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

Ladies and gentlemen, thank you for standing by, and welcome to PT Indosat Tbk Full Year 2019 Results Conference Call. [Operator Instructions] I must advise you that this conference is being recorded. I would now like to hand the conference over to your first speaker today, Ms. Christy Kusumaatmaja. Thank you. Please go ahead.

Thank you, operator. Hello. Good afternoon, everybody. Thank you for dialing in to Indosat Tbk Full Year 2019 Earnings Call. Before we start, I will provide a quick safe harbor disclaimer to note that the company, PT Indosat Tbk, cautions investors that certain statements contained in this call are management's intention, hope, beliefs, expectation or prediction for the future and are forward-looking statements. Management wishes to caution the participants that forward-looking statements are not historical facts and are only estimates or predictions. Actual results may differ materially from those projected as a result of risks and uncertainties. Furthermore, the company undertakes no obligation to update publicly any forward-looking statements, whether as a result of future investment or events, new informations or otherwise. Presentation of this earnings call has been uploaded to the website, www.indosatooredoo.com under the Investor Relations tab. Our live presentation conference call today is recorded, and a replay of this call will be available on our website following the call. On today's earnings call, we have Mr. Eyas Assaf, our CFO; Mr. Vikram Sinha, our COO; and Mr. Irsyad Sahroni, our CHRO. Now without -- and, excuse me, and Mr. Arief Musta'in, our Director, Chief of Strategy and Regulatory. So now without further ado, I will hand over to our COO, Mr. Vikram, to deliver the opening remarks. Please, Mr. Vikram.

[Foreign Language] Good afternoon, everyone, and thank you for participating in our full year 2019 earnings call. I am Vikram Sinha, Chief Operating Officer of Indosat Ooredoo. I will commence this earnings call with key performance highlight before handing it over to our CFO for financial presentation. 2019 marked the beginning of Indosat turnaround. 2019 results are a testimony that Indosat is moving in the right direction as we have outperformed industry in 2019. We have delivered a strong 12.9% year-on-year top line growth, supported by cellular revenue growth of 14.7% year-on-year. Our focus on operational efficiencies has supported EBITDA, reaching IDR 9.8 trillion, a healthy growth of 51.6% increase year-on-year, over 3x the growth rate compared to top line growth. During 2019, we took significant strides forward in the implementation of our 3-year strategy focused on increased investment in network rollout, continuing to offer innovative, transparent product that meet the changing need of our customers and further cost discipline. We are continuously investing to provide a superior network experience for our customers. As we speak, we cover over 90% of population with a strong 4G network. On all available network performance benchmark, Indosat has registered highest improvements among all operators in 2019. With addition of over 1.2 million subscribers in 2019, Indosat now is the second highest operator in Indonesia in terms of subscriber base. To further deliver the best service to our customers, we have redesigned our product by focusing on convenience, transparent and relevant offering, moving out of unlimited portfolio in quarter 4 2019 for acquisition. So the right intent to correct pricing equilibrium in Indonesia mobile market. Looking ahead, we continue to pursue our strategy to provide better service to our customers and support the Indonesian government in providing the best infrastructure for Indonesia digital economy. In fourth quarter 2019, the company completed the sale and leaseback tower transaction with Mitratel and Protelindo for 3,100 Indosat telecommunication tower. The total proceeds from the transaction is IDR 6.4 trillion, which are benefiting the value appreciated for all parties involved. Earlier this month, we announced a reorganization, aiming to be able to make faster delivering and better serve our customers. We are lining up with industry best practice by transitioning network operation to a managed services model. We are rightsizing the organization, adding the forces to increase competitiveness and service deliveries as we are streamlining resources in other business area for optimization. This action impacted 677 employees, out of which more than 90% already accepted the reorganization, and we are well thankful for their understanding and support for company sustainability and growth strategy. That concludes my remarks. And for further detail on the quarter, our CFO, Mr. Eyas Assaf, will take you through the financials. Please, Pak Eyas.

Thanks, Pak Vikram. This is Eyas Assaf, the CFO for Indosat Ooredoo. Good afternoon, everybody. Let's move to Slide #8. The financial highlights for 2019 versus 2018. As Pak Vikram explained, the operating revenue show an increase, almost 13% compared to 2018 from IDR 23 trillion to IDR 26.1 trillion. EBITDA margin also increased by 51% from IDR 6.5 trillion in 2018 to almost IDR 9.8 trillion in 2019. EBITDA margin also improved by almost 10% from 28% in 2018 to 37.7% in 2019. The profit attributable to owners increased almost by IDR 4 trillion from total losses in '18, IDR 2.4 trillion losses to profit of almost IDR 1.6 trillion. Please let's move to Slide #9. The financial highlights, fourth quarter versus third quarter. Fourth quarter shows revenue growth of almost 11% compared to the third quarter from IDR 6.5 trillion in third quarter to IDR 7.264 trillion in fourth quarter. EBITDA Q-on-Q growth is diluted due to one-off reversal cost into the quarter. On a normalized basis, it's almost stable. We need to remind that in Q3, we reversed one expenses, almost IDR 200 billion. Therefore, we see that EBITDA into Q3 are higher than in Q4. The EBITDA margin -- due to the same reason, the EBITDA went down by 6%. But the profit attributable to owners increased almost IDR 1.8 trillion from IDR 47 billion to IDR 1.8 trillion. Please, Slide #10. We are going to cover the segment revenue overview. Also, as highlighted by Pak Vikram, the cellular revenue grew by almost 15% year-on-year, driving the full year 2019 total revenue growth of 12.9%, almost 13%. If we say, full year, cellular, fixed data and fixed voice, the cellular increased by 14.7% to IDR 20 trillion, IDR 20.6 trillion from IDR 18 trillion in 2018. The fixed data grew to IDR 4.781 trillion from a level of IDR 4.3 trillion. And fixed voice decreased to IDR 662 billion from IDR 729 billion, almost by 9%. Quarter-over-quarter, third quarter to fourth quarter, cellular grew by 9% from IDR 5.1 trillion to IDR 5.5 trillion. And fixed data has increased by 21% from IDR 1.2 trillion to IDR 1.5 trillion. For fixed voice decreased to IDR 142 billion from IDR 179 billion. Moving to Slide #11, cellular customer base. The customer base in 2019 grew by 1.2 million customers from 58.1 million in 2018 to 59.3 million. Q3 to Q4 is increasing by 0.5 million subscribers. Slide #12, ARPU. ARPU has increased by 15% year-on-year and increased by 2.5% quarter-on-quarter. ARPU uplift as a result of moving out of unlimited portfolio in Q4 2019. If we go to -- compare it to Q4 to Q3, increased by 2.5% from 27,600 to 28,300. Data usage grew by 71% year-on-year and 11.3% quarter-on-quarter. Slide #13, EBITDA and net profit. EBITDA quarter-on-quarter growth was diluted due to one-off personnel cost, as explained before. On a normalized basis, it's stable. Net profit increased by IDR 4 trillion versus previous year. Slide 14, the balance sheet. Stronger balance sheet resulted in improved financial ratios. And the total net debt decreased from IDR 20 trillion level in 2018 to IDR 15.7 trillion in 2019, which also improved the net debt to EBITDA. It used to be at level 3.14 end of 2018, reduced to 1.6 in 2019. Slide #15, CapEx and CapEx versus revenue. The total reported CapEx in Q4 2019, CapEx spend is IDR 3.6 trillion comparing to IDR 2.3 trillion in Q3. Full year CapEx IDR 10.1 trillion compared to IDR 9.2 trillion in 2018. IDR 10 trillion is excluding the right-of-use assets under the new accounting standard, 73. Slide #16, network development. The total BTS by end of the year reached 124,000 comparing to 74,000, 75,000 almost last year. The breakdown of these ones: 2G, 27,700; 4G and 3G, almost 48,000. Last slide, Slide 17, the guidance. Last year or -- we guided for 2019, we expected consolidated revenue growth to be in line with market, and the actual result was almost 12.9% or 13%. And EBITDA margin, we expected low 30s. The EBITDA without IFRS 16 impact or 73 impact is 34%. The actual is 37.7%. CapEx spend, IDR 10 trillion, we almost spent the whole amount. The 2020 guidance, we're expecting to grow in line with market, EBITDA margin to be in high of 30s, 30%. CapEx spend, we expect to spend between IDR 8.5 trillion and IDR 9.5 trillion. This is the summary of the financial highlights. Christy?

Operator, we can open for Q&A.

[Operator Instructions] Your first question comes from the line of Colin McCallum of Crédit Suisse.

Congrats on strong numbers. I have 2 questions related to price competition. You mentioned in your remarks that unlimited data plans were removed for the new subscribers in the fourth quarter and that, that helped your revenue figures. I think XL management had said on their conference call a couple of weeks ago that Indosat had reinstated or started promoting again the unlimited plans on the 4th of February this year. First question is, is that true or did I maybe mishear what they said? That's the first question. Second question is, if you have put unlimited data plans back into the market in February, would we then expect a kind of reversal of the revenue growth improvement that you enjoyed in the fourth quarter? Those are my 2 questions.

This is Vikram Sinha, the Chief Operating Officer. Let me take both your questions. Let me start with the first question. Just to give more clarity and clear context on unlimited, in quarter 4, we stopped, in fact, from 1st October, we stopped unlimited on our acquisition. And very clearly, it is evident from our results that we see it working, and we introduced Freedom Internet. What we did from 1st Feb that we stopped unlimited on our base also. So my friend from XL, I think they would have not able to pick up very clearly. But I'm here to clarify that in fourth quarter, we stopped unlimited in our acquisition product. But from 1st of February, not from 4th, we stopped it even in our existing base. So what we have done is to make sure that there is no confusion in the market. Would the new customer and existing base get a more relevant, simple and transparent product? Specifically, how it worked earlier, the unlimited used to have 5112 (sic) [ 512 ] and then 128 Kbps kind of a free usage policy. In that, people were still able to use YouTube, but not with a very great experience. But now, both for acquisition and for base, we have brought it down to 64 Kbps. That is in line with our Freedom Internet strategy where we help customer save bill shock, which is Pulsa Safe because that is also -- we see significant reduction on customer complaint. So this is how we are completely moving towards Freedom Internet from unlimited.

That's very helpful. So that would mean that in terms of the second question, it would be the reverse of what I said. In other words, you've actually priced up a little bit more in terms of your average base in favor. Is that correct?

Yes. Completely aligned. We see good momentum of that. And in a way, we have taken a price up, number one. Number two, customers want more transparent, more simple product. So we are trying to reduce complexity as much as possible and make sure that there are no terms and conditions. There are no complexity. And we don't expect any reversal. In fact, we expect the industry to move in the right direction.

Your next question comes from the line of Choong Chen Foong of CIMB.

Three questions from me. Firstly, a question on competition again. Could you give us your view as to how the competition in the market is trending? On the ground, do you see aggression from any players in any particular segment, especially from the smallest player and as well as maybe the market leader. Have you seen them being aggressive in perhaps the lower-end [ sachet ] products? Secondly, I wanted to ask on the CapEx guidance for this year, which you have now guided for it to be lower. Given that your balance sheet has strengthened, especially after the tower sale, why should we be dropping the CapEx now? Why don't we keep the CapEx to expand more actively into ex Java this year? That's my second question. And third question, I wanted to ask on the staff layoffs. Do you have an estimated one-off costs that you'll be incurring as well as the annual savings on that exercise? Yes, those are my 3 questions.

Yes, take the first.

This is Vikram. So let me take your first question. When it comes to market, we see -- specifically the smaller one and specifically Smartfren going very aggressive on unlimited, and our belief is and with our experience that it is not sustainable. So when it comes to smaller, specifically Smartfren, we see -- but we are very clear with our learning that we don't need to react to that, number one. Number two, yes, the -- specifically Telkomsel, when it comes to [ sachet ] pack and all, I think the voice revenue, the legacy revenue specifically is dropping down very fast. And we see ourselves on a sweet spot because already we have taken that hit, and the way we are looking at is to make sure that industry is able to move towards a more healthy pricing and focus more on customer experience. So this is how we look at it in terms of market and specifically our learning of moving towards more simple and transparent product is helping us, and we want to build on that. Coming on to your second question. I don't think so we have dropped down on the CapEx. We had committed 3-year USD 2 billion, and we are in line. The good thing is we have been able to negotiate good run prices, and that will help us to roll out at a much faster rate and it will also help us to make sure that our CapEx to revenue ratios, all these things, we are able to improve.

This is Eyas Assaf. Regarding the third question, the cost of the layoff. We are expecting the total impact for the full year in 2020 something around between IDR 160 billion to IDR 200 billion. More details, we'll give in Q1 results.

Okay. And can I just follow up on that? In terms of your ex Java population coverage at the end of last year, what was it? And where do you think it will be at the end of this year? And also in terms of the staff layoff, what would be the cost savings? If you can sort of provide some color there.

So when it comes to Java, ex Java, we have come up with a very clear strategy of value-based investment, and we are looking at cluster. So we have divided the whole country into cluster, and we are focusing on making sure that this is our continuous coverage and this is where we see the value. We invest and we make sure that we roll it out. We are not looking at specifically Java, ex Java, but what I want to assure you is, in your definition of ex Java also, we are putting significant focus on pocket where we feel that we can build on our brand and we can build on our community.

Regarding the second question about the cost savings, we'll provide more details in Q1 results, as I said before.

Your next question comes from the line of Kresna Hutabarat from Mandiri.

Congrats, again, on your strong profit turnaround in full year '19. My first question is related to your tower sale. So if you look at Note 21 of your financial statement, there is a reduction from the latest tower sale proceeds of about IDR 700 million for provision for claim warranty. Would you mind sharing with us, I mean, or give us some color what this provision is for? And what is the condition for this provision to be reversed in the future? My second question is on network utilization. So after the major CapEx spending in the past 2 years, you've really seen very meaningful improvements in your downward speed. But would you mind giving some color on -- in the [ subscriber ] network utilization rate today?

This is Eyas. I'll cover the first question. This is -- the guarantee of the 700, we give some warranty for both buyers, Protelindo and Mitratel, and it's a 6-month validity. We are expecting to expire one in end of May and the other one end of June. So we will see the results in the second quarter. And it's warranty against the quality of the site. If they found any issues, we need either replace it or refund. The second question, I'll leave it to Pak Vikram.

On the second question, if you can repeat your question on the network utilization. What exactly you wanted to know?

Yes. So just basically understanding just how much capacity that you've built to get some color on how well your network is currently being utilized, especially after the ramp-up in your 4G LTE capacity.

Sure. So we break this into 2 parts. One is in terms of making sure that we don't have any congested site. I'm happy to share with you that we have been able to significantly reduce congestion in our network, and that is very much evident in terms of some of the external benchmarks from a level of #4 last year. We have come to #2. So that is evident in our download speed if you look at any of the third-party report. The other aspect of that is low utilized side. We have started a program from quarter 4 and -- which is giving us very good results in terms of making sure that we make every site profitable. So that is helping us make sure that we also significantly review that low utilized site. So on overall, we are very well placed in terms of the capacity, keeping in mind the product strategy we have and also moving out of unlimited has helped us manage capacity much better now.

Your next question comes from the line of Arthur Pineda from Citi.

Just one question for me, please. It's actually connected. How do you see industry growth for 2020? And why targets grow just at market if you're actually expanding network footprint with a more aggressive CapEx over the last few years? Shouldn't you be growing faster?

This is a very good question. First of all, we still see lots of potential and opportunity in the market, and then we will continue to make the investments in terms of network and then ensuring that we build on the momentum. These are early days so we want to be a little conservative. We want the industry also to move in the right direction in terms of the pricing strategy. We believe that the focus has to sit on customer experience. But overall, we believe that we can build on this momentum.

And what range would this growth be for 2020?

And which we see for industry is between 6% to 9%.

[Operator Instructions] Your next question comes from the line of Ranjan Sharma of JPMorgan.