Telkom Indonesia (Persero) Tbk PT

IDX:TLKM

Earnings Call Analysis

Earnings Call Transcript 2022-Q2

[Operator]

Good day and thank you for standing by. Welcome to Telkom Earnings Call First Half of 2022 Results. [Operator Instructions] Please be advised that today’s conference is being recorded. I’d now like to hand the conference over to your first speaker today, Mr. Andi Setiawan, Vice President of Investor Relations. Thank you. Please go ahead, sir.

[Andi Setiawan, Vice President, 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 and 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, as President Director and CEO; Mr. Heri Supriadi as Finance and Risk Management Director; Mr. Herlan Wijanarko as Network & IT Solution Director; Mr. Bogi Witjaksono as Wholesale & International Service Director; Ms. Venusiana as Consumer Business Director and Enterprise & Business Service Acting Director; Mr. Budi Setyawan Wijaya as Strategic Portfolio Director; Mr. Muhamad Fajrin Rasyid as Digital Business Director; and Mr. Afriwandi as Human Capital Management Director.

Also present are the Board of Directors of Telkomsel: Mr. Hendri Mulya Syam as President Director; Mr. Mohamad Ramzy as Finance and Risk Management Director; and Mr. Derrick Heng as Marketing Director.

I now hand over the call to our CEO, Mr. Ririek Adriansyah, for his overview. Please, Ririek.

[Ririek Adriansyah, President Director and Chief Executive Officer]

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.

Ladies and gentlemen, currently Telkomsel continues its transformation journey from telco into digital telco company and materialize 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, connected eastern part of Indonesia directly with North America. Such a gateway enables the people from eastern part of the nation, including new Indonesian capital city, to enjoy wider Internet access as well as better connectivity quality. Moreover, we successfully completed Phase 1 of 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 that’s increased respectively by 3.6%, 4.5% and 6.9% year-on-year. 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 digitalization journey to a digital telco company. During first half of 2022, Telkomsel enjoyed data price increase supported by the holy month of Ramadhan and Eid al-Fitr traffic. Telkomsel has maintained healthy EBITDA margin of 57.1% while net income margin stayed at 26.2%. With regard to equity investment in GoTo share, scored unrealized gain of IDR305 billion.

Ladies and gentlemen, IndiHome’s contribution to the consolidated Telkom’s revenue has been steadily increased, supported by additional 288,000 customers to become 8.9 million customers. IndiHome revenue reached IDR13.8 trillion with a wireless ARPU of IDR270,000. Enterprise segment contributed IDR8.7 trillion in revenue with B2B IT Services and Enterprise Connectivity solutions as the biggest contributors. White opportunities, especially in cloud business, just by making strategic partnership with global tech player, could be entered by segment opportunity to grow and leverage our capability to deliver digital solution to our customers.

Wholesale segment posted IDR7.9 trillion in revenue and significantly increased by 14.6% year-on-year. Under the segment, we continue to strengthen our network infrastructure as we launched second gateway for Indonesia in Manado that was launched on July 20, 2022. We are also in the progress of developing submarine cables, namely Bifrost and SEA-ME-WE 6, which are expected to be completed in 2024 and 2025, respectively. This is what will strengthen international traffic data to give better experience 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 data center business with the completion of the first phase HyperScale Data Center. Our competitive advantage over the competitor is that our main data centers are similarly integrated to neuCentrIX data center and are also connected to global submarine cable network. With our integrated network, we are able to accommodate a wide variety of 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 by gas-fired power plant and solar panel for public areas and office complex. Fixed-mobile convergence, or FMC, continued to be explored to give better customer experience, provide more efficient CapEx and also to create data integration. In the FMC products and features, currently we have Orbit and Smooa, in which Orbit is positioned as IndiHome’s complementary product using fixed wireless technology.

Orbit has very fast deployed Internet connection to cater densely populated area in which fiber optic connection is difficult and costly to penetrate. Orbit could also be used scare area with good future prospects. Currently, Orbit has 464,000 users and continued to serve and grow all over the nation. Meanwhile, Smooa feature shows our capabilities in integrating fixed and mobile network. We continued our consolidation whereby Mitratel acquired another 6,000 towers from Telkomsel. Following the acquisition, we expect Mitratel could strengthen its position as the largest tower provider in Indonesia; and Telkomsel, on the other hand, could focus on its core services and continue its dominance in mobile business.

That is ending my remark and thank you for your kind attention.

[Andi Setiawan, Vice President, Investor Relations]

Thank you, Ririek. We will now begin the Q&A session. [Operator Instructions] Operator, may we have the first question, please?

[Operator]

Our first question comes from the line of Luis Hilado from Citi. Luis, please ask your question.

[Arthur Pineda, Citi]

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 a fair bit. It seems that you have lost some market share and revenue share here. It’s driving a divergence. And what can be done to close the gap? The second question I had is with regard to the broadband momentum. It seems to be slowing quite a bit as well in terms of growth. Why is this the case? Is there a structural issue now with competition or industry saturation and can we see CapEx being throttled down given this lower growth? Thank you.

[Ririek Adriansyah, President Director and Chief Executive Officer]

Yes. I could take this question. Your view on market share, right, from the decline in subscriber base Q-on-Q, to us it is mostly due to rotational churn and we were doing numbers consolidation in the prepaid post festive season and increased mobility. Telkomsel initiative is to maintain our leadership and high-value customers. I want to make sure that there is healthy conduct, and we want to focus on renewal and initiatives to price rationalization to drive healthier growth and to lead data monetization.

[Budi Setyawan Wijaya, Strategic Portfolio Director]

On the CapEx side, I will take it on the mobile. Actually, Telkomsel still remained in the CapEx ratio of around 13% to 14% of the revenue, which include on the network deployment as well as to support some of the 5G deployments actually in certain areas. So that’s on the CapEx targets.

[Heri Supriadi, Finance and Risk Management Director]

Luis, Heri of Telkom here. Regarding the IndiHome customer base, actually, yes, competition is there. So in terms – from time to time, but actually, why we have been slowing down in the additional customer base that we have, actually more to the – our strategy to focus on the high-value customer, the quality of sales and also to defend from the future churn. This is involving some of initiative. For example, asking a new subscriber to have about 1 year at least for the, I think, contract and so on. This then serves that our base is becoming healthier. The – I think the – more price competition happened in the low end of market, which is, I think, a customer potential with below 20 megs of speed of the services. So we have the – as mentioned by our CEO, we have complementary products for that one. We have Orbit as our solution also. So basically, what we see actually, our position is still very strong. And what we do expect, we continue to do our investment – to enter this healthy – healthier business practice to continue and to enter the profitability also still intact. That’s from our side, Pak Arthur.

[Arthur Pineda, Citi]

Understood. So just if I...

[Operator]

Thank you, Luis. [Operator Instructions] Alright, while waiting for Luis, we’ll take the next question from Choong Chen Foong from CGS-CIMB. Please go ahead.

[Choong Chen Foong, CGS-CIMB]

Thank you so much for this call. Three questions from me. Firstly, I wanted to ask about the – it was mentioned that there was a moderation in the O&M costs due to lower content costs. Can you share with us what is the total content cost, I think, especially at Telkomsel? And 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 Q-on-Q. Were there any one-off 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. Thank you.

[Ririek Adriansyah, President Director and Chief Executive Officer]

I will take the question on the cost side. Actually, on the O&M cost, our growth already related with the – mostly related with the cost of services, that we provide some content to our customers which related with Disney content as well as the Netflix and also the solution of the Zoom that we already had with our partners. So that’s the cost. But on the other hand, we still manage on the O&M costs, which was only about 2.3%, mostly related with the spectrum that we acquired last year. So that’s on the cost side. On the second half, I think we still manage our cost transformation and do the costs relatively quickly to support our customer experience as well as supporting our strategy to have a more healthier industry and our healthier to customer. So that’s on the cost side. Heri, if you can, please.

[Heri Supriadi, Finance and Risk Management Director]

Yes. On the second half of cost pressures, additional import that we can give to you, most of our network, especially in the power costs, already using power coming from the electrical company. This is related to the tariffs that they apply. But – so for that, we see the impact is quite minimum, while other costs, including the inflation and so on, we try to manage with, I think, some initiatives. But we answer that the costs that we had as of first half are going to be outlook there to be entire of the year.

[Ririek Adriansyah, President Director and Chief Executive Officer]

To add on the staff cost activity, it’s also related to our establishment of new company of IndiHome. That’s also the additional activity to operate the company, which includes their subsidiaries, [indiscernible] and also [indiscernible] under gaming.

[Derrick Heng, Marketing Director, Telkomsel]

Yes. This is Derrick from Telkomsel. I will take the question on inflation. From our perspective, the competition in Indonesia is starting to be 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. And we will keep our eyes and ears on the ground to make sure that we continue to be relevant to our customers in terms of needs as well as network capacity. From a product perspective, now we are providing a wide variety of products in our portfolio, from the sachet packages to the weekly offerings to even the 30-day package. So we will want to make sure that from a portfolio perspective, there is an offering that would be relevant to different needs of our customers. So our next strategy is to focus on value creation for customers and to engage them with more relevant digital lifestyle solutions.

[Choong Chen Foong, CGS-CIMB]

Understood. Thank you so much, everyone.

[Operator]

Thank you very much. [Operator Instructions] Our next question comes from the line of Hussaini Saifee from UBS. Hussaini, your line is open. Please ask your question.

[Hussaini Saifee, UBS]

Yes. Hi, good afternoon. Thanks for the call. A few questions from me. First, on Telkomsel. So how should we see Telkomsel mobile growth going forward given multiple price increases industry has undertaken? And is it still a low single-digit growth outlook? Or we expect to see it accelerating to mid-single-digit growth in the coming quarters? That’s question number one. Second question is on the data center side. So any update on the data center revenue growth? And why – and what is the time line of data center IPO? Is it still the first half of next year? Thank you.

[Derrick Heng, Marketing Director, Telkomsel]

Okay. I will take the question on the mobile growth going forward. From our strategy, we will want to defend market share, both Java and outside Java. We want to focus on targeted CDN to maintain competitiveness. We want to drive personalized offering and protect high-value customers to cater for increasing productivity from our existing base. We want to make sure that we prioritize and deliver differentiated experience for our crème de la crème customers both from a service perspective as well as a network perspective. For example, the service differentiation, they will be able to enjoy a better service at our touch points, be it at our GraPARI stores or the digital channels. We want to make sure that we accelerate the network leadership and experience, and we want to maximize digital service to support and complement all forms of connectivity: big games, video and music, etcetera. This is our answer. Thank you.

[Heri Supriadi, Finance and Risk Management Director]

On the data center, what we have the growth of today is around 4.5% year-on-year. The growth was low because actually, the capacity almost fully utilized compared to last year. Our HyperScale Data Center just finished by – last month. So that’s – I mean, we’re going to have additional new subscriber coming to our data center around third and fourth quarter of the year. And when – about the time line of the IPO. You see, what we plan to do is we’re going to have additional data center maybe with cooperation with Singtel. In addition to that, we’re also going to build another two HyperScale Data Centers that we do expect going to completed by the end of next year. And whether we’re going to IPO or we’re going to have a strategic investor, that’s going to be, I think, a choice whenever there’s coming to the scale that we set already for the basically exit strategy.

[Hussaini Saifee, UBS]

Understood. Thank you. If I can ask one more follow-up question on IndiHome, is – the first half total net adds of around 288,000, what should we – or what is your target 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, actually we already are adding around 288,000 of new subscribers. With the remaining of the time and also the condition of the environment much better right now, we believe we can have around 600,000 to 700,000 of new additional line this year.

[Hussaini Saifee, UBS]

Understood. This is very clear. Thank you very much, Heri.

[Heri Supriadi, Finance and Risk Management Director]

Thank you.

[Operator]

Thank you very much. Our next question comes from the line of Ranjan Sharma from JPMorgan. Ranjan, your line is open. Please ask your question.

[Ranjan Sharma, JPMorgan]

Hi. Good afternoon and thank you for the call. Two questions from my side. Firstly, if you can provide some color on the tariff hikes that you have seen in the market by yourself and also by the peers. And then what is the impact that you are seeing on industry revenues? And the second question is in the same vein. Like how should we think of industry revenue growth over the next few quarters? Thank you.

[Ririek Adriansyah, President Director and Chief Executive Officer]

Yes, my answer to your – from a tariff perspective, we want to make sure that we will focus on improvement on usage, consumption and productivity of customers, which will drive the stabilization of ARPU. We want to optimize our monetization efforts to tape off the declining rates in the RPMB. So, our context on tariff is we want to balance between profitability as well as market share. From a competition perspective, we realize that the competition in Java continued to be intense as all of us try to defend our share in the Java area. So, Telkomsel’s strategy is to make – to remain competitive with a variety of products and offerings while maintaining network quality. Outside Java, we will want to extend our – to make sure that we continue to dominate by protecting the existing customer with optimized CDN offering, distribution channel and network quality. So, overall, we want to make sure that we achieve stability both in Java as well as outside Java. Thank you.

[Ranjan Sharma, JPMorgan]

Thank you. And on the wireless revenue trend for the industry?

[Ririek Adriansyah, President Director and Chief Executive Officer]

Sorry, could you…

[Ranjan Sharma, JPMorgan]

And so with the changes that you are seeing in the competitive environment, how do you think…?

[Ririek Adriansyah, President Director and Chief Executive Officer]

Yes. I think competition to us is starting to be more rational, yes. We have seen a healthier conduct and we are driving for profitability. When we look at, for example, XL, they have stopped true unlimited. They have also now looked at a more tempered FUP. We have also seen our competition of Indosat increasing price. So, that to us is really a concerted effort to drive the right pricing in our industry. From a Telkomsel angle, we want to make sure that we continue to be relevant to our customers by prioritizing the best of our experience at our touch points as well as the network perspective.

[Ranjan Sharma, JPMorgan]

My question is on industry revenue growth that you are expecting over the next few quarters.

[Ririek Adriansyah, President Director and Chief Executive Officer]

Yes. I mean from an industry perspective, we see that there is an opportunity for recovery momentum on the back of better competition as well as our agenda for the right pricing. So – however, we will be monitoring the development in the market, including the macro condition and inflation rate. Thank you.

[Ranjan Sharma, JPMorgan]

Thank you.

[Operator]

Thank you. Our next follow-up question comes from the line of Hussaini Saifee. Hussaini, your line is open. Please ask your question.

[Unidentified Analyst]

Sorry, all of my questions have been answered. Thank you.

[Operator]

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

[Choong Chen Foong, CGS-CIMB]

Hi. Yes. Thanks for the opportunity. Two follow-up questions. Firstly, for Heri. Just now you mentioned on the data center that you will be building another two Hyperscale Data Centers to be completed by the end of next year, end of 2023. Are you referring to Phase 2 and Phase 3 of the Cikarang Hyperscale Data Center, or are you talking about new data center entirely? And also, you mentioned that the plan is to have additional data center with SingTel. Are these going to be greenfield or just an injection of data centers from their side?

[Heri Supriadi, Finance and Risk Management Director]

Actually, first on the – from SingTel, it is greenfield that we plan to have a new data center in Batam. We are going to use more energy friendly. So, we are now in the process of basically talking for gear on this one to supply for the market in Singapore. And the first one, the data centers that – I mean it’s actually the second and the third data center in Cikarang because we still have land banking in Cikarang and also some infrastructure relating to the power and already in there. So, we do expect this is going to be – optimize all the capacity and also all the costs – common costs that we already put.

[Choong Chen Foong, CGS-CIMB]

Understood. And for Heri on the greenfield data center in Batam. Do – can you share what the megawatt capacity is and the timeline to complete that?

[Heri Supriadi, Finance and Risk Management Director]

Bogi? Yes.

[Bogi Witjaksono, Wholesale & International Service Director]

Okay. For the first phase, we will build 10 megawatts. And the maximum capacity will be 80 megawatts.

[Choong Chen Foong, CGS-CIMB]

Okay. And Phase 1 will completed by when? Yes. Please, yes, the timeline, yes.

[Bogi Witjaksono, Wholesale & International Service Director]

The timeline, we will be starting beginning of the next year. And completed, it takes 1.5 years.

[Choong Chen Foong, CGS-CIMB]

Okay. And subsequent capacity expansion to the 80-megawatt maximum capacity would be dependent on demand, is that right, or do you already have a planned expansion?

[Bogi Witjaksono, Wholesale & International Service Director]

Yes, depending on the demand. Depending on the demand.

[Heri Supriadi, Finance and Risk Management Director]

Depending on the demand not only in basically Singapore, but also can be in our side as well.

[Choong Chen Foong, CGS-CIMB]

Okay. Understood. And one last question. Do you have an update for us on the fixed-mobile convergence strategy that you were talking about earlier in the year with regards to consolidating IndiHome assets within Telkomsel? Any progress there? And what that picture might look like once we complete that exercise?

[Heri Supriadi, Finance and Risk Management Director]

Budi, on the progress of the FMC?

[Budi Setyawan Wijaya, Strategic Portfolio Director]

Okay. For the FMC, actually we already completed we, call the Split-1 [ph] is more elaborate. What kind of the customer demand, and then what is the operating model. And also, the product gets suitable to the customer. It’s already done. And then we already set up also in the team to follow-up the results of the Split-1 to be implemented later on. And then also, we will started to talk we call Split-2. It’s about the possibility of the injection of IndiHome to Telkomsel with SingTel. So, it has already started today. And then the Split-1, the result is quite good, actually. If we look on – the response of the customer base on the benchmark is above the average benchmark, actually. So, the length, actually, how we deliver those services in the right momentum to the customer. So, we don’t lose the opportunity for the customer who interest to use our assets, FMC product. Thank you.

[Choong Chen Foong, CGS-CIMB]

And when it comes down to the – you mentioned the injection of IndiHome into Telkomsel, right? Does that include any fiber assets, the last mile or maybe even a trunk network, or is it just maybe the customers?

[Budi Setyawan Wijaya, Strategic Portfolio Director]

We are under discussion about this asset because the asset is also opportunity for us also to monetize – monetizing in the future. That’s why we are on the process of the discussion also for this asset. Thank you.

[Heri Supriadi, Finance and Risk Management Director]

Yes. Basically, what we are doing right now, we determine what is the right operating model with regard to how we run the FMC. So, regarding who is going to manage the asset, where we put the asset is going to be also under discussion. In addition to this, actually, we see that the fiber that we have actually can also serve the industry in the future. I think this is also a kind of potential that we need to see in order to basically unlock the valuation and to be a substantial player or the leading player here.

[Choong Chen Foong, CGS-CIMB]

Okay. Understood. Thank you so much Heri and everyone.

[Operator]

[Operator Instructions]

[Andi Setiawan, Vice President, Investor Relations]

With that, I think there is no…

[Operator]

Please continue.

[Andi Setiawan, Vice President, Investor Relations]

Yes, I think there is no more question. You can conclude the discussion, yes.

[Operator]

There is no more questions, so I will now turn the call back to Mr. Andi for closing remarks.

[Andi Setiawan, Vice President, 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]

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