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

Good day and thank you for standing by. Welcome to Indosat Ooredoo Hutchison FY '22 Earning Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the call over to your first speaker today, Pak Indar Dhaliwal. Thank you. Please go ahead [indiscernible].

Thank you, Desmond. Good afternoon, everyone, and welcome to Indosat Ooredoo Hutchison's earnings conference call for the financial year 2022. My name is Indar, and I am the Head of Investor Relations for Indosat Ooredoo Hutchison. With us on the call this afternoon, we have Pak Vikram Sinha, our CEO; and Pak Nicky Lee, our CFO. I will now hand over the call to Par Vikram for his opening remarks. Over to you, sir.

Thanks, Indar. Hi, everyone, and thank you for joining the call today. Allow me to take you through some of the highlights for 2022 and our quarter 4 performance. We had a great first year of operation post merger in 2022, exceeding all expectations; and it has been one of the most successful telecom mergers, so far. Our integration progress is well ahead of schedule. Both our brands are performing well, and we have recorded a strong normalized net profit of close to IDR 1.5 trillion. This is around 76% year-on-year, and I am talking about normalized organic net profit. Allow me to take you through a bit more detail on post-merger progress. With support from our network partners, specifically Huawei, Ericsson and Nokia, we have delivered our network integration much ahead of schedule. At the end of the year, we have completed MOCN activation on more than 31,000 sites. And our site shutdown is going well, with around 13,000 sites progressively being shut down. We aim to complete the network integration by end of this quarter. Our customer base continues to grow as we continue to deliver the maximum customer experience, both on the network side and our growth mindset to ensure that we help deliver to our customers. In September 2021, in my first presentation when we announced the merger, we talked about delivering pretax annualized synergy of between USD 300 million to USD 400 million and a time line of between 3 to 5 year. Given our fantastic progress this year, we expect to deliver closer to USD 400 million in synergy in closer to 3-year time frame. Drilling down to quarter, fourth quarter, we are pleased to show the third consecutive quarter of operational and financial improvement. Our revenue grew 1.8% quarter-on-quarter, with cellular revenue growing close to 1%. This was coupled with EBITDA rising 5.5% quarter-on-quarter. And we reached -- and we recorded IDR 835 billion of normalized net profit in the quarter. Positively, we added 3.6 million subscribers, of which majority were 4G customer, indicating the quality of our acquisitions. In December, we welcomed our 100 millionth customer, another milestone for IOH that we are very pleased with our achievement year till date. I want to highlight an important move that we made in January 2022 where we raised the benchmark price for starter pack to IDR 25,000. This is to encourage healthy behavior. And we hope that the rest of the industry follow us on this minimum pricing for starter pack. Finally, I just want to talk about the growth potential of Indonesia. If you look at the digital economy metrics, this is a huge growth opportunity for Indonesia, as it will increase from 8% of GDP today to 14% of GDP by 2027. Indosat [ stands steady ] to play its part in empowering Indonesia. And there is a clear opportunity from the level of cellular revenue spend in Indonesia relative to rest of the region. I will end my opening remarks there and pass on to Nicky for financial performance update. Over to you, Nicky.

Thank you, Pak Vikram. And good afternoon, everybody. I'm delighted to report our financial performance for Q4 2022 continues to shine. Overall revenue grew 1.8% or IDR 0.2 trillion quarter-on-quarter to IDR 12.2 trillion. This growth was underpinned by the enlarged customer base as well as strong uptake of data services. EBITDA after normalization improved by 5.5%. The normalized EBITDA margin is up by 1.5% (sic) [ 1.5 percentage points ] resulting from revenue growth and savings in cost of services. I will take you through more details later on. Normalized net profit lifted by 76% from IDR 475 billion to IDR 835 billion, thanks to higher EBITDA as well as higher other income, in Q4. Generation of positive cash flow also helped to lower our net debt. As a result, our net debt-to-EBITDA ratio fell once again quarter-on-quarter to 0.61x. Moving on to our financial indicators. As mentioned earlier, our quarter-on-quarter EBITDA grew 5.5% on normalized basis. Reported EBITDA, which includes the gain on restructuring of an associated company, achieved 9.6%. [ The better ] EBITDA would bring the EBITDA margin for Q4 to be similar to the level before merger at around 44%. For net profit, you may notice there is a drop of 30% year-on-year full year. This is because of onetime profit from tower sale in 2021. There was also some one-off profit recognized in full year 2022 but not as significant as the one-off tower sale gain. However, if you look at our normalized profit, you will see the full year actually underlying profit improved by 76%; and on quarter-on-quarter basis, also rise by a similar percentage, 76%. In terms of our revenue growth, it is powered by cellular revenue on quarter-on-quarter basis, 0.9% growth for cellular business. MIDI, with the help of additional revenue consolidated from Artajasa, quarter-on-quarter improved by 10.3%. Fixed telecom revenue reduced by 13%, but the revenue decrease was related to low-margin wholesale business, so it doesn't really hurt us. Moving on to costs. We continued to exercise cautious cost control. And overall, you can see our total expenses condensed by 7% on a quarter-on-quarter basis from Q3 to Q4. Cost of services reduced by 7% also, driven mostly by booking of [ credit notes ] received; [ accrual reversals ] at the end of the year; and also, to a lesser extent, lower rental expenses following site integrations. Personnel expense returned back to the normal level after we booked the one-off restructuring cost in Q3. We spent a little bit more on marketing and general and administration in Q4 for seasonal reasons as well as on World Cup promotion. We managed to finalize the purchase price allocation for the merger with Hutchison 3 Indonesia following the valuation results assessed by the independent KJPP. We are required to book additional depreciation and amortization, and as a result, quarter-on-quarter basis, there is a one-off increase in such expense from IDR 3.3 trillion to IDR 3.7 trillion, quarter-on-quarter. For other operating expenses, we -- it has increased significantly in Q4. During this quarter, we restructured the ownership of our associated company Artajasa, which involves the sale of an equity stake to -- in this company as well as regaining control, triggering consolidation and revaluation of Artajasa. Based on the [ sale value ], IOH picked up a gain of around IDR 1 trillion, or IDR 541 billion after deducting minority interest and tax. In addition, Artajasa also paid around 220 billion of dividend before the ownership restructuring. Both the IDR 1 trillion and the dividend of 220 billion were captured as other operating income in Q4, and that explained the movement quarter-on-quarter. For Q3, there was also a one-off provision reversal relating to IM2 receivable amounting to 390 billion, which I reported in the last meeting. Going into our CapEx. We continue to catch up on our CapEx booking. So for Q4, it went up to IDR 5 trillion from IDR 3 trillion. And that took our overall CapEx-to-revenue ratio for full year '22 to 25.6%, so the catch-up is within our expectation and will be helpful to -- for our network expansion. As I mentioned earlier, our net debt has dropped. In terms of IDR, it dropped from IDR 13 trillion to IDR 11.8 trillion, 10 percentage drop quarter-on-quarter. And that helps to lower our net debt-to-EBITDA ratio from 0.75x to 0.61x. And that's a quick summary [ in my ] financial section here. I'll pass the -- hand back to Pak Vikram.

Thanks, Nicky. Moving on to operational performance. As you can see, numbers continue to climb in the right direction. Our customer, 4G customer, data traffic continues to increase. Our ARPU is slightly down this quarter, but that is due to the timing of customer acquisition, meaning that we did not have the full quarter of ARPU contribution from these customers. And we expect in subsequent quarters the number to move up. ARPU upside is a great opportunity for us. Our network footprint continued to grow, with BTS count now at 180,000. And our 4G BTS is at 137,000. We have completed our Jabotabek integration. This is a very critical one, which was most complex in December -- and look forward to delivering even more improving customer experience there and across Indonesia as we commit to empowering every Indonesian and continue to deliver world-class experience. Finally, our guidance for 2023. We expect the revenue to grow in-line or better than the market, EBITDA margin in the mid-40s and CapEx spend to be around IDR 13 trillion. With this, I'd like to again thank all of you for joining. And Indar, let's move for Q&A session.

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

2 questions for me. Firstly, can you share the progress of network integration? Like is it on track to complete by first quarter of 2023? And in terms of site relocation exercise, how much is completed? And the time line to remaining the total relocation. Secondly, on the CapEx, what is driving an increase in CapEx to IDR 13 trillion for 2023? And -- yes.

Piyush, this is Vikram. So in terms of network integration, we are very happy to update that -- if you look at my presentation deck also, I tried doing a recap. In September 2021, first time when we met all of you, we had given a guidance of we will take 24 month. And the synergy value which we had set was anything between $300 million to $400 million. And timing was 3 to 4 year -- 3 to 5 year. So we are heading towards $400 million, and the timing is 3 year. And we are very happy to share that, as we speak, we have completed close to 85% of our overall. Important market like Jabotabek is all done, 100%. And by March, we will be able -- March this quarter, we will be able to complete 100% across Indonesia. Coming on to the next question, on CapEx, I think this is a very important point to highlight. We are looking at this merger with a growth mindset and we see a lot of important areas. One of the specific area is Nusra. After merger also, our network is under-indexed. And those are the pockets where we are investing to ensure that our customers get a good network experience across Indonesia, whether they travel to Nusra or they travel to ex Java. So step by step, we are putting more focus on ensuring that there is no compromise on customer experience, and that is why -- it is not increasing. What Nicky said, this year, we have spent well. Guidance is IDR 13 trillion, so it will be in the same range, but we are working with a growth mindset.

Understood, Vikram. Again congratulations for the results, but if I may just ask on the integration side, on your site relocation, which was on the duplicate sites which were -- which you were about to relocate. Could you also share, what is the progress of that? And when do you expect that to complete, the relocation of all the sites?

I think the important point to highlight here is that, all the tower company, whether it is Protelindo, whether it is Tower Bersama, whether it is [ Persada Tama ], whether it is Mitratel, we had different kind of contracts with all of them, but now all of them have given us 100% relocation [ right ]. So that gives us a lot of flexibility to work with all of them in terms of how we are taking it forward. So our overall number for dismantling is around 17,500. 13,000 sites, we have already dismantled, but this flexibility coming from all the tower company gives us -- helps us on making sure that we have full flexibility in terms of how we want to take it forward.

[Operator Instructions] The next question comes from the line of Hussaini Saifee from UBS.

Congratulations on the good set of results. I hope you can [ listen me okay ]. So multiple questions from me. First is on the outlook. And Pak Vikram, you said that -- in-line or better than market, so I want to understand. What are your expectations for the industry revenue growth, particularly on the mobile side? And second question is again on the guidance, which is mid-40s on the EBITDA margin, but if I see your exit fourth quarter margins at around 44%, which I hope that the exit margin for the 2022 which -- in the month of December must be even better than that. So just wanted to understand like why it's still a mid-single-digit revenue -- sorry, EBITDA margin guidance. And again on the guidance, which is on CapEx IDR 13 trillion. Is some CapEx being brought forward given that Indosat is tracking ahead on the merger process? So those are my questions. I have some follow-ups but maybe starting with these.

Yes. No, I think it's a good homework for me, so let's start with 3 question you have. I think the good news is that the industry -- if you look at this year, industry is heading towards a 5%, 6% growth, which is very positive news. Last 5 year, industry was flat 1%. And we believe very strongly that the industry in 2023 and next 3-year CAGR will continue to be in the same range of 6%, 7%, if not more. And our expectation is that we will be, at least minimum, in-line. And with the scale and the network quality which we have, we can grow faster. We are very mindful of growing the industry. So this is one. And if you look at some of the action which we have taken, [ especially ] any genuine customer who want to come and buy SIM, they will be very happy to pay at least $1.5, so I think the move which we have taken of IDR 25,000 for a starter pack -- and the quota also, we have kept it in that. This is also a step towards helping industry move in the right direction and helping industry grow. We don't want customers to come in the market who want to buy data pack. And we don't want to encourage them buying SIM because it is waste of money for everyone. So all these actions, we are taking to ensure that the industry is in the right direction. The second one, second question, was on EBITDA margin. Your observation is right. We just want to stay humble. What we are telling is the minimum where we are heading towards. Rest all, you can do your work, but your observation is absolutely right. We are already at the level of last quarter, of 44%. And we see a lot of opportunity with synergy value ahead of the time and on all those things; and revenue at least 6%, 7%. We see more upside, but our guidance are generally more humble so that we -- this is the number we have given. On CapEx also, your observation is very much right. We are fast tracking our integration, and that is what is leading to fast tracking and putting some of our money upfront. And also we are making sure, especially on ex Java, if there are pockets where our network is under-indexed, we invest on it so that people get a good coverage across Indonesia.

Great. Maybe, if I can move on to my next set of questions. First is pertaining to the -- to Piyush's question. You said that Indosat is going ahead with a growth mindset, so I just wanted to understand from where that growth will come. [indiscernible], i.e., is -- the target is to gain market share, which probably is not a good news because it may come at the cost of some pricing competition. Or do you mean that the outlook is to go into under-indexed areas and try to gain market share over there and possibly try to monetize in the areas like Java where you have better coverage? That's question number one. And the second question is on fixed broadband. [ I mean Indosat said that ] -- in that fixed broadband aspiration which you discussed last quarter, in the third quarter results, so any update on that side will be helpful. And what portion of the CapEx will go into growing that business?

I think it is important to highlight my point on growth mindset. Our learning have been most of the mergers struggle because we focus too much on synergy values. Synergy value is important, but what the organization enjoys is the ability to maximize all our resources, so when I say growth mindset, it's a very important guiding principle, for us to maximize. And while doing that, we are making sure we put all our money. So just to give you an example: We already have a scale of 100 million. We have a lot of opportunity on ARPU opportunity. We have a lot of growth opportunity on covering areas and giving better indoor experience. So I think these are the things which defines our growth mindset. Pricing. Historically, Indonesia market have also seen, by cutting price, you don't grow. It has not helped anyone, but look at my slide which I have put on my deck. The cellular spend as a percent of GDP in Indonesia is only 1.3%. Thailand is 2.3%. Philippines is 1.6%. I am not even looking at Malaysia and Singapore. So I think we see a great opportunity to drive consumption, drive ARPU. And at the same time, it is very important that we deliver a very good customer experience, so these are the things which defines our growth mindset. I hope I am clear to you now.

This is very clear, but just a follow-up, and apologies if I'm hijacking the call, is that there are macro factors which we -- which telcos in other markets do -- are facing challenges on the back of that. High inflation is one of them. Are then -- are those an issue in Indonesia, in your...

I think 2 things is important here. Yes, these are real things around us. And we have seen a bit of a challenge on inflation, on customer optimizing their data packs, but the good thing is our telecom services is more consumption than primary. So the need of these products to drive the overall GDP, I think we -- this has been our biggest learning, so -- at a point where we see some of the challenges. And the good thing is Indonesia is better off than some of the other countries or in the region. So overall, things are looking quite positive for us from an overall industry outlook also. I think you had another question on FTTx: So FTTx is a very important initiative. We launched it last year, in September. We have got a good start. We are now looking at scaling it up, but it is a very core part of our strategy. And we are looking at doing it as a -- Indosat, as an opco, we have asset-light opportunity, but we have strong group [ like ] Ooredoo and CK Hutchison. And there are a lot of interests from other private equity companies to partner with us on the fiber play. So we want to do this in partnership, but at an IOH level we want to be asset light.

Next questions, we have the line from Sachin Mittal from DBS.

Can you hear me?

Yes, Sachin.

My 2 questions -- yes, yes. 2 questions. Firstly, when I look at your return on invested capital, actually it is still below the cost of capital which is WACC, so how much time or how long do you anticipate that ROIC can exceed WACC? That's question number one. And especially, I think you talked about, on one hand, cost cutting. On other hand, we are talking of a little bit of high CapEx, so I think both factors kind of counterbalance each other, so just some light on that will be very interesting, ROIC versus targets on anything [ we have a mission ]. Number two, while we -- on the 5G spectrum, I think Omnibus clearly says that it's allowed. Sharing of spectrum is allowed on new technologies. Can you share if -- do you think there's some hindrance [ in case ] of any 5G spectrum coming up? And any anticipated time line for that? And would Indosat be keen to share the spectrum costs and network rollout with another partner?

Sachin, this is Nicky. On the ROIC question, it's really a function of how quickly we can ramp up our profit, right, so it wouldn't be in conflict with the cost movement. As Pak Vikram mentioned earlier, it is important for us to realize the synergy we set out to achieve from the very beginning of $400 million. And this is a per -- annual saving we are talking about, right, so we are confident that we will be able to achieve the high-end of this range. At the time when we gave this indication, we talked about $300 million and $400 million. Now we are confident we are able to achieve high end of it. And a lot of these savings are coming from efficiency gained from the merger, particularly from the network area. And there wouldn't be any chances of us compromising the performance of our network system experience, et cetera. So it's not something that will be able to come in a single quarter or 2 but gradually over time, as you can see from the improvement in the EBITDA margin quarter-on-quarter, 1.5%. You -- the margin improvement will flow through to our NPAT also. So if you look at the quarter-on-quarter. Or like from Q1 to Q4, our net profit improved from 44 million -- sorry, IDR 44 billion on a normalized basis to over IDR 800 billion in Q4. So that is a very significant improvement just within the year of 2022. And of course, looking forward, we are giving a guidance of -- for EBITDA margin of mid-40s. And there is a chance we would go higher than that, but we don't want to give further guidance or details on this yet, but this is very much the focus we are working on for 2022 -- sorry, on 2023. And that will also -- as more and more progress is made, we will report and then you will get a much better idea on our progress. So what you ask is very much in line with what you're seeing and what we are focusing on doing.

To your next question, on 5G. I think, 5G spectrum, we are very supportive of these are resources which is -- need to be utilized, so we are very open for looking at all those options. And we have already started working on it. When it will happen, it will be difficult for me to say, but whenever it happens, we are getting ready for it.

[Operator Instructions] Next up, we'll have the follow-up questions from Piyush Choudhary of HSBC.

Can you hear me?