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

Ladies and gentlemen, thank you for standing by. Welcome to the PT Indosat Tbk 9 Months 2020 Results Conference Call. [Operator Instructions] I must advise, today's conference is being recorded on Tuesday, November 3, 2020. I would now like to hand the conference over to your first speaker for today, Ms. Christy Kusumaatmaja, Head of Investor Communications, Indosat. Please go ahead, ma'am.

Thank you, operator. Hi, everyone. Thank you for dialing in to our third 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 investment or events, new information or otherwise. Presentation of this earning call has been uploaded to the website, www.indosatooredoo.com, under the Investor Relations tab. As has been mentioned earlier, this call is recorded, and a replay of this call will be available soon after the call is completed. On today's earning 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 directors on the line. So without further ado, I will hand over to our CEO, Mr. Ahmad, to deliver the opening remarks. Please, Mr. Ahmad.

[Foreign Language] Good afternoon, everyone. Thank you for joining our Third Quarter 2020 Earnings Call. I am Ahmad Al-Neama, CEO 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. Quarter 3 2020 is yet another positive quarter for Indosat. I am extremely happy to share that we continue to progress well on our turnaround plan despite all the competitive end market challenges. For the first 9 months of 2020, our total revenue increased by 9.2% year-on-year to IDR 20.6 trillion. Cellular revenue increased by 12.9% year-on-year and reached to IDR 17 trillion. And EBITDA reached IDR 8.5 trillion, a remarkable 17% improvement year-on-year. EBITDA margin is recorded at 41.1% and grew by 2.7 points from last year. Indosat crossed 60 million cellular subscribers and saw an ARPU increase of 14% year-on-year, reaching IDR 31,700, a testimony of our continuous improving network experience and simple and value for money customer offerings. 2020 has been a challenging year for all of us, but it has also been a year of great learnings. And building on those, Indosat has launched Empower, a fully integrated digital experience for our customers. This is yet another step in our journey towards simplification and digitalization. Indosat Ooredoo will continue our support to government initiatives and community welfare. We are continuously working to provide a better network experience and network uptime that so our communities will be able to stay connected during this challenging situation. We are confident that we will continue a positive momentum in the coming months as well. That concludes my remarks. And for further details on the quarter, I will pass to our CFO, Mr. Eyas Assaf, for the financial work group.

Thanks, Pak Ahmad. [Foreign Language] Good afternoon. I'll take you through the financial slide, on Slide #11. As Pak Ahmad highlighted, our operating revenue year-to-date increased by 9% compared to last year and reached IDR 20.592 trillion. Quarter 3 operating revenue grew by 3.1% compared to second quarter and reached IDR 7.140 trillion. EBITDA increased by 17% comparing to last year and reached IDR 8.466 trillion. Q3 revenue, almost flat compared to the second quarter and reached IDR 3.036 trillion. EBITDA margin improved almost by 3 points compared to last year and reached 41%. Quarter-on-quarter, it's at least 42.5% comparing to 44%. The loss attributable to the owners year-on-year reached IDR 458 billion compared to IDR 285 billion last year. Quarter-on-quarter, it reached a loss of IDR 116 billion comparing to IDR 265 billion profit in the second quarter. If we move to Slide #12, the segment revenue. The cellular revenue reached IDR 17.030 trillion comparing to last year, IDR 15.085 trillion, which is almost 13% of growth year-on-year. Q3 revenue -- cellular revenue reached IDR 5.889 trillion, which is 2% growth comparing to second quarter. Fixed data reached IDR 3.166 trillion, which is 2.5% less than last year numbers. Quarter-on-quarter, fixed data grew by almost 10%, reached IDR 1.130 trillion comparing to the second quarter. Fixed voice declined by 24% and year-on-year, which is IDR 396 billion compared to IDR 520 billion. Quarter-on-quarter, decreased by 7% and reached IDR 121 billion. If we move to Slide 13. The total OpEx for 2020 is IDR 12.126 trillion, which is 4.4% increase comparing to last year numbers. Quarter 3 OpEx is IDR 4.104 trillion, which is 6% -- or 5.8% compared to the second quarter. The total OpEx this year reached IDR 18.836 trillion comparing to last year, IDR 17.3 trillion. If we go to the Slide #14. The improvement in the operations and in data helped us to improve -- to strengthen our position in the balance sheet, which shows that the net debt has been reduced from IDR 23 trillion last year to IDR 13.123 trillion. This improved us to improve the net debt-to-EBITDA from 2.7x to 1.1 year-on-year. Quarter-to-quarter, the net debt reduced also IDR 13 trillion compared to IDR 14.6 trillion last quarter, and net debt-to-EBITDA reduced from 1.35 to 1.18. CapEx and CapEx over revenue. As we announced in our guidelines, our guidelines was between IDR 8.5 trillion to IDR 9.5 trillion for the full year. As of today, we spent almost IDR 60 trillion, which is an alignment with our guidelines and shows a 9% reduction comparing to last year. Quarter-over-quarter, almost flat, from 2.6% last year -- last quarter to the same number, small increase, 2%. CapEx over income, it went down to 28.9% from last year's percentage, 34.7%. Quarter-over-quarter is almost flat. This concludes my financial presentation. I'll pass now to our COO, Pak Vikram, who will take us through the operational highlights.

Thanks, Pak Eyas. Good afternoon, ladies and gentlemen. I am Vikram, Chief Operating Officer. Happy to say that Indosat posted yet another positive quarter. Especially amidst all the challenges around current competitive and economic challenges, we have managed to grow both our subscriber as well as ARPU. Ladies and gentlemen, this is a testimony of our effort on network improvement and relevant consumer offerings. So if you go to key usage KPI slide, as I mentioned now, Indosat will continue to offer customized consumer offering and keep leveraging analytics-driven customer value management, which we have been able to set up very nicely. And that is helping us when you look at blended ARPU, when you look at data usage, when you look at subscriber, all these metrics are moving in the right direction. If you look at our network excellence slide, I think network experience improvement with our focus on distribution has been the key growth driver in 2020. Some of these third-party reports clearly indicate that we are moving in the right direction. When you move to network expansion slide, we have doubled our 4G BTS in last 12 months. We have taken a conscious reason to reallocate resources from 3G to 4G. So for the 4G data demand, currently, over 90% of our total data traffic is on 4G. If you look at digital, I think this is also a testimony and another milestone for Indosat, which highlights our focus on digitalization. And we are very confident of taking some of these things to next level, especially our IM3 app rating, which is one of the best in Indonesia. With this, I conclude my operational highlights. Thank you.

Thank you, Pak Vikram, Eyas, Ahmad. Operator, I think we will -- we are ready to continue to Q&A session. Thank you.

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

Just 2 questions, please. Are there any updates on the planned spectrum auction into the fourth quarter? That would be appreciated. Second question is with M&A. Your competitors' major shareholder had expressed openness and intent on M&A, Indonesia. Is this something Indosat Ooredoo would consider? Or is the priority now really sweating the assets, given you've been investing heavily?

Thank you, Arthur, for the questions. Pak Vikram will take this question.

Yes, this is Vikram. On your first question, on spectrum on 2.3GHz, we are still waiting for the clarity from the government on that. We'll wait and watch in terms of what the direction is. On your second question, as management, we are very focused on sweating our asset, and we are very focused on making sure that Europe, as management, we work on both in terms of growth and customer experience. So the other part of M&A is more of a shareholder reason, which we generally don't comment on. But management is very, very focused on sweating the asset.

We have the next question from the line of Niko Margaronis.

Yes. Thank you for the good results. Congratulations. Basically, my question is about the OpEx and whether you have any one-offs. I see that some of the OpEx items have gone up a little bit. That's my first question. Second question is about what do you see so far from the school subsidy? What is the impact so far on your ARPU? Is it neutral? And whether you have upside on your revenue. Yes, those 2 questions first.

Thank you, Niko. Arief?

Yes. I'll answer the first -- thanks, Nico. I'll answer the first question. There is no onetime adjustment in the third quarter. No major one. And the increase is [ normal ] as based on our investment on CapEx, and this is as expected, and nothing -- no onetime adjustment. The second question, I'll leave it to Pak Vikram.

So this education program, we are very supportive of it. I think the government has taken this one of the biggest in the world in terms of making sure that we are able to keep our student educated in these difficult times, with the background of Indosat playing a very important role on making sure that we support the government on these initiatives. What we have seen in the first month that there is no negative impact of it, but still, these are early days. But as of now, we don't see any negative impact of this in our ARPU.

I see. And do you expect that you have upside on your revenue mainly due to this education program?

As I said, this, I will be happy to answer in the next quarter when we will have the 3 months performance. At this point of time, what I can say, there is no negative impact. And I think all of us need to understand the larger picture that the government and all the telcos have got together to do this, which is very important for the country. But what is important to highlight is that we don't see any negative impact. But in the next quarter call, we'll be able to say the outcome of it.

We have the next question from the line of Choong Chen Foong.

This is Foong from CIMB. A couple of questions from me. Firstly, just to go back to the question on the free education [ corporate ]. Just wanted to ask a question from the network side, whether the traffic has gone up significantly in October. And in terms of the network utilization rate, has it caused it to go up significantly? And yes, this program is extended beyond into the next year. Do you think that it may put some pressure on Indosat to raise CapEx to add network capacity? That's the first question. Second question, I wanted to ask a bit more for some color on the competition, if you could provide some color there. The -- you registered quite decent growth in subscribers, and your data yield was also just down just slightly. So I wanted to understand whether competition was not as bad as you had feared, or you were just able to sort of eke out some good gains because of your network against your competitors. And if you could also provide some color as to how the numbers are looking right into -- so far into October and November. And third question, there was a big spike in maintenance costs Q-on-Q. What drove that? Was there any one-off there? Yes, those are my 3 questions.

Thank you, Foong. Pak Vikram will take the first 3 questions.

So on the education, as I said, because we have been able to roll out our network as per the plan during COVID time also. So we are very well placed in terms of capacity management and the capacity which we have built. So again, early days on the education program, but what we see from the first month trend that it looks to be very much manageable. But more in detail, we will be able to talk in the next call when we have the 3-month trend and all the number. But as of now, whether it is ARPU impact, whether it is more impact on CapEx, we see all these things as neutral. There is no negative impact. We are very confident that these are things which are under control. And then we are more focused on supporting the government on this important initiative. So this is on education program and things related to that. Coming on to competition. I think our strategy, and we have been very consistent about it, and we have been talking about it every quarter, is moving out of this price war to more focus on customer experience and distribution. So we feel that this is what is helping us. And then the more we are focusing on simplifying customer journey, the more we are focusing on distribution, making sure that we are able to sweat every site, every DTF is what we are focusing. So we are not too much worried or too much into this whole price thing.

Okay. Before we go on to the last question I mentioned, maybe I can just put in a follow-up question to Vikram. So in terms of -- on the ground, right, do you see your competitors being quite aggressive on pricing? And so far, there has been no -- not much of a trend in terms of your customer base going into October.

So again, when you look at quarter 3 number, it's a testimony that what we are doing is working well. So nothing has changed in October. So whatever competition has been doing, they have been doing it for the last 2, 3 months, most of the things for last 45 days. And we are more confident that coming out of unlimited or the right strategy for us, focusing on Freedom Internet, simple, relevant product and more and more focusing on customer experience, as I highlighted, if you look at all the third-party report, the improvement on customer experience on all parameters and also focusing on distribution. So this is how we are driving. Yes, we are driving our own agenda. We are not looking at competition too much.

Okay. Understood. And yes, the last question on the spike in maintenance costs Q-on-Q, what drove that?

Yes. It's a normal increase due to the increase in the CapEx investment. I need to remind all of you that the second quarter, most of the CapEx investment came in the second half of the quarter. So it didn't have a lot of expense [ hit ] in the second quarter started from third quarter. The same also for the third quarter, CapEx came in July and August. So therefore, we saw such increase in cost of sales and maintenance.

Just to support what Arief said, we are focusing on growth. And for that, our speed of network rollout and all, quarter-on-quarter, you see that. And we are very confident because it has a little bit long lead. The moment we roll outside, we see revenue flowing in over a period of next 90 days and on. So I think this is asked for our strategy.

We have the next question from the line of Norman Choong.

This is Norman from CLSA. I have one question related to network utilization and CapEx. So I'm very happy to see that you managed to double your 4G BTS year-over-year. I'm just wondering how do you feel on your network utilization at this point? In relation to that, in terms of CapEx flow, should we be expecting a similar amount of CapEx as in -- going forward? Or should we expect -- or should we be expecting a slowdown in CapEx intensity, for instance? This is my question.

So this is Vikram. On the network utilization, when we saw the early trend of COVID in the month of March, I think with a lot of speed and agility, we were able to make sure that we are able to roll out the network as per our plan despite of all the challenges. And also, we were able to manage the shift in pattern on traffic, moving from business district to residential area. So all these things, we have been able to manage very well. And in terms of the CapEx deployment, we will be in line with our guidelines. We said around IDR 9 trillion, and this is where we are heading towards, and this is where we'll close this year.

Yes. Pak Vikram, maybe allow me to add more to that, because my thinking is we are in the middle of a 3-year transformation program. This was mentioned to be a $2 billion CapEx, right? And next year is going to be our third. I'm not sure if you're in a position to talk about maybe first half 2021 in terms of -- will you be expecting a similar kind of CapEx going forward?

Allow me, Pak Vikram, to answer here. As you rightly said, we announced $2 billion program CapEx last -- from '19 to '21. As Pak Vikram confirmed now, we are expecting by year-end we'll invest IDR 9 trillion. And last year, we invest almost IDR 10 trillion. So we are on track on that plan. So by year-end, we'll be having IDR 19 trillion. And this is -- still we have [ '21 ] to complete the plan. So we are on track, and we are confident that the plan is achieving the objective from this plan, which has been end of 2018.

We have the next question from the line of Kresna Hutabarat.

Congrats on the strong revenue and EBITDA performance in this third quarter 2020. Two questions for me, please. My first question is on the impact from Job Creation law. So the Job Creation law has been officially signed this month, finally, and the law sets the path for network sharing and infrastructure sharing in the Indonesian telcom industry. So can I just get your thoughts what this will mean to Indosat? And realistically speaking, what sort of infra or spectrum sharing format that you think the industry can look forward to have in the near future? That's my first question. My second question is on leverage. If you get your leverage today, it's already at relatively low level, around 2x. Do you intend to keep it around this level? Or do you see the need for leverage to go higher in the next 12, 24 months?

Thank you, Kresna. The first question will be answered by Pak Arief.

We think that the new omnibus law is very good for industry and also for this nation. However, as you know, this needs some application for the minister law, so that's why we are still waiting with this kind of the very good environment with this kind of the new law. However, an initial perspective, the infrastructure sharing, the spectrum sharing is very good for us. So we can have a possibility to build and widening of the coverage of our network in the future.

Just to add to what Pak Arief said, one of the things which will be very important for the industry, and we are looking forward to it after this law, is a more kind of a price floor. We have seen in all the big countries the importance of sustainable pricing. So I think some of these things, we are looking forward to, which will help us make sure that we move into more sustainable direction when it comes to [ driving ] and focus more on customer experience.

This is Eyas. Regarding the leverage, as you know, all our effort is focusing on improving the operation and improving our efficiency, and this will help us to improve our leverage. As of today, the operation done very well, which helped us a lot. And also some addition for the spectrum payment, which was supposed to be paid in September, delayed, helped us a little bit. But we are not expecting any major increase in leverage. It will be somehow in the same level by year-end.

Kresna, does that answer the question? Hello?

Sorry, I think I was on mute just now. Okay. Yes. Can I just have 1 follow-up question to the answer -- to your answers on Job Creation law?

Sure.

Yes. So basically, if we speak with the ministry, this -- that infrastructure -- sorry, the spectrum sharing that is being talked about revolves around system sharing in the use of new technology such as 5G. Is that what you guys are hearing, too? Is that -- or do you think there's room for this opportunity for spectrum sharing for current technology for 4G LTE, for instance? I just want to get your thoughts on what you guys think about that opportunity.