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

Good day and welcome to the PT Indosat Tbk First Half 2021 Results Conference Call. [Operator Instructions] Today's conference is being recorded. I would now like to hand the call over to Ms. Christy Atmaja, Vice President of Communication. Please go ahead, Ma'am. Please go ahead, Ms. Christy Atmaja.

Hi. Sorry. Thank you, Rachel. Yes. Hi, everyone. Thank you so much for joining our second quarter 2021 earnings call. Before we start, I will provide a quick safe harbor disclaimer. Note that the company, PT Indosat Tbk, will 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. 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. For today's earning calls, we have Mr. Ahmad Al-Neama, our CEO; Mr. Eyas Assaf, our CFO; Mr. Vikram Sinha, our COO on the line. So without further ado, I will hand over to our CEO, Mr. Ahmad, to deliver the opening remarks. Mr. Ahmad, the floor is yours, sir.

Thanks, Christy. [Foreign Language] Good afternoon, everyone, and thank you for joining our second quarter 2021 earning call. I am Ahmad Al-Neama, CEO of Indosat Ooredoo, and I will start this call with a few remarks, and then our CFO and COO will follow through with the detailed presentation. As you know, I lead our solid quarter for Indosat Ooredoo in the first half of 2021. Total revenue increased by 11.4% year-on-year to IDR 14,983.5 billion compared to the same period last year. The growth was driven by strong performance in ancillary revenue supported by a rebound in the enterprise businesses. Our EBITDA increased to IDR 6,777.7 billion in first half 2021 and -- which is an increase of around 24.8% compared to the same period in the previous year. Due to a combination of a top line growth and cost optimization measures, which include optimization of network maintenance, contracts and more efficient marketing campaign, our EBITDA margin stood at 45.2% in first half 2021. Net profit is recorded at IDR 5,598 billion, including a one-off of IDR 6 trillion net proceed from tower sale conducted in the second quarter of 2021. Consistence with our strategy of offering simple, relevant and transparent product, and smart CapEx network investment, Indosat Ooredoo customer base has increased by 5.3%, which is equal to 60.3 million customer in the first half of 2021 compared to the same period in the previous year. Average revenue per users, our ARPU, increased to IDR 33,900 from previously IDR 31,400 in the first half of 2020. Our overall network experience improved and fine-tuned product portfolio has resulted in data traffic growth by 40.2% year-on-year. So another milestone that has been unlock by Indosat Ooredoo in this first half 2021, which is the launch of our first commercial 5G service in the city of Solo. 5G services is the next step in bringing world-class digital experiences to people in Indonesia. The launch of 5G in Solo has established Indosat Ooredoo at the forefront of the 5G rollout in Indonesia. We have been very fortunate to have the support from our customers and employees to help navigate our way through COVID-19 challenges. I can tell you the past 3 years has been a marvelous turnaround for the company, and we will continue to continue the growth momentum and stay focused on our execution. With this, I concluded my remarks and for further details on this quarter, I will pass to our CFO, Mr. Eyas Assaf, for the financial walk-through. So Mr. Eyas, the mic is with you now.

Thanks, Pak Ahmad. [Foreign Language] This is Eyas Assaf, Chief Financial Officer of Indosat Ooredoo. I'll take you through the slide. We are on Slide #6, the key highlight. Before we go in details, I would like to highlight the major achievement in first half '21. Revenue, as usual, our top line has outperformed the market performance, especially with the cellular revenue grow 3 to 5x industry on the last 3 years. On EBITDA margin, again the EBITDA shows a growth 2x of revenue growth. It reached 24.8% increase year-on-year through -- this achieved through strong top line revenue growth and cost discipline. This helped us also to reach 45% EBITDA margin, which improved compared to last year by 5 points almost. While we are doing all of this, we didn't forget to improve our customer experience and this shows that our NPS has become or showed the highest growth by 7 points. And the customer number in consistent increased by 3 million year-on-year. More details will be highlighted by Vikram in his operational highlights. For the bottom line, the net profit achieved ever highest number with IDR 6 trillion, year-on-year improvement delivered helped by one-off tower proceeds. This -- if we can go to Slide #7. This is a high level comparison between first half '21 comparing to first half of '20. As we highlighted, revenue grow by 11% or 11.4% and it reached almost IDR 15 trillion level. EBITDA reached IDR 6.778 trillion, which is almost 25% growth. And as we highlighted, EBITDA margin 45%. Again the net profit reached IDR 5.6 trillion and we'll take more details -- we'll talk more details about the net profit in the next slides. Net debt-to-EBITDA also has been improved due to the tower proceeds, went down from 1.35x to less than 0.34, and we'll discuss this in more details. To go, please, Slide #9. This is comparison year-on-year and quarter-over-quarter. Operating revenue, as we highlight, 11.4%. Quarter-on-quarter we showed -- or we could deliver 4% improvement and EBITDA, the same, has been improved 25% as we highlighted and flat compared to first quarter -- second quarter. I would like to highlight here that the first half of the year, EBITDA, is the top or the highest EBITDA numbers in the last 3 years and with 2x growth more versus the revenue growth. The revenue growth was 11% and EBITDA is more than 2x of the revenue growth. EBITDA margin, as we highlighted, 45%. Quarter-over-quarter, it decreased by 1.9%, but almost steady or constant. First half achieved IDR 5.6 trillion comparing to a loss last year of IDR 341 billion. Quarter-on-quarter still profitable and we'll go in more details on Slide #10 where we normalized the second quarter profit. If we normalize it, removing the impact of the tower sale of IDR 6 trillion profit and removing the onetime cost, of consultant cost, IDR 74 billion, and fixed asset impairment IDR 419 billion and tax provision IDR 235 billion, Q2 normalized net profit will be IDR 74 billion. And this is the second quarter we delivered profitable number without onetime adjustment. If we go to Slide 11, details of the cellular revenue which we highlighted, the growth year-on-year is 11%. And quarter-over-quarter, it reached a growth of 5.2% and number-wise IDR 6.358 trillion compared to EUR 6.45 trillion. Fixed data, again as Ahmad highlighted, it's a growth year-on-year almost by 13% to a level IDR 2.297 trillion. We saw a small decrease of 3% quarter-over-quarter. Fixed voice grew by 3% year-on-year and the quarter-over-quarter is 12%. I would like to highlight the reasons for the fixed voice revenue improved by 12% in second quarter because of ongoing initiatives on international incoming IDD. For data revenue dropped in second quarter because of one project rollover from last year to first quarter '21. Otherwise, it will be almost flat. If we go to Slide 12, it shows that year-on-year, the total OpEx grow only -- increased by only 2%, while the revenue increased by 11%. Therefore, it helped us to grow or to increase the EBITDA to 25%. Overall, total OpEx reached IDR 8.2 trillion first half; the second quarter IDR 4.2 trillion, which is an increase of 7.6%. Here I would like to highlight that first quarter we have, last year in the personnel cost, there was onetime cost. Therefore, there is a -- we see a major difference between last year and this year. And the marketing is -- quarter-on-quarter is only seasonality. Usually, we spent in second quarter more. This is the major difference in OpEx between year-on-year and quarter-over-quarter. If we go to Slide 13, this is highlighting our ongoing CapEx investment as planned, despite COVID situation. We'll continue to improve our customer experience through smart CapEx investment. Comparing to last year first half, we spent almost IDR 3 trillion comparing to IDR 3.2 trillion. This is in alignment with our guidance where we said that we want to spend between IDR 7.5 trillion to IDR 8.5 trillion. And last year, we spent IDR 8.7 trillion. Quarter-over-quarter, it's an increase from IDR 1.40 trillion to IDR 1.5 trillion as a percentage of revenue went down from 24% first half 2020 to 20% this year. Quarter-on-quarter we saw almost as a percentage the same, 19% to 20%. Again we want to emphasize that the customer experience at heart of everything we do. Slide 14. The whole improvement in operation helped us to improve the balance sheet also to -- due to the tower deals. The net debt went from -- down from IDR 14.6 trillion last year to IDR 4.3 trillion. Quarter-over-quarter the same due to the tower deal. This helped us also to control net debt-to-EBITDA from IDR 1.35 to less than 0.34 in second quarter. Here till now no decision has been made how to allocate the proceed of sales of tower deal. This conclude the financial highlights. Now I'll pass to Pak Vikram to give us more details on operational highlights for the first half '21. Pak Vikram?

Thanks, Pak Eyas. Good afternoon, ladies and gentlemen. This is Vikram Sinha, Chief Operating Officer. Just to start building on what Pak Ahmad said in the opening remarks, the growth trajectory is very solid and consistent. So if you look at Slide 16, it reflects how consistently we have been growing for less 10 -- last 10 quarter and it has been very consistent. So from quarter 1, 2019 to quarter 2, 2022, there has been a very consistent growth story for us making Indosat Ooredoo grow faster than industry. If you refer to Slide 17, that shows and Pak Eyas also highlighted how we have been able to grow 3x, 4x, while industry has been under the pressure. Our objective has been to focus on simple transparent pricing and help industry growth, and that is how we have been driving this. Consistent growth is validated by increase in customer trust. Whether it is NPS, CSAT, brand equity, all of it is looking -- one of the biggest gear in the industry, all 3. And then that is also getting reflected. If you go to Slide 19, on our customer addition, we have added around 3 million subscriber, 5 million active days and ARPU is plus 8.2%. All these things again is talking to each other. If you go to Slide 20, data contributes to a significant part of our revenue. Despite huge surge on data traffic, we have maintained good network experience. Pak Eyas spoke about customer being the center of everything we do. And that philosophy is working very well. Data traffic, 4G subs, mobile data revenue, all of them are showing very healthy trend. One of the challenges of COVID has been managing data surge demand and managing the shift in pattern, data traffic moving from business district to residential area. All these things have been done very smartly. And if you look at Slide 21, we have been able to demonstrate that we can stay ahead of the demand in a very smart manner. Also, if you look at Slide 22, cellular revenue and B2B revenue, both is showing a very, very healthy trend, which has been already highlighted. 5G we all know is very important for Indonesia. And Pak Ahmad spoke about Solo was the first city and it is a very symbolic city, Solo. A lot of people ask us why Solo? Because Solo is one city where Indosat is #1 in terms of customer market share. So we thought that we owe it to our customer to start the journey from there. Also we understand that it is very important to ensure that 5G is done in a manner, which is sustainable and which is also relevant to the country and all our customer. So this journey has already started. Quarter 2, we also got some very prestigious award. One of the most prestigious one was our CEO, Pak Ahmad Al-Neama, was awarded the gold in terms of innovative management in technology. It also reflects our leadership in terms of challenging time. And then there are many more, I don't want to talk about everyone. I think the most important thing at this point of time is our contribution towards the society. Especially we all know that telco sector and Indosat has a big role to play. So whether it is our employee, whether it is our customer and especially the community and all, we have been very focused. Our initiative around helping Indonesia government to vaccinate people, our initiative around making sure that all our employees are healthy, they are vaccinated, and also helping the government through some of the initiatives like EDU program, which is helping the student's community to continue their studies while the lockdown and some of the challenges continue. We are very, very committed to all those things. And at the same time, for our investor, how do we make sure that we have a very strict discipline on our CapEx control, improving results month-on-month, striving for sustainable profit and Pak Eyas spoke about in organic way also, this is the second quarter Indosat is profitable. So with all these things, I just want to share with all of you that we have a very clear strategy, what we call it as juara in bahasa, which means winning, and it is very important during this challenging time to stay positive. And that is backed by a very, very strong execution. Our whole game plan is around executing our plan and that is giving us sustainable growth. And we very strongly believe that with customer at heart of everything, we will continue this momentum in months and quarter to come. With this, I conclude my presentation. Over to you, Christy.

Thank you, Pak Vikram and Pak Eyas, for the presentation. I think Rachel, we are ready to move forward with the Q&A session.

[Operator Instructions] Your first question comes from the line of Arthur Pineda of Citigroup.

Arthur?

Your next question comes -- or your first question comes from the line of Choong Chen Foong of CIMB.

This is Foong from CIMB. A couple of questions from me. Firstly, congrats on the good set of results. You've had a very healthy 7.5% ARPU increase Q-on-Q. I wanted to understand if that's mainly seasonal? Or have you done anything with regards to pricing to improve monetization in the quarter? That's question number one. Secondly, can you give us your view on the current competitive landscape? And given the future economic outlook in Indonesia, your thoughts on whether there is room for Indosat to optimize tariffs going into the second half of this year? Or do you think that it is better to hold on to your current tariffs and focus on other revenue growth drivers? These are my 2 questions and I'll come back with more questions after this.

This is Vikram. To your first question on ARPU, I think if you look at our ARPU journey, while quarter-on-quarter you see improvement, year-on-year you also see an improvement of close to 9% to 10%. I think there are 3 important driver. One is the 4G unique users, 4G unique users and the number of subscribers, which is smartphone subscribers in our base, all these things have significantly improved. Second is our CVM engine, which we initiated in quarter 2 of 2019, it has become very mature and it has become best-in-class. So it is really working well in terms of giving relevant offer and making sure the third piece, our strategy of staying away from unlimited and then focusing on more simple and relevant product. These are the big driver. But at the same time, wherever we see opportunity of taking -- I'll not say price up, but making sure that the prices are more sustainable and relevant, we keep taking those corrective actions also. Hope it clarifies your question.

Yes, Pak Vikram. How about my second question on the competitive landscape?

I think it -- our quarter-on-quarter performance I think will give a right message to our competition also that it is important to move out from things like unlimited and focus on more experience and value for money. So we expect that less of major reaction from the market moving towards more proper and sustainable private. So from a competitive landscape, we see -- we are expecting more mature behavior coming from the top 3 operator here because all of us have seen, and it is very evident, that what customers are looking for is a good customer experience because the importance of the whole connectivity is becoming more and more very relevant. So we expect things to be more constructive, which will help us deliver as an industry more sustainable pricing in the market. This is what we expect.

Okay. If I can just put in another 2 question. Firstly, do you see any impact on Indosat's revenue thus far from the imposition of the partial lockdowns in the third quarter? And do you also see any sign of stress on Indosat's customer spend so far in the third quarter? And then another question is on the network. Have we been rolling out actively to new areas? Or have we been focusing more on capacity additions and quality improvement in existing areas? And I think where I'm coming from here is I'm trying to find out how much of our revenue growth is coming from expansion into new areas in the last 6 months?

No. I think some of these things are very relevant question. So let me start with this -- the new PTKM. Look, the whole country, if you look at the impact of this and the GDP outlook, there is a bit of a stress on that. And all the sector will have an impact. The important thing to highlight is the telco sector has a more important role to play and we have seen it in part also. So the challenge is some of the daily worker, daily earner, we see a bit of a repeat recharge, small denomination coming down. But there are also lot of opportunity coming our way. So it is important that we play our part. So when we look at everything in totality, I think these are early days. Maybe in quarter 3 end, we'll be able to give you more insight. But as of now, we are in a good safe. Now moving on to your network question, I think it's a balance of both. We have our strategy. We don't call it Java, ex-Java. We have our own strategy where we look at cluster, community of interest and how we want to invest. So it's a good balance between capacity and also coverage. We have a disproportionate focus on indoor quality coverage improvement. So this is how we are driving it.

Okay. And how much would you say the revenue growth that you've seen is coming from new areas or new clusters?

I don't -- we don't look at it like this, honestly, how much is coming from new area because we cover 92% of the population. So I don't know what you say as new area. But what is important is we are very focused on our site monetization, low revenue side. So whatever new site which we have invested on because if you look at our rollout, we have been very consistent. The good news is that we have been able to deliver to our expectation, both on the capacity side and coverage side.

Your next question comes from the line of Sachin Mittal of DBS.

Go ahead, Sachin.

Can you hear me?

Yes.

Okay. This is actually second quarter that we are seeing stabilization of data pricing. So rather a very good news although I mean Indosat data pricing is still below the data pricing levels at other cities -- other 2 major [ typos ]. So my question is are we looking at a point where data pricing is almost stable and hence, whatever is a rise in data usage, that kind of directly leads to rise in revenue? Is that a possibility? Or could there be -- is there a possible scenario going forward? #2, how much is the impact? Could you just throw some light on have education subsidy programs, have you reduced the free quota data? And has that been a factor in data pricing stabilization this quarter? And what is the outlook going forward because of that education subsidy program. These 2 questions. Hello?

Please remain online. Your conference will resume shortly.

Hello, Sachin? Hello?

Yes. Ms. Christy, you are back. Please go ahead.

Sorry, our connection was lost. Sachin, can you repeat the question please?

Yes. Mr. Sachin Mittal?

Are still below you 2 other major peers. So question is, what is -- is it a possibility that data pricing remains stable and hence, whatever data spike happens, data surge happens, it flows down to the top line? That's question #1. And question #2 is have education subsidy being a major factor in data pricing stabilization? Have we -- are we seeing lower quota now for free data quota? And what is the outlook for the education subsidy going forward? These 2 questions please.

Thanks, Sachin. On your first question, I don't know which data point you are referring to. What I want to tell you is that look at our ARPU growth, our data traffic growth, the way we are managing our yield. Everything is all in the positive direction. So it is Indosat which is growing the industry. So I think others need to follow us instead of we -- so I think you should check your data, update it till date and look at the ratios, you will get the answer yourself. So this is to your first question. And on education pack, on the education pack, I spoke about this earlier also and it is very important that we support the government initiative. We all understand how important it is. But our CVM machinery has been able to manage it well. So the EDU program, yes, for it would be yield down. But on an overall basis, we have been managed it well so that it has no negative impact on us. So that's a good news for us. So we need to keep supporting such program. It is on the benefits of the country. But our commercial team and especially our customer base management team with the CVM machine getting more mature, we initially thought it will be a big risk and it can have a downside to our revenue. But the good news is that team has managed it very well twice. And it has a short-term impact on yield, but that's okay.

Okay. So actually, just to clarify, I was talking on revenue per MB, per megabyte, right? That's what that I'm talking about. Yes. And that's about 3.6 based on the latest disclosure, yes.

So what is happening is we have the highest growth on data traffic. That is by revenue per MB, you look at it. So look at it in totality, ARPU, yield, everything, we should not look at some of these KPIs in isolation.

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

Can you hear me now?

Yes, Arthur.

Okay. If I can ask 3 questions please. First, the -- I apologize, if this has been asked because my line got disconnected. Are you able to characterize the competition in the market for mobile? Are you seeing it more rational now versus 1Q? So I understand your competitor had moved to raise pricing in the last period. Is that being mirrored by the industry? Second question I had is with regard to investments, specifically on 5G, given that you're starting to roll this out. Should we then see this as sustained levels of elevated spending as you further build out into 2022 and 2023? I'm just wondering how we should think of CapEx. Third question lies with network spend, particularly on your tower portfolio. I understand a significant chunk of your towers are up for renewals in the next 12 to 18 months. I'm just wondering where you are at this and how you see the pricing upon renewals.

This is Vikram. So on competition, we have been very consistent. So what the good news is, if you are seeing some correction in pricing, I think the industry is also slowly following the footprint, which we have been driving. So Indosat, if you look at from the third quarter of 2019, first big bold move which we did is to move out of unlimited. Second, we took price up on some of the low denomination, 1 GB and smaller packages. And we saw some clear benefit and we are very consistent with that. So overall I agree with you, there is a more constructive approach in the industry because all of us see the value of -- value for money and good customer experience. So I think that's a clear learning which is coming out. So this is to your first question. Moving back to 5G, I think this is just a start of a journey. And till the time the dedicated spectrum, like especially 3.5 and 700, comes into play which is a more 5G-specific spectrum, we don't need to put too much of money on our CapEx. We have been investing on the 5G readiness and that's a long haul. Our site to fiberization and our transport, whatever we have been buying from end of 2018, we have been ensuring that it is all 5G ready in terms of software upgrades. So all those approach has helped us make sure that we are 5G ready, but we are very conscious. If you look at B2C and if you look at 5G, it's a defensive business case. 5G monetization and all those things will come more from enterprise. You all know about it. But it's equally important that Indosat support this journey. So it is a start of a journey. The case of CapEx and all those things will come into play in a significant manner when the spectrum is ready for auction. Hope I answered your questions.

Yes. I had a third one on the towers.

This tower portfolio, I think we have some good opportunity. And look, these are all positive on our side. So we will make sure we have got the capabilities. And the good thing is with the new investor coming into play in terms of Digital Colony and spend, we are expecting that some of the legacy issue which we have will get fixed in the coming time. So it's all good news for us in terms of some of the challenge which we had earlier. It will even make us more competitive.

Are you able to share what the rental rates are for the new towers that you sign on?

Sorry, these are something which I cannot say here. But what I can tell you is…

Are you able -- sorry, can you hear me?

Yes, I can.

Yes, sorry. Are you able to share what your rental rates are for renewals now versus, let's say, what they are currently?

Sorry, we cannot disclose this detail. This is the Eyas Assaf, Arthur. We cannot disclose these details. But anyway, I confirm what Pak Vikram mentioned and will maybe in due course we'll disclose more.

[Operator Instructions] Your next question comes from the line of Niko Margaronis of BRI Danareksa.

Congratulations for the good results in Q2 '21. I would like to ask more like due diligence questions I suppose. Are there any one-offs in the -- in your cost for quarter 2? And may I ask what is recorded under other expenses? Other -- it's about IDR 350 billion -- IDR 358 billion. That's question #1. And question #2 is about there is a spike in the 3G BTS', number of BTS' in quarter 2. And maybe could you perhaps provide some insight how this bodes with customer-centric -- customer centricity and going into 4G users?

Niko, this is Eyas. Regarding the first item, if you -- as we highlighted in our slides, in the normalized slide, there is -- we made it clear how much the one-times. But under the IDR 358 million, there is a tax what we highlighted with 2012 and IDR 74 billion which is the consultant. And there is some expenses around IDR 50 million, IDR 60 million related to the tower deal. Is it clear, the first question, Niko?

Yes, yes. So the network cost, they sort of increased in Q2. This is -- there's no one-off there?

Sorry, can you repeat the question?

Are there any one-off in cost of services?

In Q2? No, it's normal. The increase in the cost of sales is in line with the increase in the revenue. If you noticed, between quarter 1 to quarter 2 is in line with the revenue growth.

Your next question comes from the line of Piyush Choudhary of HSBC.

2 questions. Firstly, can you share with us what percentage of sites are fiberized and your strategy to improve fiberization? Secondly, I don't know if you can comment further, but is there any update on potential merger with Hutch? Like has discussion started around network integration? And can you share any guides on emerging trends you benefit or integration time lines?

Piyush, this is Vikram. Before I answer your question, I will go back to Niko. If you may allow, he had one question on 3G BTS. So Niko, on 3G BTS, there is a reduction of 10,000. If you look at our slide, from 45,000, we have come down to 35,000. I think the key message is we want to make sure that we put all our spectrum on 4G and that is progressing very well, and this is how we are focusing. So coming back to, Piyush, you your question, close to 50% of the site is fiberized now. And this is moving very well. When we started our 3-year turnaround end of 2018, we said that in 3-year we want to reach to a level of 65. We are on track for that. On the second one, unfortunately it is beyond our paycheck level, you have to ask our shareholder.

Operator, do we have any more questions on the line?

Your next question comes from the line of Niko Margaronis of BRI Danareksa.

Pak Vikram for your reply earlier. My -- an additional question would be on the cash balances. Are there any thoughts of what is the use of this cash going forward?

Niko, as I highlighted in my slide, this is not yet decided and will update you in due course once we make the final decision.

[Operator Instructions] There are no further question at this time. I would now like to hand the conference back to these presenters. Please continue.

Okay. Thank you, Rachel. It seems like there is no more questions on the line. Thank you, everybody, for participating on today's call. If you have any further questions, please feel free to reach out to me directly or e-mail us at [email protected]. Thank you, everybody. Stay safe and good afternoon.

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