and business opportunities in increasing the economics of macro, micro, small, and medium enterprises (MSMEs) alongside growing wholesale spending in Indonesia and increased expenditure in the telecommunication sector. Telkom Group has been transforming into a digital services company serving both B2C and B2B segments; we are ready to seize opportunities for steady growth in telecommunications. This transformation enables us to become a retail economic catalyst for Indonesia. This is important as the industry is experiencing evolution with unique technology while managing the global geopolitical environment. On the B2C segment, we have implemented a fixed-mobile convergence (FMC) strategy for one year since July 1, 2023, focusing on profitability in market share maintenance without creating price instability. Mobile customer base grew at a healthy 4.3% to 159.9 million subscribers. As a result, normalized EBITDA margin has also been sustained at 51.9% for this semester. We remain of the view that necessary consolidation and healthy pricing could be developed toward fostering healthy competition. Moving forward, the synergy effect from the FMC initiatives serves as revenue uplift and operational as well as capital expenditure efficiencies to ensure the maximum impact of the FMC strategy on our company's financials. A part of our Five Bold Moves strategy, our corporate performance ensures that all business processes achieve efficient results without duplications. This includes the process of group purchasing initiatives, which significantly improved our CapEx purchasing rates. Such initiatives have positively impacted content offerings, enhancing user experience at the end. We have also successfully transferred payments mostly to Indonesian Rupiah contracts to offset foreign exchange uncertainty. Similarly, in June 2024, the group initiated an early pension program, affecting more than 1,000 employees. This aligns with our budget to optimize workforce efficiency while creating value through our Five Bold Moves strategy. The program cost totaled IDR 1.24 trillion with a payback period of two years and is designed to enhance shareholder value in the future. On the B2B business, we continue to focus on creating long-term sustainable revenue growth supported by platform expansions with data centers. Our additional data center capacity within 2024 will come mainly from the hyperscale data center by 18-megawatt in Cikarang, as well as capacity expansions of our existing data centers driven by demands from artificial intelligence applications and gaming. We expect to enhance our international subsidiary connectivity through our end-to-end data center setup and improve internet connectivity and latency by rerouting traffic internationally. Digital Infrastructure Indonesia will serve as a managing asset service provider starting August 1, 2024. Besides the FMC initiative, this establishment will also help us address market demands effectively given additional investments to increase CapEx efficiency. We strive to enhance our digital added services and with strategic partnerships with global technology players in our subsidiaries. That concludes my remarks. I now hand over the presentation to Mr. Heri Supriadi, our Group Finance and Risk Management Director, for a brief overview of our financial performance. Thank you.

Heri Supriadi, Finance and Risk Management Director

Thank you, Ririek. Good afternoon, ladies and gentlemen. During the first semester of 2024, Telkom Group has delivered a healthy revenue growth of 2.5% year-on-year to IDR 75.3 trillion, with EBITDA recorded at IDR 37.9 trillion, showing a slight decrease of 1.3% year-on-year. This revenue growth has been primarily driven by our continuing efforts to promote data and internet services amidst the ongoing decline of our legacy revenue. The decrease in EBITDA occurred in the second quarter, where we initiated an early retirement program affecting approximately 1,000 employees at a cost of IDR 1.24 trillion. This caused personnel expenses to rise by 20.9% year-on-year during the semester. However, we believe this initiative will not only create a leaner organization, but also enhance operational efficiency and productivity in the long term. After adjusting for the one-off costs from the program, our normalized EBITDA stood at IDR 39.1 trillion, reflecting a growth of 1.9%, stabilizing the normalized EBITDA margin at 51.9% compared to the first quarter of 2024. Our operating net income grew by 4.2% year-on-year to IDR 13 trillion after adjusting for certain effects from GoTo ERP costs and one-off asset unlocks. Examining the expenses breakdown, G&A costs have seen a spike over previous quarters primarily due to payment bonuses. Our total CapEx realization for the first half of 2024 was IDR 11.7 trillion, largely utilized for connectivity followed by digital platform investments. CapEx realization to revenue was 15.5%, and we hope to accelerate this towards the end of the year, reaching levels between 22% and 24% to generate significant additional revenue. As of June, our liabilities increased as we withdrew certain debts for dividend payment. Our gearing ratio remained healthy, with net debt-to-EBITDA at 0.67x at the end of June 2024. On the B2C business front, despite some deterioration due to increasing competition, the second quarter of 2024 was steady for Telkomsel. In this quarter alone, mobile revenue reached IDR 28.6 trillion, showing modest growth of 0.4%, while home revenue stood at IDR 6.6 trillion, up by 0.3% from the previous quarter. Overall, our revenue for Telkomsel rose solidly by 29.9% to IDR 57.2 trillion for the semester, maintaining an EBITDA margin of 47%. We've also seen a further acceleration in convergence penetration to 47%, reaching approximately 80 million digital asset users. Our productive improvements are driven by data payload, which increased by 11.7% year-on-year, while our customer base grew by 4.3% to 159.9 million at the end of June 2024. Continuing our efforts to enhance customer experience in digital services, the introduction of Telkom Satellite has also contributed to maintaining healthy pricing without instigating a price war. Our IndiHome business is also demonstrating a positive growth trajectory in fixed broadband. Looking at our guidance for 2024, we anticipate revenue growth in the low single digits, with EBITDA margins ranging between 50% and 52% and a CapEx to revenue ratio of 22% to 24%. That concludes my remarks, and thank you for your attention.

Unknown Executive, Unknown

Thank you very much, Mr. Heri. Ladies and gentlemen, we will now begin the Q&A session. Operator, may we have the first question, please?

Operator, Operator

First question comes from the line of Kelsey Santoso of Goldman Sachs.

Kelsey Rochili Santoso, Analyst

This is Kelsey speaking. A couple of questions from my side. Firstly, on your two cost items. First one is your G&A costs. So if we look at the quarterly basis instead of on semester basis, Q2 actually saw a 20% increase quarter-on-quarter and year-on-year. So can I check what led to the spike? And second one would be your personnel costs. Understand that the spike in Q2 was due to the ERP. But can I confirm if this is already largely behind? Or if there's still some headwinds remaining in the upcoming quarters? And my second question would be on your mobile business. So we saw ARPU still declined slightly Q-on-Q, while subscribers were flattish. So how should we expect these to trend in the upcoming quarters? And should there be any uplift that we can expect as you continue executing on the FMC strategy?

Heri Supriadi, Finance and Risk Management Director

Kelsey, your question. Allow me to answer that one. In the second quarter of this year, we had increased spending due to certain bonuses and incentives for management. Regarding the ERP, it is a significant transformation intended to make the fixed mobile business more efficient by transitioning employees lacking new skill sets. We do not foresee additional ERP initiatives in the near future. Addressing your question on ARPU, I will pass this to Derrick.

Derrick Heng, Marketing Director

Yes. This is Derrick and I'll share some insights on our ARPU. In our context, Telkomsel has maintained a stable ARPU at IDR 45,000. Several factors contribute to this stability. From a macroeconomic perspective, we've observed a contraction in consumer purchasing power. Additionally, the Lebaran incentives at the end of March impacted spending patterns between Q1 and Q2. We have maintained our average pricing while selectively expanding engagement with new segments. We aim to improve product competitiveness and maintain subscriber growth, which we believe will ensure ARPU stability.

Kelsey Rochili Santoso, Analyst

Can I just double-check on the G&A costs? I didn't catch that.

Heri Supriadi, Finance and Risk Management Director

On the G&A, the second-quarter increase is primarily attributed to management incentives and bonuses.

Operator, Operator

Next question comes from Ranjan Sharma of JPMorgan.

Unknown Analyst, Analyst

Sorry, can I just again request clarification on what G&A costs are up 20% quarter-on-quarter. I apologize, the line is very unclear, so I am asking this question again. The other question that I have is on the early retirement program. Are there any costs incurred at Telkomsel level as well? And lastly, on the data center side, if you can help us understand how the lease rates are trending in Jakarta.

Ririek Adriansyah, President, Director and CEO

Can you repeat your second and third questions, please?

Unknown Analyst, Analyst

The early retirement program first, are there any costs booked within Telkomsel? And on the data center if you can help us understand how the lease rates are trending in Jakarta.

Ririek Adriansyah, President, Director and CEO

Yes, regarding costs from the ERP at Telkomsel.

Heri Supriadi, Finance and Risk Management Director

On the G&A costs, as we explained before, the increase was primarily coming from bonuses for the management group. For ERP-related costs at Telkomsel, we don’t have such a program; this is solely from Telkom as the parent company. Please see this as an investment for the future, allowing us to bring in new talent with the right skill sets. Regarding data center trends, I will request Derrick to elaborate.

Derrick Heng, Marketing Director

Yes, given the higher demand versus supply, we foresee lease rates maintaining an upward trend in Jakarta. However, as more players enter the market in the long term, we may expect some rationalization of those rates.

Ririek Adriansyah, President, Director and CEO

Does that answer your question?

Unknown Analyst, Analyst

If I can just have a quick follow-up on the G&A side, sorry, can I just have a quick follow-up on the G&A cost?

Ririek Adriansyah, President, Director and CEO

Yes, sure.

Unknown Analyst, Analyst

So if the G&A costs are up because of payment of bonuses, that would have been paid last year as well, right? Why is it up 20% on a year-on-year basis?

Heri Supriadi, Finance and Risk Management Director

This is a timing issue with bonus payments. The increase is normalized towards the year-end as planned, and additional contributions have come from our allowance for bad debt, which we believe is manageable.

Operator, Operator

Our next question comes from Luis Hilado from Citi.

Luis Hilado, Analyst

We had three questions. The first is on the wireless side. It seems that your revenue market share is still slipping. What's driving this growth gap? Is it because your usage is shifting to other operators? And is it mainly in Java, or in the outside Java areas where you're seeing usage changes? Second question is on fixed broadband. It seems to be quite slow for the entire industry aside from yourselves. What's the key bottleneck in driving better broadband subscriptions going forward? And last question is on the ERP. As you mentioned, there'll be savings from that as well as having room to hire new talent. But in terms of the savings, can you quantify for us what amount you're looking at for the medium term?

Derrick Heng, Marketing Director

Okay. This is Derrick. I'll answer your question on wireless. We observe that competition is expanding aggressively outside Java, and we need to defend this space robustly. Our strategy includes tailored pricing and packaging to deliver superior customer experiences. We wish to maintain revenue share along with profitability. In terms of fixed broadband, we aim to accelerate penetration using our assets while enhancing customer value, achieving solid revenue growth.

Unknown Executive, Unknown

Let me add on fixed broadband growth. We note that while competition is present, we've identified growth potentials. We've proactively launched competitive pricing strategies such as EZnet to address affordability and drive penetration. Our goal is to enhance fixed broadband from the current levels steadily.

Heri Supriadi, Finance and Risk Management Director

Luis, on the ERP, we have calculated expected efficiency savings based on the early retirement program which equates to a return of around 21%. The payback for the initiative is approximately 2.5 years, and it positions the company positively moving forward.

Luis Hilado, Analyst

Just one follow-up question. I didn't catch the earlier answer to the question on whether there is going to be ERP in the second half or for next year? Or are you done for the year?

Heri Supriadi, Finance and Risk Management Director

For the ERP itself, we do not foresee additional requirements for this, as the necessary transformations regarding skill sets among our employees have already been addressed, and there are no plans for another ERP in the near future.

Operator, Operator

I'm seeing no more questions from the line. I will now hand the call back to management for closing.

Unknown Executive, Unknown

Thank you very much, everyone, for participating in the call today. We apologize for those whose questions could not be addressed. If you have further inquiries, please don't hesitate to contact us directly at investors@telkom.co.id or reach out to me directly. Thank you very much. Good afternoon.

Operator, Operator

That does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.