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

Ladies and gentlemen, thank you for standing by, and welcome to PT Indosat Tbk First Half 2020 Results Conference Call. [Operator Instructions] Please be advised that today's 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.

Hello. Hi, everyone. Thank you for dialing in to our second quarter of 2020 earnings call. Before we start, as usual, I will provide a quick safe harbor disclaimer to note that the company, PT Indosat Tbk, caution investors that certain statements contained in this call are management intention, hope, beliefs, expectation or prediction for the future and are forward-looking statements. We wish to caution the participant 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 investments or events, new information or otherwise. Presentation of this earnings call has been uploaded to the website, www.indosatooredo.com, under the Investor Relations tab. I would like to mention that the conference call today is recorded, and a replay of this call will be available soon after the call is completed. On today's earnings call, we have Mr. Ahmad Al Neama, our CEO; we have Mr. Eyas Assaf, our CFO; Mr. Vikram Sinha, our COO; and Mr. Arief Musta'in, our independent Director, on the line. So without further ado, I will hand over to our CEO, Mr. Ahmad, to deliver the opening remarks.

[Foreign Language] Good afternoon, everyone. Thank you for tuning into our second quarter 2020 earnings call. I am Ahmad Al Neama, Chief Executive Officer of Indosat Ooredoo. Allow me to start this earnings call with a few remarks, before handing it over to our COO and CFO, for a more detailed presentation. Lately, the global situation has been challenging, and Indonesia is also impacted. Indosat is constantly learning from the current situation, and putting relevant initiatives in place so that we come out as winners from this situation. We have been accelerating our digital initiatives and have prioritized our efforts in a focused manner to ensure that we continue our turnaround growth momentum. We were the first to implement working from home. And despite some relaxation coming from the government, we, at Indosat, have decided to continue working-from-home practice for the time being to ensure the health and safety of our employees. I am extremely pleased to say that we have adapted extremely well to digital way of working and continue to see high productivity from our employees. Quarter 2 is another stellar quarter from Indosat. And especially in the mindset of the current situation, I am very pleased with our performance. It is a testimony of our fact that our initiatives put in place with regards to working from home and business continuity are delivering results. We are humbled by the support given by our loyal subscriber towards the company effort and providing the best network experience during this COVID-19 pandemic. I'm glad to say we have managed to maintain the growth momentum for Indosat Ooredoo by delivering a solid performance for the first half 2020. Total revenue increased by 9.4% to IDR 13.5 trillion year-on-year. Cellular revenue increased by 11.8% to IDR 11.1 trillion year-on-year. And EBITDA reached IDR 5.4 trillion, a 22.5% improvement year-on-year. EBITDA margin recorded at 40.4%, improved by 4.3 points from last year. Cellular subscriber number stands at 57.2 million by end of June 2020, 0.9% year-on-year growth. Average revenue per user, ARPU, increased to IDR 31,400 from previously IDR 27,900 in first half 2019 and data traffic growth by 61% year-on-year. Indosat Ooredoo will continue our support to government initiatives and community welfare. We will also ensure our network resilience, uptime and superior customer experience so that our communities will be able to stay connected during this challenging situation. All in all, that concludes my remarks. And for further detail on the quarter, I will pass to our CFO, Mr. Eyas Assaf, for the financial walk-through.

Thanks, Ahmad. [Foreign Language] This is Eyas Assaf, and I'll take you through the financial highlights. I'm on Slide #7. As Ahmad highlighted, the operating revenue has increased by 9% from last year to this year, and stood up at IDR 13.4 trillion year-on-year. And quarter-on-quarter, the revenue increased by 6%, from IDR 6.5 trillion to IDR 6.9 trillion. At EBITDA side, we saw growth of 22.5% year-on-year, and it reached IDR 5.4 trillion in first half of 2020. Quarter-on-quarter, EBITDA grew also by 28%, and it reached IDR 3.05 trillion. EBITDA margin shows increase from 36.1% last year to 40.4% this year. Quarter-on-quarter also increased by 7.5 points from 36.5% to 44%. Loss attributable to owners stood largely from last year to this year from IDR 332 billion to IDR 341 billion. Quarter-over-quarter, we saw a huge improvement from IDR 606 billion losses to IDR 265 billion profit. If we move please to Slide #8. The details of the revenue showed in this slide shows that cellular revenue increased by almost 12% from IDR 9.9 trillion to IDR 11.1 trillion year-on-year. Quarter-on-quarter showed 7.4% increase from IDR 5.372 trillion to IDR 5.7 trillion. Fixed data grew also by 2.4% to reach IDR 2.036 trillion in the first half 2020. Quarter-on-quarter, we saw also almost the same growth of 2%, and it reached IDR 1.029 trillion. Fixed voice decreased year-on-year almost by 20%, and it reached IDR 274 billion in first half 2020. And quarter-over-quarter decreased by only 9%, and it reached IDR 130 billion. Please, Slide #9, OpEx. While we saw the revenue grew by 9%, the OpEx increased only by 2% from last year's level of IDR 7.8 trillion to IDR 8 trillion this year. Quarter-on-quarter, we saw a decrease by 6%, due to the onetime entry in quarter 1, which is IDR 314 billion, related to the restructure. If you see the total expenses, most of it is in the same level, but we'll highlight the personnel expenses year-on-year to grow by 43% because of 2 reasons: onetime adjustments in 2020 negative additional expense of IDR 314 billion and onetime reserves and positive in '19, which is almost IDR 140 billion. The other major change year-on-year is G&A. And 2 reasons behind it is the saving here is consultancy in 2020 is lower than first half of the year, and also control or improving the budget provision. Quarter-on-quarter, we can say the major difference is still the personnel expenses. In the quarter 1, as we highlighted, we booked onetime adjusted interest restructuring IDR 314 billion. Depreciation expenses year-on-year grew by 5% due to the additional capitalization -- additional investments in capital. The same -- the reason for quarter-on-quarter we saw increase by 1.1% due to the same thing. So other operating income/expenses, last year was IDR 1 trillion positive compared to IDR 619 billion. Last year, there was 2 major adjustments, one is related to the re-farming agreement with telecom and the other one is reversal of a provision in income tax. And here, this year, the major positive item is coming from our reversal of the loan provision. This is what's explained between '19 and '20. Please, let's move to Slide 10. Slide 10 highlighted the net debt. Between first half last year and this half this year, we saw huge improvement from net debt IDR 20.8 trillion last year to IDR 14.6 trillion, and this reduced the net debt-to-EBITDA from 2.81 to 1.35. This is year-on-year. Quarter-on-quarter, the net debt reduced -- also decreased from IDR 15.3 trillion to IDR 14.6 trillion. Same applies for net debt-to-EBITDA, that's reduced from 1.52 to 1.35. Please, let's move to Slide #11, CapEx and CapEx revenue. The CapEx last year was -- for the first half was IDR 4.2 trillion. This year, it went down to IDR 3.2 trillion. And quarter-on-quarter, we see an increase from IDR 600 billion in the quarter-to-quarter to IDR 2.628 trillion, and we're still committing to meet the CapEx guidance, which was announced at the beginning of the year between IDR 8.5 trillion to IDR 9.5 trillion. CapEx, as a percentage of revenue went down from 34% last year to 24%. Quarter-on-quarter, it increased from 9.7% to 37.9%. This is summary of the financial highlights. Now we'll move to Pak Vikram, our COO, to take you through the operational highlights.

Thanks, Eyas. Good afternoon, ladies and gentlemen. This is Vikram. Just to build on what Ahmad, our CEO, said, and also Pak Eyas highlighted, this has been yet another strong quarter by Indosat, especially in the midst of this current situation. We have seen a good growth in subscriber, coupled with significant ARPU growth. Network enhancement and distribution expansion, complemented by our focus on offering simple, relevant and value for money offering, have been the key driver. Let me take this opportunity to highlight and share with all of you that, in last quarter, our Ramadan campaign was judged as the YouTube APAC Ads Leaderboard. The key message, which I want to highlight here is, while this campaign has more than 100 million organic viewers, but all these local artists, which you see, they all made this video staying at their home, and we facilitated it and which has become a tune and lifeline for a lot of Indonesians. This shows our testimony that how, as a team, we are adapting and how we are working with local talent and artists. Let me move to some of the key usage KPIs. Certainly, I want to highlight our blended ARPU. There has been quarter-on-quarter plus 12%. The good news is this has been a quarter where both subscriber and ARPU have grown. And if you look at data usage, all these KPIs are giving us confidence that we are building everything in a very sustainable manner. Talking about network expansion. In spite of all the rollout challenge and everything, we were able to make sure that our focus on making sure a very strong indoor coverage experience and managing the capacity, which during this COVID time, had moved to residential, all these things were very nicely handled, and we were able to execute our plan. So with this, I conclude my highlights on the operational side.

Operator, I think we can commence the Q&A.

[Operator Instructions] We have a first question from the line of Arthur Pineda from Citigroup.

Just 2 questions. Firstly, on mobile competition. So the market seems to be quite concerned with the recent launches of unlimited plans by your competitor, Telkomsel. Is this something you find as concerning and requiring action on your part? Or is this still pretty much in line as per before? Second question I had is more of a housekeeping one. If you just look at the labor cost component, would 2Q levels be representative of normalized labor expenses going forward? Are there any one-offs being booked there as well? And maybe if you can just provide any color on how things have trended into July, maybe? Our consumption trends remaining high going into this quarter?

Yes. This is Vikram. Let me take your first question. In terms of driving...

Sorry. Vikram, do you mind speaking into the mic? It's quite soft.

Can you hear me now?

A little better. Yes.

Okay. So let me take your first question. In terms of driving what we have been seeing, we saw our competition getting into unlimited in last few weeks. What we very strongly believe at Indosat with our experience that unlimited is not sustainable, and also it is not transparent to customers. So we have been building on our Freedom approach, where I highlighted about simple and translating products, and we will continue to focus on that. With our learning with unlimited, we very strongly believe that this is neither good for the industry, nor good for customers also. So we will keep focusing on our strategy. And as you see in our quarter 2 results, it is giving us good -- customers are liking it. And in terms of data usage, customers -- everything is in track with our expectation. So we'll focus on that. And we hope that industry will also fall in place because the need in the COVID situation is more around giving more -- better customer experience. In today's world, home is becoming office. And more and more customers are expecting a more stable and more reliable customer experience. So our focus will be on that, and I think we'll move in that direction.

So based on this, you don't seemed to think that there is room for escalation? It's basically status quo.

Sorry, if you can repeat your question?

Sorry. Based on the response, it seems like you're sticking to your plans. There's no need to really respond in any big way on what's happening in the market. Is that fair a comment?

Yes. Correct. We will focus -- 100%, you are absolutely right. We will focus on our plans, and then we'll continue to focus on customer experience. And we'll continue focusing on making sure that simple and relevant offering under Freedom umbrella continues. So we will not be reacting to unlimited.

This is Eyas. Regarding the second question, about the labor cost, we are expecting that Q3 still might go even lower than Q2 because we are -- as part of the plan, we released the first batch 1st of April, and we released the second batch 1st of July. So we are expecting lower, but it will be not too different to Q2, but significantly lower than Q2. Regarding the July, I think it's still too early results for the quarter and we'll discuss it [Foreign Language] in third quarter analysis as well.

We have our next question from the line of Sebastian Tobing from Trimegah.

First of all, congratulations on the great result. Now on a question, if you could provide some granularity as to whether on the revenue -- on the subscriber's growth, so you had like almost 2 million subscribers growth in the Q2. Whether that growth is driven more by outside Java or in Java? And also on your CapEx side as well, I saw that your CapEx increased in the 2Q, right, versus 1Q. And -- but the number of BTS didn't go up much. So I assume that's for backbone. And if you could provide some granularity on that as well, which part of backbone? Or whether it's outside Java or in Java? And I think second is that if you could give some color as to how is the revenue trends throughout the 2Q? Because in April, we were -- in Jakarta, especially, we were in sort of regional kind of lockdown. But obviously, in June, some people have gone back to work. So how is the revenue progression when people during that regional lockdown and post regional knockdown? Are you seeing changes in trends, that sort of thing? Any color would be much appreciated.

Yes. This is Vikram. Let me start with subscribers. I will again clarify the way we look at Indonesia, we don't look at Java as Java. We have divided the whole country into 260 micro clusters. I mean what we can say is that we see healthy growth coming from across. And there have been a few pockets which have been relatively higher than others. But overall, we see a good momentum on subscriber. So this is what it is. In terms of the color on the revenue spending, we saw a very good build up in quarter 2 month-on-month. And then in the month of June also during the Lebaran month, it was a unique month where people have not traveled and they have stayed more where they are. I think our focus on improving our indoor coverage experience have been able to help us make sure that we are leading in terms of our revenue in a more sustainable manner, and then we see a good trajectory. So overall, very positive momentum in terms of revenue coming from across the country. Yes, there are some pockets, especially Jabodetabek and all, where we saw a better trend compared to others a little bit. But overall, if you ask me, a very sustainable buildup on revenue. You also spoke about CapEx. On CapEx, I think, last analyst call, I remember there was some concern on our ability to execute the rollout plan during COVID kind of a situation. I think we have been able to execute that, and that is reflecting in our quarter 2, especially 4G BTS and with coverage improvement. So -- and we have done in a very balanced manner, both the between transport and brand. So it is also coming up very well.

We have our next question from the line of Kresna from Mandiri.

Congrats on the strong turnaround in this quarter. I have 2 questions. My first question on the BTS count. So how should we view the quarter-on-quarter decline in your BTS numbers. Especially regarding your recent 900 gigahertz spend reform, how has that helped with your network size requirement going forward? That's my first question. My second question was on subsidiary stake sale, on the subsidiary called APE. I understand that from financial statements that the asset has a carrying value of around IDR 1 trillion. In the event of final stake sale, would this IDR 1 trillion be the amount of cash that you'd be able to collect? That's my second question. And my last question is more long term. I think in previous meetings with you guys, management had expressed that you have the intention to return to net profitability by 2023. But given the strong trend witnessed today and potentially the restructuring that Indosat could engage in, could Indosat bring forward that target to 2021 or 2022? Any color on that would be very helpful.

Okay. I'll answer number two and three, and I'll give the question regarding number one for Pak Vikram. For the subsidiary stake sales, yes, the book value is IDR 1 trillion, where the cash collected is still too early. The deal is not closed. So we'll ensure that we went public once the deal is closed. So now it's too early to talk about any amount. Regarding the profitability, I don't think -- I'll just recall, we didn't say any commitment about profitability in the next 2 years or 3 years. As you know, this is what we give usually the guideline CapEx, revenue growth and EBITDA. Sorry. My voice was clear?

Sorry. It was a bit soft in the last 5 seconds. Could you mind repeating the last 5 seconds or 5, 7 seconds of your statement? It was a bit softer towards the end, sorry.

For number two, for the sale or for the profitable issue? I'll repeat the summary...

For the profitable...