PT Indosat Ooredoo Hutchison Tbk (ISAT.JK) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the PT Indosat First Half 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your first speaker today, Indar. Please go ahead.

Thank you, Michelle. Good afternoon, everyone, and thanks for joining us today. With us on the call today, we have Pak Vikram Sinha, our Chief Executive Officer; Pak Nicky Lee, our Chief Financial Officer; and Pat Vivek Mehendiratta, our Chief Marketing Officer. I will now hand over the call to Pak Vikram for his opening remarks. Over to you, sir.

Thanks, Indar, and good afternoon, everyone. Let me start my presentation by sharing with you the highlight of our quarter 2 performance. Despite the challenging market environment continuing in the second quarter of the year, we managed a solid set of number for the quarter with our focus on customer engagement and profitability. Our customer number remains steady at close to 96 million, despite the SIM price increase, while we saw an increase in our own app users, which is evidence of the success of digital engagement strategy. This quarter was tough in terms of seasonality being the post-Lebaran festival season. As a result, we saw a moderate decrease in revenue and ARPU. But overall, both are still holding up well. Importantly, our EBITDA increased by 0.4% quarter-on-quarter, and EBITDA margin was also higher to 47.6%, as part of our focus of making sure we deliver on profitability. If you look at the next slide, the first half of the year was important to establish more rational behavior in the market with several market correction measures. These includes rising of the SIM price, removal of freebies and discount, which our CMO, Vivek, will talk in greater detail in his presentation. Market consolidation is also a positive and helping to promote more rational behavior. Finally, for IOH, we are seeing that our AI engine is powering our growth with better customer engagement and optimization. All these factors will drive our growth in second half of 2025. If you go to the next slide, we continue to play our role in shaping Indonesia future in connectivity and AI. Thus far this year, we have spent USD 400 million in CapEx, adding more than 20,000 BTS till date. This has also been recognized by external parties such as OpenSignal, where we have hold well on the experience metrics as part of our mantra and experience first approach. Our role as the key part of AI ecosystem for Indonesia continues with the establishment of Indonesia AI Center of Excellence in collaboration with Komdigi, NVIDIA and Cisco, in line with our commitment to develop AI in Indonesia. Looking at the next slide. Continuing the theme of AI, we are seeing strong momentum on our AI-driven TechCo, which continue to gain traction in the market. We are on track to deliver USD 35 million in net new revenue for 2025, which will meaningfully contribute from second half of 2025. Our GB200 Blackwell are now operational, and we are one of the first to go live in Asia on GB200. We now have more than 20 customers on our sovereign AI cloud business. Everything that is connected must be protected. And hence, we have built a security operation center, along with Cisco, which will add to our security stack. That ends my introduction, and I'll now hand over to Nicky for more detailed financial presentation. Over to you, Nicky.

Thank you, Pak Vikram. I'm delighted to report a solid set of numbers for the first half, given the challenging market environment so far in 2025. If we move on to the -- yes, move on to our financial performance slide. Overall revenue for quarter 2 remained resilient at IDR 13.5 trillion, small decline by 0.3% due to lower spending post Lebaran period. We have sustained our cost leadership strategy to drive growth and enhance profitability, achieving a 1% quarter-on-quarter reduction in total cost of sales and OpEx. This helped to uplift EBITDA by 0.4% and EBITDA margin by 0.4 percentage points quarter-on-quarter. If we move down to net profit, we delivered a normalized net profit above IDR 1 trillion. This was 11.5% lower quarter-on-quarter due to one-off operational other income of IDR 180 billion in Q1, which is then largely from disposal of dismantled assets and early site terminations. If we would exclude this nonrecurring item, net profit would have been higher by approximately 5% on a quarter-on-quarter basis. The final line on this slide, net debt to EBITDA ratio increased by 0.13x to become 0.49x, primarily driven by continued CapEx investment to deliver mid- to long-term growth. Let's move on to the next slide. As highlighted earlier, in the first half of this year, reported revenue declined by 3.1% year-on-year, reflecting a challenging market environment so far this year. This revenue contraction contributed to a 4.2% year-on-year reduction in EBITDA. As a result, EBITDA margin dropped 0.5% to 47.4%. The margin decline was partially offset by ongoing cost leadership assets, which helped preserve profitability amid top line headwinds. The bottom line reflected a similar trend with reported net profit declining by 14.6% Y-o-Y to IDR 2.3 trillion. This, again, was largely the impact coming from software revenue and a small increase in depreciation and amortization expense during the period. Moving on to cost. In the second quarter 2025, we further sharpened our focus on cost leadership to support us, resulting in improved spending discipline across most cost categories. This led to a 1% Q-o-Q reduction in total costs. On a Y-o-Y basis, total cost of services and operating expenses declined by 2% compared to the first half of 2024, underscoring our continued commitment to cost discipline and prudent cost management. We also benefited from operational one-off for vendor requirements and certain cost reversal. On cost of sales, we experienced a 2% Q-o-Q increase, primarily due to increased installation and partnership costs linked to media and VAS revenue performance. On a year-on-year basis, the cost of sales saw a 4% increase, mainly due to higher partnership costs associated with wholesale business, international SMa2P content provider cost and the installation costs, which were in line with the corresponding revenue movements. Personnel costs reduced by 14%, mainly driven by lower bonus and incentives. On a Y-o-Y basis, personnel cost declined by 23%, reflecting the same underlying factors. On the marketing expenses, it declined by 10% Q-o-Q, primarily due to the seasonal impact of higher spend for Ramadan and our brand campaigns in first quarter. Comparing to last year, our marketing spend decreased by 19%, reflecting a shift to a more targeted and cost-effective digital marketing initiatives. G&A expenses reduced by -- quarter-on-quarter and year-on-year by 10% and 13%, respectively, primarily due to lower professional fees and public relation expenses, again, reflecting our efforts on cost control. Depreciation and amortization expenses, up by 3% quarter-on-quarter and year-on-year, respectively, primarily driven by the additional fixed assets from the network rollout. In quarter 2 this year, our other income expense was a IDR 3 billion net expense compared to a IDR 303 billion income in last quarter. This variance was primarily attributable to one-off operational gains recognized in Q1, as highlighted in the previous call. On a year-on-year basis, other operating income increases from IDR 81 billion in 2024 to IDR 300 billion in 2025, again due to one-off prior year tax reversal and gain from a determination of site leases in the first half of the year, in the first quarter mostly. If we now look at CapEx on the left-hand side of the chart, it has gone up by 85% quarter-on-quarter to IDR 4.8 trillion, reflecting additional investments in network quality, expansion of network and GPU infrastructure to support our strategic growth initiatives. Consequently, first half CapEx now represents 57% of our full year guidance, indicating strong execution momentum, in line with our investment road map. Net debt, up from IDR 9.3 trillion to IDR 12.5 billion quarter-on-quarter basis, driven by higher CapEx investment and finance lease payments. As a result, net debt to EBITDA also up by 0.13x as highlighted earlier to 0.49. Still remaining in a very healthy level. That's it for me. Now I'll pass the time over to Vivek.

Thank you so much, Nicky. A very good afternoon to everyone on the call. Let me just walk you through the operational metrics. As far as the trends are concerned, they continue to be healthy and much more stable, despite the seasonal headwinds. What's important to note is that Lebaran this year was in quarter 1, and quarter 2 was actually involved the post Lebaran period. Mobile customers continue to stay flat at 95.4 million. We've seen a very healthy addition in app monthly active users. This number has moved northwards, and we've added around 1.7 million. And this also translated into robust traffic growth. On the ARPU side, there's -- it's ballpark in the same range as it was in the range of circa 39,000 and has been steady. If you were to move to the next chart. This is important. Vikram spoke about it. And this chart actually talks about the market stabilization efforts that got initiated in quarter 1 and have flown through in quarter 2 of 2025. Starting with starter pack. So the entry point of the starter pack has been uplifted to IDR 35,000, and this happened in late quarter 1. Quarter 2 witnessed liquidation of old market stock, and the full impact of this is likely to flow in, in quarter 3 of '25. As the acquisition market got more cleaner and better, the base pricing also saw an uplift, and the entry price of the rebuy plans also moved up by approximately 10%. This was also accompanied with some sharp hyper-personalization efforts that have also powered affirmative pricing, with the removal of doles and discounts that were being extended for base engagement at the time of the hypercompetition in the acquisition market. If we were to move to the next chart. This essentially talks about how at Indosat we've been able to leverage AI for ARPU enhancement and base engagement and the time trended numbers over the past 10 quarters, talk about it in deep detail. The most important call-out here is us bucking the seasonality post Lebaran in FY '25. So if you were to look at previous years, the degree of slump post Lebaran is much less this year. And the ARPU effort, in addition to hyper-personalization powered by AI is also being powered by enhanced high-value focus, especially on the IM3 Platinum side and on the international roaming arena as well. So that's largely the update from my side. Handing it back to Vikram.

Thanks, Vivek. Finally, on the guidance, we have made a change to our full year EBITDA guidance. We calibrated to align with market conditions. We have -- we are expecting EBITDA growth for this year to be in the low single-digit range. This is driven by the challenging market condition, which have lasted longer than we had anticipated. Nevertheless, we do expect to see a stronger second half of the year, which will bring growth back to the industry and for IOH. No change on revenue guidance, which is for revenue to grow better than market. This year, the CapEx, that guidance, which is for IDR 13 trillion in 2025. So with this, we conclude our presentation. Thank you, and let's proceed to Q&A session.

[Operator Instructions] Our first question is going to come from the line of Piyush Choudhary with HSBC.

Yes. A couple of questions. Firstly, if you can talk about the outlook for prepaid ARPU and, in particular, when these changes have been done on removing discounts or freebies. And when did you implement the 10% price up in the entry-level recharge packs? Secondly, on the cost side, Nicky, you briefly mentioned, but what is driving such a decline in the staff cost, despite of increasing number of employees? And how much is this sustainable? Secondly, within the cost of services, we saw rental and services cost was down 8% quarter-on-quarter. Is this -- any one-off? Or is this sustainable?

Okay. So let me start and let me -- Piyush, Vivek, this side, so let me start with your -- with the first question that you posed to us with respect to prepaid ARPU. So prepaid ARPU, directionally,Piyush, as you've seen, is moving in the range of -- range towards 40,000, and we are more than sure-footed that it's going to get there no sooner rather than later. And the steps that have been taken are testimony of the point that I'm making. As far as the removal of discounts and freebies are concerned, so Piyush,, this is something that has been in place throughout the quarter. And this is -- this has been done gradually, and it is something that is still in progress, and there's always room for improvement there. But as far as the structural headline pricing is concerned, the 10% price up on the entry-level plans, which is purely the entry-level plans, was effected in the second fortnight of June. So impact of this is going to fully get recognized starting quarter 3.

On the cost side, Piyush, essentially, the movement in the staff cost is to do with bonus and incentives. So if we do better in the second half, following what we expect to see, we might see the cost go up. On to rental expenses, we do have a bit of a discount given by our provider. So we have captured that in the second quarter. So going forward, we do see the costs to be sustainable, given the reduced cost base.

Got it, Nicky. And Vivek, just to follow up on your response, on the entry-level prices, which were up 10%, how much of your revenue contribution comes from these entry-level packs?

So Piyush, use the entry-level packs contribute approximately 1/3 of our overall revenue. And the entry-level prices that have been rationalized for the monthly packs, while we maintained status quo on the smaller ticket offerings.

So not the entire 1/3 of revenue will be impacted by this change, which you have done.

So Piyush, as far as the structural price correction is concerned, at a headline level, it is 10%, but how much of it translates into real gains is something that will unfold as we get to see that in the balance part of quarter 3 because of the movement of customer to different price plans.

Our next question is going to come from the line of Sachin Mittal with DBS Bank.

Two questions. So firstly, on the guidance that from a greater than 10% to now low single digits, is it all because of the revenue? Or is also a bit of some margin issues from some side of the business? Because, I mean, has there been a material decline in the revenue growth for this year? That's something I want to understand. And how -- why it has changed in 1 quarter so much? Question number one. And question number two, you're talking about 35 million new AI revenue. How much have we -- I mean, do we know how much is our first half AI revenue, if any? And is there a change in margin assumption of the AI revenue or something else, which is also a factor in the EBITDA revision downward?

Sachin, this is Vikram. I think it is mainly coming from B2C, the prolonged market condition because B2C, we were expecting things to pick up from an overall consumption in Q2 much better in our assumption. So that has been prolonged. Last 3 months, we have seen especially lower middle class still struggling, optimizing. So that has been the main driver of the guidance revision on EBITDA. All the other, more or less, we are on track, especially on the new net revenue on AI cloud. I think only 15%, 18% has been realized in first 6 months. Most of them will start flowing from quarter 3, and you will see quarter 4 also. And we will see the full impact of this starting next year for the full year impact. So in terms of guidance, it is mainly because of the prolonged slowness in the market on B2C side.

So got it. So when we're talking of 35 million new unit revenue, which is mainly happening in 3Q and 4Q, and probably it's more in 4Q, so we're talking of definitely maybe IDR 70 million to IDR 100 million kind of AI revenue next year. I mean, just -- I know -- I mean, difficult to put a number, but directionally we're talking of more than doubling of AI revenue, right, next year.

100%.

These are annual long-term contract. So the minimum full year impact for next year will be around IDR 70 million, IDR 75 million positively on revenue. And these are coming with healthy EBITDA margin.

Which is exceeding, I would say, 60% kind of, right, from ballpark, yes.

I think Nicky can give more update on that. But as I said, one, yes, the full year impact will be annualized around IDR 70 million minimum. And as we go along, there will be more contracts getting signed. And on EBITDA, I think Nicky can add to that.

Yes. Sachin, on EBITDA margin is around 60%, as we mentioned, although the different contract services involved will give us varying level of margin. But overall, that's the kind of EBITDA margin we're looking at.

Our next question is going to come from the line of Arthur Pineda with Citi.

Just wanted to ask about the consumption trends into the third quarter. Are customers actually spending upwards to match the price increases? Or does it remain challenging into 3Q? I understand that you raised prices on starter packs and on the top-ups, but are customers actually absorbing this and actually driving up revenues based on the early months?

Arthur, we have seen some positive trends especially starting June, mid-June, and that continued in July. Vivek, you want to add anything?

No. So Vikram, you've captured it well. So as far as the consumption trends are concerned, we are seeing customers moving to the higher plans. And like I'd shared with Piyush, whenever there is a headline price correction, customers, there is a set that moves up and there is a set that right adjust the spend to the lower ticket prices, which are essentially the sachet plans. So that's there. And the consumption has been steady. As far the early trends are concerned, this is getting absorbed really well in the consumer base. And we can see it from -- and it's also evidenced in the steady consumer base numbers and also the movement in the app MAUs.