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

Good day, and thank you for standing by. Welcome to PT Indosat Tbk 9 Months 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 first speaker today, Pak Indar. Please go ahead.

Hi. Good afternoon, everyone, and welcome to the call today. My name is Indar, and I'm the Head of Investor Relations for the company. With us on the call today, we have 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.

Thank you, Indar. Good day and good afternoon, everyone, and thank you for joining the call today. I'm pleased to report another solid performance in the third quarter, where we again showed improvement across all financial and operational metrices. This is due to consistent execution of our strategy to become the most preferred digital telco in Indonesia. Allow me to take you briefly through some of the highlights of the quarter before I pass on to Nicky for more detailed financial results. We saw quarterly growth across revenue, EBITDA and net profit, while also adding 2.4 million customers this quarter. Very important to note that previously, our data yield continues to increase as a result of our monetization efforts. The continued strong results are driven by the resilience in demand of data despite some challenges in the economic environment. It is important for me to highlight that nowadays, more and more we see data becoming a primary than being a consumption. And then that is something what we saw in last 2 months, 3 months. Increasingly, data service are being used for productive means as Indonesia digital economy grows even bigger. I'm pleased to report that our integration is well on track, and we are ahead in many areas. We have activated more than 20,000 sites with MOCN. What does this mean? This means that more than 20,000 sites is now powered by all the spectrum, which we have, 900, 1,800, 2,100, fully loaded and fully modernized. And while we are doing integration, we have also shut down 800 duplicate sites, putting us well on track to achieve our target by 2023. This execution has been made possible by both our RAN and tower lease partner. And we thank them for their support and becoming a partner of our growth. Because of this, we are optimistic to hit the higher end of the range of synergies, which is closer to $400 million by year 4. This is earlier than what we had planned. Finally, we have also reached another milestone this quarter with our FTTH brand launch under Indosat HiFi this quarter. This is a key step towards building our portfolio. I will now hand over to Nicky for the financial performance update.

Thank you, Pak Vikram, and good afternoon, everybody. I'm delighted to share with you our financial performance for Q3. Let's start with our quarter-on-quarter numbers. Overall, revenue grew 3% quarter-on-quarter from IDR 11.7 trillion to IDR 12 trillion. This growth was underpinned by the enlarged customer base, as mentioned by Pak Vikram, as well as strong uptick of data services. You will see later we get good revenue growth contribution from all 3 business segments. Our EBITDA after normalization for one-off plus costs for Jiwasraya restructuring and rightsizing exercise, improved by 4.7%. The normalized EBITDA margin percentage is up another 0.7 percentage points. If you recall, we started Q1 at 40.3%. So in 2 quarters' time, we have improved our EBITDA margin by 2.3% to 42.6% now. This reflects benefits we get from an increasing revenue base, as well as our assets on cost control. Our normalized net profit jumped 3.5x from IDR 105 billion to IDR 475 billion. Thanks to higher EBITDA, less interest expense from reduced debt balance and with higher SG&A savings. Our net debt to EBITDA also reduced, improving the performance from 0.85x to 0.75x. Next slide, please. Here, we show a lot of details on the normalization just to give people clarity and transparency on what it just means we've made at the net profit level. Without going into the details of each adjustment, I just want to highlight a couple of points. Number one is the reported net profit. The trend is some of this reported by the booking of massive gain from the formation of data center JV in Q2. But the normalized -- secondly, the normalized net profit shows a very clear and solid upward trend. -- starting from Q IDR 105 billion, it grew -- sorry, first quarter, IDR 44 billion to the second quarter IDR 105 billion. And then in Q3, we achieved IDR 475 billion. So very solid growth there. Moving on to the next slide. As I mentioned earlier, we are seeing very good growth, very good contribution from everybody. And now we are looking at our different P&L metrics for 9 months, as well as on a quarterly basis. Let us focus on year-on-year. There are quite a number of bar charts here, many charts here. So on a year-on-year, 9-month basis, most of the movements are because of the effects of the merger. So, I'm not going to elaborate on that. In the case of net profit, we had tower sales gain in the 9 months of last year and data center profits in the 9 months this year. Both of these transactions boosted our profit for these periods to IDR 5.8 trillion and IDR 3.7 trillion, respectively. On a normalized basis, the effect of merger has brought about 38.3% of normalized EBITDA growth and the net profit rose by 16.3%. If you look at our Q-on-Q reported figures, the normalized growth was 4.7%, but it was diluted by the one-off additional employee costs from the rightsizing asset side to 3% on a reported basis. At the net profit level, Q2 net profit has included the data center profit IDR 3.5 trillion gain on a normalized basis, as mentioned earlier. The net profit growth is 3.5x, and it is very, very encouraging numbers for us. Let's move on to look at our revenue performance across the 3 segments. All of them are performing very well in Q3. Cellular expanded by 1.4% quarter-on-quarter after a very strong growth of 8.5% in Q2. And moving to the right side, both MIDI and fixed telecom grew at double digits quarter-on-quarter at 12.8% and 19.2%, respectively. How about our cost base? Let's go to the next slide. Our total OpEx for the third quarter is 3% higher after including the additional rightsizing costs. And if we are to strip out this one-off cost, the delta will drop to a mild 1.2% increase compared to our 3% revenue growth. The incremental cost for rightsizing is reflected in personnel expense as well as G&A. So, you see some increase in those 2 lines. In terms of our marketing expenses, it dropped 14%. This was because of additional spending in last -- in Q2, which was to do with promotion -- seasonal promotion for Ramadan. Now it has come back down to a more normal level in Q3. For G&A, apart from some incremental spending for rightsizing exercise, as I mentioned earlier, we also have a bit more corporate sponsorship program such as Formula E in Q3. Just to -- in case people -- when you look at the other operating income expense, you see a fairly significant movement quarter-on-quarter. Once again, this is just because of the one-off data center profits that we booked in Q2. So if you strip out the IDR 3.5 trillion there, it would explain readily the movement on a quarter-on-quarter basis. Despite the impact of the various one-offs, it's pretty apparent, our overall cost control -- costs are stable and are well controlled. Next slide, please. So in terms of our CapEx spending, our integration projects has gathered pace and the capitalized CapEx almost doubled in Q3 from the level we spent in Q2. This catch-up in CapEx booking is within our expectation and was highlighted in the previous meeting. The Q3 CapEx pushed the CapEx-to-revenue ratio up by 12.1 percentage points, but our overall ratio for the 9-month period is still 13.4%, 1 percentage point below that of last year. So, we are still not spending very high CapEx overall. But definitely, we are catching up, which is a good thing for us. Moving on to the next slide to look at our net debt. Our net debt declined by 4.8% from Q2 to Q3, as our strong operating cash flow in the third quarter and the collection of receivables from IM2 liquidation was able to offset the payment of dividend of around IDR 2 trillion. So even after the payment of this significant dividend, we still have our net debt balance coming down. And it helps to compress further our net debt-to-EBITDA ratio to just 0.75x. On a year-on-year basis, in case you wonder why our net debt has gone up so much, the IDR 4.4 trillion, for the first half reduced following the tower sale transaction in first quarter last year before the payment of IDR 9.5 trillion dividend prior to merger. Following this and the merger, net debt was up to IDR 16.8 trillion at the end of first quarter. However, our strong cash flow from operations from the second and third quarter this year help us to trim the net debt from this level to just IDR 13.1 trillion. So, this is an update for the financial section, and I will now pass the time back to Pak Vikram.

Thank you, Nicky. Let me touch briefly on operational trends. Most of our commercial indicators are positive, as I mentioned earlier, with customer data traffic and especially data yield growing. There was a slight decline in ARPU, but this is mainly due to seasonality factors with a strong Lebaran in quarter 2. And if you all remember, quarter 1 versus quarter 2, our ARPU grew 9%, and that was mainly driven by Lebaran. Our underlying ARPU continues to trend very well. Our network rollout continues with us now targeting 188,000 BPAs across the country, and we have completed the launch of 5G in Bali in August to support the G20 presidency. We have also attained some good awards this quarter. Especially, I'm very happy to receive the award of One of the Best Performing Stock. Finally, we have updated our guidance. We expect the revenue this year to grow at least in line, if not better than the market rate of growth, given our strong performance in the first 9 months so far. We have also updated CapEx guidance to IDR 12 trillion, given we are seeing good traction so far, both on the progress of our integration and CapEx project. As a result, some CapEx projects have been completed earlier than expected. This would help us accelerate realization of synergy savings and to deliver a strong and reliable data service for our customers. That concludes my remarks. I think now let's go to the Q&A session.

[Operator Instructions] First question comes from the line of Piyush Choudhary of HSBC.

Yes. Congratulations on the strong results. 2 questions for me. Firstly, can you talk a little bit about the pricing environment, competition? After the fuel price hikes, have you seen any impact on consumption or lower spends by any customer segment? And I'm curious what drove this 8% sequential increase in ARPU in the postpaid segment, if you can cover that also. Secondly, on network integration, you mentioned more than 8,000 sites are now shut down. Can I clarify that the cost savings are already reflected in the second quarter -- in the third quarter results? Or there is some kind of lag impact as many tower lease rentals would not have come off? And if you can give timeline for out of the balance sites, which are left, what is the timeline for shutdown and timeline for relocation?

Piyush, this is Vikram. Let me start with your first question on the pricing environment and concerns around the impact of inflation or fuel price hikes. So on pricing, I think we have seen a more mature trend from everyone in the industry. As I always say, that the current level of data yield is one of the lowest in the world and customers are now looking for more reliable and better experience. And everyone is responding to that. So, I think we are seeing a more mature and right things. And that is what will be reflected on the industry growth. If you look at historically last 3 years, industry was growing 1%, 2%. I think this year industry will grow at least 5%, 6%, which is a very good news for the industry. Now coming on to -- the whole thing around price increase, my learning and as a team what we saw, and this is what I tried highlighting in my presentation that data, I see this more as a primary than consumption. It has become an essential need of enabling the digital economy. Let's take an example of a Gojek driver. If the data is not there, his work stops and there are many more such examples. So, that has been one clear indicator that data is more as a primary than consumption. Yes, there has been a bit of an optimization there with food inflation of 10%, with fuel price increase of 30%. There is a bit of an optimization around past consumptions and all. So historically, if certain set of customers used to consume 70% of their quota, now they are consuming 80%. So, we are seeing how we can add more value to those customers. So, they see this more as a primary need. But overall, it is very resilient. We were very, very happy with the way -- we were also a bit nervous with all these things. But the current third quarter results gives us more confidence that now it is even more important that we focus on giving good customer experience and good services and then we want to build on that. Coming on to -- I think, postpaid, we are seeing some good traction on postpaid high-value customers and all. With our -- with merger now we have a very strong network across Indonesia, and that is why we are focusing on even pockets like Nusra and then eventually, we will try to fix Papua and all, so that we want to make sure that people understand that with IOH scale, our network works very well across Indonesia. So, we are working that path and then we are getting some good response. So, I think that is one. But you will see more work on postpaid. Postpaid, we see as a clear opportunity. We see that our current level of market on postpaid is under indexed. So in the coming quarter, you will see more and more opportunity and better performance coming out of postpaid. So, this is what is on postpaid. On this 8,000 shutdown, I will start and I will request Nicky to add. But to your question, 8,000, we have shutdown by year-end. We want to shutdown 10,000. And by first quarter next year, we want to shut down around 17,000 sites. What you see now -- the moment we shutdown, there are few things which gives immediate benefit like power consumption and all. There are few things which takes 1 or 2 quarters, yes. So, that is how it flows, and this is how we are tracking. Nicky, over to you, if you want to add anything?

Yes. Just to add that, yes, you're correct, there is some time lag between when we shutdown the site versus when we will get the savings to come into the book. Even among the savings, different elements of savings, it will come at different stages of the processes. But of course, the big significant saving will come from the tower leases. And in terms of that, yes, the expiry of leases is one factor, but we are also able to work with our partners in the power company on different arrangements. So that, for example, we would be able to relocate some of these leases to the new locations that we may need for our rollout. So even if we are not eliminating the costs in our P&L, we will be able to expand our scale and generate more revenue.

Got it, Vikram and Nicky. If I may follow up, just on this time lag, right, to reflect on the cost savings or to have the benefits of relocation, what should we think about as the time lag? Is it 6 months? Is it 12 months? When we'll start to see full benefit of this shutdown of sites?

So Piyush, as I said, there are 2 major elements there. One is -- in fact, 3. One is power. Second is managed services. Third is the tower. So the first 2 is between 3 months to 6 months maximum, yes. The third one, when it comes to towers, there are multiple angles to it. The good thing is, as I highlighted in my presentation, all the tower companies, they have given us 100% relocation right, number one. Number 2, there are some renewals and all which are all planned. So that also helps us do it. So the third one is not a straightforward 3 months to 6 months. It's a combination of relocation, renewals. But eventually, over a period of 1 year, we make sure that everything is productive for us.

[Operator Instructions] Next question comes from Hussaini Saifee of UBS.

Yes. A few questions from me. Pak Vikram, apologies because my line was cut for a moment. So, I just wanted to understand what drove such a significant growth in MIDI and fixed telecom revenues in the third quarter? And how should we see it going forward? And the second question is, again, going back to Piyush's question on the price increases. There is some softness on the macro side. So, I just want to understand, is there still a scope maybe this year or early next year for further price increases? Or given where the macro situation is, it will be more of a -- in the next maybe 1 to 2 quarters, it will be tough to do that. And third question is on the CapEx side. So yes, as you raised the CapEx guidance to IDR 12 trillion, what portion of that CapEx is also going in terms of rolling out FTTH? And what is management's strategy over there in terms of rolling out FTTH or fixed broadband? And just an housekeeping question is that the marketing expenses was down significantly on a quarter-on-quarter basis, just want to know that.

This is Vikram. Let me allow me to recap your questions. So the first one was on MIDI. Correct?

Yes. MIDI and fixed telecom.

Correct. Fixed telecom. So MIDI, we see a very good traction on our core connectivity between us and our subsidiary, Lintasarta. I want to remind all of you, Lintasarta is also one of the most preferred brand in Indonesia when it comes to core connectivity and enterprise services. So what you see there is very sustainable. In fact, we believe it will only go up because we are seeing very good demand. That also has a bit of a one-time, what we call it as OTC project coming out. So sometime between quarter-on-quarter, there are more one-time projects versus another. But the good news is the core connectivity is seeing lot of traction, and this is where we are also investing on fiber and all so that we have a good presence. We are covering more and more cities between us and Lintasarta. And on ICT side, also we try to do these projects, which have healthy margin and also it helps us on our recurring revenue. We are seeing some good traction there also. So, you can only see upward trend on that, and these are all very sustainable numbers. So coming on to your price question, I think the way I look at it, the current level of yield is very, very low and a bit more focused on experience and service and the way demand which we are seeing. Obviously, there's an opportunity. But at the same time, we want to build trust with our customers. We don't want to do major things, short-sighted things. So, we are very mindful that this whole journey of making sure that we have more sustainable and sustainable level of price, which is helping us deliver the right kind of experience. So while doing that, we don't want to be transactional and shortsighted. It is not about pressure on doing it. It is more about doing the right thing and building the trust with the customer. The third one is on CapEx. FTTH is very important to us. Again, I want to remind everyone, our aspiration is to get to first milestone is 10% market share on the home broadband space by maximum 3 years to 4 years. And the current level of CapEx is very small. We are now capitalizing on our existing fiber footprint. We have close to 50,000 kilometers of fiber laid down across the country between us and Lintasarta. And then we are trying to see how from fiber to tower, we create home passes. And at the same time, we are working with partners. We are seeing a lot of interest from partners and private equity companies who are ready to work with us on creating digital infrastructure in terms of home passes and all, and we are exploring all those opportunities. The last one was on sales and marketing. I think Nicky highlighted, generally, quarter 2 is a Lebaran quarter. The promotions and all those activities are significantly higher to normal quarter. It is more of the function of that.

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

This is Foong from CIMB. 3 questions from me. Firstly, on the mobile revenue growth Q-on-Q, I note your comment on the seasonality effects. My question is whether the tariff hikes that you carried out in mid of July, have they been fully reflected in the third quarter's revenue? Or do you think that we will only see the full effects in the fourth quarter? That's question number one. Second question. Post those tariff hikes, what have you seen in terms of the price elasticity of demand? Are you seeing consumer spend remaining very resilient? Or is there any signs that starting to -- the price elasticity effect is starting to kick in. And then my third question on the rightsizing that you have done. Are we expecting any more rightsizing costs to be incurred in the fourth quarter or even next year? Yes, those are my 3 questions.

This is Vikram. On your question of mobile revenue growth, I think we are seeing a very healthy trend. If you look at quarter 3, we have added 2.4 million customers. And we have seen in the revenue growth on back of Q2, Q2 historically is the best quarter because of Lebaran and seasonality. And we have seen a growth over that. I think we did -- yes, we did one in March and one in June, July. We have seen some impact of it in quarter 3, but the full impact, you will see in the quarter 4 full year because there are certain plans, validity and all. So to answer your question, you will see the full impact of price trends coming in quarter 4, but some impact we have seen. The important thing to note is Europe, while there was an increase on the price, there was also a lot of increase on food inflation, fuel price inflation. The most positive news for us was that we saw clearly that data is becoming primary. I personally used to categorize data under consumption. But my personal learning is data is more primary now, yes. And with this background, yes, there is a pocket size, there is a wallet share, but people are using it more productively. They are using it, whether it is student, whether it is business class people, whether it is our -- all segments of customers. We have seen some optimization on our lower segment. Their past utilization has gone up. They are trying to optimize. But overall, we see all those things have been managed and we see a more positive trend than what we had expected. Coming on to the last point on rightsizing. Nicky, do you want to add anything here?

Yes. On rightsizing, it's a one-off exercise for us following the merger. So, we don't expect any more costs in relation to that in Q4 next year.