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

Good day, and thank you for standing by. Welcome to the PT Indosat Tbk First Half 2022 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the call over to your host today, Pak Indar. Please go ahead.

Thank you, Desmond. Good afternoon, everyone, and welcome to the call. My name is Indar, and I'm the Head of Investor Relations for the company. As a reminder, the call today is being recorded for replay purposes. With us on the call today is Pak Vikram Sinha, our CEO; and Pak Nicky Lee, our CFO. I will now hand the call over to Pak Vikram for his opening remarks. Over to you, sir.

Thanks, Indar. [Foreign Language] Good afternoon, everyone, and thank you for joining us today. Allow me to start this earnings call with a few remarks before handing it over to our CFO, Nicky, for the financial presentation. I am pleased to report a good performance for IOH in second quarter 2022. All financials and operational indicators are trending positively, despite challenging market conditions, which is a very positive and good sign for us. Our foundation was laid in January, in fact, 4th January 2022, and as we speak today, we are 206 days young company. The initial journey has been quite encouraging for IOH, and we stay committed to give marvelous customer experience. Our #1 focus is delivering the customer experience, which we have committed to all our customers. As you can see from the numbers we have reported, which our CFO will go into more detail, our revenue grew strongly by over 7% quarter-on-quarter, and EBITDA grew faster than revenue at around close to 9.5% quarter-on-quarter. We also delivered a positive net profit in quarter 2. Important -- the most important thing, our subscriber continues to grow, having added 1.6 million new subscriber in quarter 2, which proves that customer trust on brand IOH is growing every day. Healthy ARPU growth of 9.2% quarter-on-quarter has helped IOH to gain revenue. Our integration continues to progress very well, and we have hit 46% of our milestone, which we have outlined in our plan. And we have also realized synergy ahead of our target through relentless execution. Network is the biggest driver for synergy, and we are tracking well ahead versus our target. MOCN, this is something the technology, which we spoke about for integration. The activation in progress is progressing well while our partner: Huawei, Ericsson and Nokia, are fully committed at the highest level and completely onboarded to support our integration and participating in our growth journey. We are clear on our future priorities as well as we have -- we'll continue to execute and deliver on our promises to create value for our shareholders. That concludes my opening remarks. I would like to pass it on to our CFO, Nicky Lee, for the financial walk-through. Over to you, Nicky.

Hello, ladies and gentlemen. This is Nicky Lee speaking. I'm going to present our financial section of the presentation. I'm actually very delighted to present our stellar financial performance of second quarter 2022. Our overall revenue grew 7.2% quarter-on-quarter from IDR 10.9 trillion to IDR 11.7 trillion. This growth was underpinned by the enlarged customer base, as mentioned by Pak Vikram, as well as strong uptake of data services, particularly over the Ramadan festive season. You can also see in our detailed slides that Cellular was leading the charge in Q2 as MIDI and Fixed Telecoms revenue remained stable after a very strong first quarter. In terms of EBITDA, it is up by 9.5% to IDR 4.8 trillion from IDR 4.4 trillion in the first quarter. The EBITDA growth is revenue driven and has included extra provision for Jiwasraya provision of IDR 80 billion in second quarter. If such provision is excluded, as it is not related to our second quarter performance, the quarter-on-quarter improvement for EBITDA would amount to 11%. EBITDA margin percentage improved by 90 basis points, reflecting higher margin contribution from Cellular and our efforts to keep costs contained. We completed the formation of our data center joint venture with BDx. This transaction has not only created huge business value for us but it also generated a gain after tax of around IDR 3 trillion. This has catapulted our net profit attributable to owners to IDR 3.1 trillion compared to IDR 129 million in the first quarter. The data center transaction also greatly enhanced our net debt position as it provided us with cash proceeds of around IDR 2.7 trillion. This, along with our strong operating cash flow, has managed to bring net debt-to-EBITDA significantly -- bring net debt-to-EBITDA significantly down from 1.13x to just 0.85x. There were a few one-off adjustments in both first and second quarters. We have prepared normalized analysis to enable you to understand the underlying net profit performance. You can see that from our normalized net profit, for first half, it was IDR 149 billion in total. And if you look at the first quarter and second quarter split, the contribution from second quarter is IDR 105 billion, more than double quarter 1. We have the key financial indicators in the next slide for first half this year against the same period last year as well as second quarter against the first quarter. As we just focus on quarter-on-quarter numbers, I will briefly take you through the year-on-year number for first half '22. In terms of revenue, incremental revenue of 50.3%, reflecting largely the impact of the merger. Similarly, the merger also pushed the EBITDA upwards by 35.4% from IDR 6.8 trillion to IDR 9.2 trillion despite the dilution of EBITDA by 4.5 percentage points to 40.7%. Our net profit book reduced year-on-year, basically reflecting the movement in one-off transaction. In the first half of last year, we had tower sale transaction, giving us a gain of IDR 6 trillion. And this year, we had the data center JV formation, as I mentioned earlier. While these gains are not recurring in itself, we do and will continue to look for ways to improve shareholder value. Looking at the performance of our individual business segments, all of them are performing very well. Cellular attained 8.5% quarter-on-quarter growth, while MIDI and Fixed Telecom revenue growth for first half was 14% and 31% over that of 2021. There was some contribution from merger on these 2 segments, but the 3 main contribution is relatively small in these 2 segments. Moving on to costs. Our costs have escalated on a year-on-year comparison first half against -- first half '22 against 21% due to the merger. And we are confident the merger process we are going through will help us to cut some of the OpEx we are spending. If you look at our cost of services on a quarter-on-quarter basis, it pretty much stayed at the same level despite the significant revenue growth we are seeing, as reported earlier by Pak Vikram and in my earlier slides. Personnel cost is up by IDR 315 billion. This is to do with some adjustments. There was a IDR 70 billion reversal in retirement provision in the first quarter following release of a new accounting requirement. Another adjustment relates to IDR 80 billion extra provision for Jiwasraya restructuring. And we also made some bonus provision as we got a pretty good number for the first half. There's also some seasonality spending on marketing. It's up in second quarter because of the Ramadan festive spending that we used to do for every Ramadan. So it is budgeted in our plan. As you can see, if we exclude the effects of seasonality and nonrecurring adjustments, our costs are actually very well controlled. The other adjustment on this slide relates to the IDR 3.6 trillion gain for the data center transaction, and this is before tax. So I refer to the same transaction earlier, and this gain is captured under other operating income expenses. In terms of CapEx, our first half capitalization stood at IDR 3.9 trillion, which is 31.5% more than the same period last year. For the second quarter, it was a bit subdued with booking amount of IDR 1.6 trillion, down 34% from Q1. This is not -- this is more just a timing difference as we expect capitalization to go up in the second half of the year. The CapEx-to-revenue ratios for both first half and second quarter fell when compared to last year -- or last quarter due to enlarged scale this year as well as lower spending in second quarter. Again, this is more a timing issue. Our net debt has been going up and down, so let me spend a minute to remind you guys of what happened. The IDR 4.4 trillion at first half last year was reduced following the tower sale transaction in the first quarter before the payment of dividend prior to the merger. Following this, net debt was up to IDR 16.8 trillion at the end of first quarter this year, but we managed to trim it by almost IDR 3 trillion after the data center transaction was consummated in second quarter. With these net debt movements, you see the corresponding changes in our net debt-to-EBITDA ratio to come down to just 0.85x at the end of the second quarter. And that is the end of the financial section presentation for me. Thank you very much.

Thank you, Nicky. Allow me to share some operational highlights before we move on to Q&A session. As you can see, our operational metrics are trending in the right direction across all numbers. We have added 1.6 million mobile customers in Q2. And importantly, these are high-quality customers and we can see them from the number of 4G customers, which we have added and the growth on ARPU quarter-on-quarter. Both our brands continued to do well and are performing well within their target segment. This is a great advantage, which we see both brands IM3 and Tri having a very distinct target segment and both doing very well on that. I would like to highlight that brand IM3 NPS has increased again this quarter and now is the highest NPS among the big 4 operator in Indonesia. The brand Tri NPS also continued to increase this quarter, which is evidence of the strong traction that we are getting in the market. Our network rollout continued to be on track, and our 4G BPS now is 124,000 across Indonesia. This quarter, we also launched BDx Indonesia, which is a joint venture between IOH and BDx, one of the leading provider of data center worldwide. This venture will create new hyperscale focused data center company that will help to empower Indonesia digital transformation vision. Finally, as we continue our existing journey as Indosat Ooredoo Hutchison, I would like to thank our loyal customers and shareholders for their ongoing support, which has helped us deliver a strong set of numbers this quarter. We remain committed to provide marvelous customer experience to our customers, to our partners and also to our employees so that they can enjoy being part of this journey and also to our customers who can enjoy our digital products and services in our network. Thank you, everyone, and let's proceed to Q&A session.

[Operator Instructions] Our first question comes from the line of Arthur Pineda from Citi.

Three questions, please. Firstly, with regards to mobile competition, I just wanted to get your thoughts on how this will fare into the second half. Do you think that The Street can continue to see price increases into the second half of this year? Second question I had is with regards to your expectations on costs, particularly on the upcoming 2,500 towers expiring with the contract on Tower Bersama. Is there room for you to significantly reduce your network expenses into the second half as this expires? And any idea in terms of how the costs on these will change? Third question I had is with regard to labor expenses, that's obviously jumped a lot 44%. And you mentioned there's some one-offs in terms of these items. But even if you take out severance and the reversal, it seems to be up by more than 20% quarter-on-quarter. How should we see this trending into the second half?

Okay. This is Vikram. Let me take your first and second question, and then I will request Nicky to take on employee -- we don't call it labor. So that is important to highlight on the employee cost. On mobile competition, I think we see a more healthy trend at an industry level, a more mature outlook. I've highlighted earlier also the current level of yield is not sustainable, and our customer is demanding for more -- better customer experience and value for money. So we are very supportive of that journey, and we think we see only things improving at an industry level also. So this is a very positive news. And then if you look at our ARPU increase and all, in spite of 1.6 million adding customer, our ARPU went up by more than 9%. And then -- we see this as a very healthy trend. Second, on your cost, especially related to Tower Bersama 2,500 sites renewal, we just concluded our negotiation in quarter 2 with them. Happy to share with all of you that it was a very, very good outcome. We see strong support from our partners and our tower companies for IOH. So it has been one of the good conclusion. And as you know, that these were all 2012 deal, which was on U.S. dollar term and we were paying quite high. So we have been able to conclude with very good outcome for us. And at the same time, it has been a good outcome for Tower Bersama also because they are all supporting and they are banking on our growth opportunity. So specific numbers, you will see in the coming quarter, I don't want to get into detail, but it is important for me to highlight that it was a 6 months long negotiation and the outcome we are very happy with. And then more important, the partner continued to believe in our growth and support us, and in a way, it supports them also because it is good for everyone. So Nicky, if you can take the question on employee cost.

On the personnel cost, as I mentioned, by and large, about half of the increment is to do with one-off. And the other half is to do with bonus provision, basically, incentives based off the good performance the company has delivered. When we made this extra provision, we have to cover the entire first half, not just the second quarter. So what you're looking at is if you strip out the one-off, we're -- half of it would be like incremental charge we put in when you compare first and the second quarter. Now going into the second half, if we are required to make extra provisions, that would mean we are outperforming again, and this is a good thing for the company. And I hope that we will be able to give more such incentives to the staff based off their good performance.

Just to build on what Nicky said, Arthur, we want to build IOH on pay-for-performance. So looking at our H1 performance, we have increased our bonus provision and all. So that is what it is.

Next question comes from the line of Hussaini Saifee from UBS.

Just one question from me that as part of the merger deal, IOH has committed to around 1,400 sites to be rolled out. Just want to get your update on that side, how it is progressing and what are the milestones to watch for. Maybe one more question is on the upcoming spectrum auction. So any color on that side, which spectrums are up for allocation and the time line on that?

This is Vikram. On your first question, yes, as part of our merger, we had spoken about these numbers. We are completely on track to deliver that. And the good thing is with all these things together, we are trending that by next year, both the brand after removing duplicate sites also will have the benefit of close to 50,000 physical sites, physical, and that will have everything integrated in terms of using all the spectrum, 900, 1800, 2100. So we are completely on track to deliver our commitment. What you need to watch out for is, I think, as part of that commitment, we have committed close to 4,000 to 5,000 sites every year and we'll be able to deliver that. Coming on to spectrum, I think we are waiting for more clarity to come from the regulatory authorities. But we believe that next year, we expect to see 3.5 megahertz, which is more a 5G series spectrum, and we are getting ready for that. But in terms of exact time and all, we will wait for the clarity from the government authorities. 700, we believe that it will be after 2024. We feel that, first, it will be 3.5.

Understood. Maybe just one more question, and congratulations on the Tower Bersama renegotiations. Just to confirm like what lease rate you are re-leasing or co-locating on new towers? Any color on that side?

Sometime I get confused whether it is a Tower analyst call or it is Indosat. So I think what I told you, we had a very good outcome with our Tower partners. More detail, you will have to wait for -- under a quarter in terms of specifics. But for sure, we are very encouraged to see how initially we saw it from end partners, the way Nokia, Ericsson, Huawei supported us and the same trend we see from the Tower partners now. The outcome has been very win-win for both of us.

[Operator Instructions] Our next question comes from the line of Choong Chen Foong from CIMB.

Are you there? We can't hear you.

Can you hear me now?

Yes. Now it's a bit better. Could you speak up a bit as well?

Okay. [indiscernible]

Foong, the line is a bit unclear on your end. I'm not sure what the problem is.

[indiscernible] Can you hear me properly?

Yes, now it's okay.

Okay. I'll try to speak clearly and slowly. Okay. First question, with regards to the integration progress. It was mentioned during the presentation by Pak Vikram that is well ahead of the target and time line. So I wanted to get -- maybe is there an updated guidance on the amount of energy, the run rate synergies and perhaps could this be achieved earlier than the earlier -- than the previous guidance of 3 to 5 years down the road? That's question number one. Second question with regards to the price increases that were carried out by the players in the market. So I hear you that the environment is very healthy at the moment. But do you see any signs of resistance from consumers or even regulators to what has been price increases so far through this year? That's question number two. Question number three, on the DC sales to BDx, what are you going to be doing with the cash proceeds? And if you could also share, what would be the cost to lease back the data center from BDx?

Yes. Let me start with the whole integration and recurring benefits. I think to remind all of us, we said that we are expecting USD 300 million to USD 400 million of recurring synergy in 3 to 5 years. Against that, after 6 months, we feel more confident on the higher side. We feel more confident that we are trending towards $400 million. And in terms of time line, we feel more confident that it will be around 3, 3.5 year, maximum 4 years. It has been very encouraging. The important point to note here is, we are talking about integrating close to 45,000 sites, which also means eliminating close to 17,000 duplicate sites. The earlier plan was to do it in 24 months. Now we are trending towards completing it in 12 months. We have got immense support from our partner. And all these things is what giving us more confidence of completing it faster and also closing it on the higher side. Coming on to the price. I think what is important to note is, one, that we have all seen the important role companies like Indosat and overall telecom sector plays post COVID. So customer behavior is also changing. Instead of looking for cheap product, they are looking for value for money and good customer experience. So that has what our focus has been, and we are very happy to see that industry is also moving in that direction. We don't see that it has been a steep hike. If you -- I don't know how you read those things, but it is more in terms of making sure that we are delivering value. Still the current yield level in Indonesia is on the bottom 2, 3 countries, if you look at in the region or worldwide also. So I think overall, it is all moving in the right direction. Coming on to BDx, we are internally assessing the use of what we want to do, whether we want to give some interim dividend or annual dividend still or we want to do something else. We are in the process of assessing that. But more important to highlight is this is a very strategic partnership for us and we start seeing some great value how this partnership also bring into our B2B business and also to Lintasarta.

Is it clear, Foong? Any follow-ups? Sorry, your line is muffled again, Foong.

How much would it cost to lease back the data center from BDx?

We'll get back to you on that after this call, Foong. We don't have the numbers on hand. We'll just speak to you after the call, yes.

[Operator Instructions]

Okay, everyone. We don't have any -- currently any hands raised, but we still have about 30 minutes left in the call. So we're going to pause here for 2 minutes. If anybody wants to ask a question, please feel free to do so. Operator, I just want to check, do we have any questions in the queue?

At this time, we do not have any more questions. Please continue.

Okay. I guess we'll close the call then here as there are no more questions. Thank you, everyone, for your participation in the call today. As always, if you need further information, don't hesitate to reach out. And if not, stay safe, stay healthy. We'll speak to you next quarter. Goodbye, everyone.

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