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 Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your host today, Pak Indar Dhaliwal. Please go ahead, sir.

Thank you. Good afternoon, everyone, and welcome to the call today. With us on the call, we have Pak Vikram Sinha, our CEO and Pak Nicky Lee, our CFO. I will now hand the call over to Pak Vikram. Over to you, sir.

Thanks, Indar. Good afternoon, everyone, and thanks for joining the call today. We had a great start to the year with double-digit year-on-year in both revenue and EBITDA, which grew 10% and 22% year-on-year respectively. We are especially happy that our EBITDA grew 2x of our revenue, which is the result of merger synergy, cost optimization that we have been doing. I want to call out the focus on execution, which we have brought to this merger, is helping us both on revenue and synergy values. We also recorded another consecutive quarter of organic net profit with our normalized net profit of IDR 287 billion this quarter as we continue to deliver value to our shareholders. The next slide shows some of the highlight of quarter 1 '23. I won't go into too much of detail, but the trends are moving positively, in the right direction for us. Allow me to take you through our integration update. We have completed our network integration in 5 quarter, which is ahead of our earlier planned time line. And MOCN integration is done across our 46,000 sites, physical sites. This is one of the fastest integration that we have seen across merger in telco space, and it was made possible with the support of our network partner. The next phase is our core integration, which will focus on further optimization and improvement of our network to deliver the best experience for our customer. There are also longer tail projects that we are working on including especially the IT side and the business process improvement. We remain on track to deliver the higher end of and life synergy that we have promised, which is close to USD 400 million in approximately 3 year post merger. If you recall, in the last quarter, we talked about our move towards improving industry dynamic where we raised the minimum price of our starter pack to 25,000. I want to again call out, we did this with also ensuring that there is no increase on data quota, 3 GB and 25,000 price. This is to move out of the segment of the market that buy, then throw SIM card per month, which is creating unnecessary wastage in the industry. Again, this is one important move which we took to ensure that by design, we come out of a segment where we don't entertain customers who are coming in the market to buy cheap data GB and they do it with the SIM because it is not a good thing for us. And then we also see this not going in the right direction for the industry. So by design, by putting the right pricing and the right incentive to our distributor and channel partner, we have completely vacated the space and it has shown us early good trend. While it is still early days, we are seeing positive sign in our underlying number. We are seeing that our base, which has been with us for more than 90 days, continue to increase quarter-on-quarter, which indicate that the healthy part of our base is growing. This means we are adding serious customer and not the nonprofitable rotational churner. As a result, the underlying profitability is also improving with our EBITDA margin increasing quarter-on-quarter. Our CSAT scores have increased quarter-on-quarter, which is a positive indicator that customer trust in our continues to increase as a result of a positive benefit of network integration and the market move, which we are making. Finally, we have completed our Tower Sale this quarter to Mitratel and the [ IBS ] to Dhost where we have monetized our asset base to create value for -- from our balance sheet. I will now hand over to Nicky for more detail on financial presentation. Over to you, Nicky.

Thank you, Pak Vikram, and good afternoon, everybody. Delighted to report that we started the year with a set of strong results for the first quarter. This is the first time for us to provide you with year-on-year comparison with the inclusion of [indiscernible] results in both sets of numbers. As you can see, our overall revenue grew 9.9% or IDR 1 trillion to IDR 11.9 trillion. This growth is coming along as all 3 business segments is growing and is underpinned by a large customer base, as well as a strong uptick of data services. EBITDA improved by 21.7% as it reflects the benefits of both top line expansion and better cost efficiencies as we are able to keep the overall cost to stay at pretty much the same level a year ago. The improved profitability is highlighted as EBITDA margin percentage, increased by 4.3 percentage points to 44.6% from 40.3% a year ago. Our normalized net profit uplifted from IDR 44 billion to IDR 287 billion. Thanks to our better top line and higher EBITDA. On the balance sheet side, we continue to generate cash from operations and from our asset sale transactions, enabling us to cut net debt-to-EBITDA ratio from 1.13x to a very comfortable 0.33x. If we move on to our -- look at our key financial performance numbers on a quarter-on-quarter basis. Total revenues dropped by 2.3% comparing to Q4 of last year. That is due to 2 less days in first quarter against last quarter. If you look at the revenue on a same number of day basis, they are actually pretty much similar despite fourth quarter is the highest season of the year, whereas first quarter is the lowest. EBITDA dropped by 1% from fourth quarter because of the same reason I mentioned earlier, but it has actually grown 1%, again on the same number of day basis. The improved EBITDA led to another quarter-on-quarter EBITDA margin improvement by 0.6 percentage points. For EBITDA -- sorry, for net profit, the first quarter profit is much better than the same quarter last year due to much improved EBITDA as well as the booking of wholesale gain in Q1 this year. Our normalized net profit from Q4 dropped due to the receipt of dividend income of around IDR 240 billion in last quarter and also FX movement in favor of Q4, around IDR 170 million on our U.S. dollar cash reserves. Interest -- escalated interest rate has also had an impact on this. The difference in the reported net profit between the 2 quarters is much smaller due to a one-off booking of tax charge of IDR 340 billion in fourth quarter last year. As I mentioned earlier, all 3 business segments are growing very well, and you can see the performance in this chart. Cellular revenue year-on-year growth of 9.4% and 1% on quarter-on-quarter gain on the same number of day basis. MIDI year-on-year 11.2% expansion and revenue reduced by 10.7% quarter-on-quarter due to seasonality reasons. For fixed telecom revenue, both on a year-on-year and quarter-on-quarter basis, we are seeing over 20% of revenue growth. Moving on to cost. Total OpEx is higher by 2% from first quarter of last year, mostly due to some reversal of cost provision last year, consolidation of Artajasa and more provision for performance-related payment in first quarter this year. From quarter 4 to quarter 1, overall OpEx dropped by 3% as there were more marketing activities for the festive season and World Cup promotion last year. Other operating income represents mostly one-off transactions, which are highlighted in the footnote. For quarter 4, there was a gain of IDR 995 billion relating to restructuring of our associate Artajasa, whereas tower sale gave us a profit of IDR 722 billion in this quarter. That was the overall transaction in the first quarter. Moving on to our CapEx. As reported in our previous meeting, there was a sizable catch-up in our CapEx booking in fourth quarter of last year and spending came down to the same level, pretty much the same level as first quarter of last year. Again, we expect CapEx to catch up in the later part of 2023 in a fashion similar to what we experienced in 2022. With a positive cash flow generated from operation, next slide, and tower sale, our net debt declined from Q4 to Q1 further from IDR 11.8 trillion to IDR 6.8 trillion. This helps to compress further our net debt-to-EBITDA to just 0.33x, as I mentioned earlier. And that is a quick summary of our financial highlights. I'll pass the time back to Pak Vikram.

Thanks, Nicky. Allow me to just wrap up before we proceed to Q&A. Our operational indicators are all trending in the right direction with growth in customers, 4G data users, data traffic, ARPU year-on-year. Network integration, as I mentioned earlier, is complete and our 4G site, 4G BTS are now 152,000 while our 3G shutdown has progressed very well. There are snapshot of some of the prestigious awards that we have achieved in 2022, and we remain committed to continue to deliver world-class digital experience to every Indonesian, especially through our spirit of gotong-royong. So with this, I want to thank all of you, and let's move on to Q&A session.

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

Congratulations to the management team on strong growth. Several questions, maybe I'll start with 3. Could you give some color on what is driving a decline in subscribers and ARPU quarter-on-quarter? And is this implementation of minimum kind of starter pack leading to churn of rotational subs? And if you can provide some color on the competitive intensity and how it is trending in the second quarter? Second question is on the margin outlook. Like what percentage of your overlapping sites are now closed, like shut down or relocated? How much more cost savings is coming from there? And lastly, we saw that there is an increase in your upfront discount and customer loyalty within the financials. So what is driving that? Is competition heating up or I'm reading too much into it?

Hello, Piyush, this is Vikram. Let me start by answering your first question. I think the move which we made in January. Again, I spoke about it, we see some very good early trend. So 2, 3 things which is happening. One, greater than 90-day base, we have seen the growth on that on quarter-on-quarter. But in less than 90, which is driven by gross add, we dropped our gross add by around 4 million, which is reflecting in our base also. So these were the guys who were coming in the market to buy data, not SIM and they used to get data on a cheaper price than rebuy and they used to buy it. So this is where -- we have vacated that space and that has led to what we see in our gross add has led to the drop in our base. But when you look at the advantage of this, these were numbers or customers with the cost of SIM and what we were giving, we feel that it doesn't make sense for us at all. So by design, we have walked out and we see a good benefit of it. We have seen the same pattern. Especially we have seen the leader here following us, and I'm sure others will also follow because very clearly we can see that it doesn't make sense for any offers to -- this is a size of revenue pool, which you buy at a very high cost. So we have vacated that place by design. And as I said, early trend, we have seen a benefit of it. And I'm sure one more quarter, we will see more benefit. Hope it address your question, Piyush, or if you want to ask more into it, I'm happy to clarify. On competitive intensity, we see the whole industry moving in the right direction. And one of the examples was this whole starter pack, which we have done. We see others also follow. So I think from a competition intensity, we see everyone being more logical and things moving in the right direction. On the other one, which is on margin outlook, Nicky, you want to take this?

Hello, Piyush. We have given a guidance of mid-40s in terms of our EBITDA margin outlook for this year. There is still a significant amount of savings we will be able to achieve through the integration work while we have completed the MOCN integration. There are quite a number of sites. We are yet to complete all the related cleaning up process, maintenance work, et cetera. So we'll be getting all those engineering and site work done later on in the year. And we are very hopeful that we'll get most, if not all, of such savings into the book later on in the year.

To your last question on upfront discount on customer loyalty, I think from a customer and market angle, things are only getting better. I think some of these things last year was our first year of merger, is more of an accounting angle. But from a customer intensity or competition, I think it is all getting better, Piyush.

Just on the competition side. Can you talk a little bit about how the pricing trends are? Are you able to kind of increase the ARPUs going forward, looking at how the trends were during the Ramadan season?

Yes, Piyush. In fact, we see a lot of upside opportunity. I think same time next year, we feel more confident that we will be in the 40,000 club on ARPU. Especially with integration getting completed, we are able to deliver much better indoor experience, and we have seen the benefit of it, early trends. So I very strongly feel that we will get to 40,000 club on ARPU within 4 more quarter.

Our next question comes from the line of Hussaini Saifee from UBS.

Several questions from me. First on, Pak Vikram, data traffic trend. I see the data traffic tipped EBITDA on a quarter-on-quarter basis. So just wanted to understand that the price increase effort, is it having any negative impact on the purchasing power or affordability leading to volume dip? Or is it just a seasonal effect? Then the second question is, again, linked to that competition remains highly rational and there is potential for price increases. Now we are already in the 1/3 of this year. So looking at the trend, what's your expectations for the full-year mobile revenue growth for the industry? And finally, on the network integration side, Indosat has done an exceptional job in terms of MOCN integration. But can you maybe throw some light on the core integration as highlighted in the -- in one of the slides? Like what it entails and how much time it will take? And what kind of cost synergies it will lead to?

Let me start with your first question. I think data traffic, if you look at on an equal day basis and all, is all holding on. In fact, with what's going around us with the pressure on inflation and all, I spoke about it earlier also, data is becoming more primary. And I think now the good thing is there is a right balance between revenue growth, data revenue growth and data traffic growth. So we are heading towards a more sustainable model. There were days where data traffic was growing 50% and revenue is growing 5%. So I think now it is getting to the right model. And we don't see slowdown quarter-on-quarter. It is more of, when you look at it, normalize, it is holding on. The other question was on industry revenue growth. So I think, personally, I feel that industry should grow in line with the GDP. I think we have been playing a very constructive role on ensuring that we grow the industry. And I personally feel industry growth in the range of 5%, 6% for this year. I think you had a very good question on core integration. So there are 2 angles to core integration. One is customer experience. Let me start with that. I think with our new scale and with our distributed core strategy from 4 core network, which IM3 had, we are moving to 36 core. So the latency will significantly improve. We will be able to serve the customer in that specific region and island. So it will give a significant improvement to latency, and we are expecting to complete it in the next 3 to 4 quarters. In terms of financial benefit, for sure, it will bring some savings. But the bigger benefit is on customer experience.

Our next question comes from the line of Arthur Pineda from Citi.

Several questions. Firstly, can I just clarify the trends on your financing charges versus your debt? So financing seems to be up materially quarter-on-quarter, which is contrary to your decline in debt levels. What's driving this considering that you should have seen lower D&A and interest given the renewals on the towers are probably much cheaper than what it was in the past? Second question I had is with regard to competition. Are you seeing better cooperation across all the players in the space? Like have the 2 other competitors followed suit? Or are there outliers where there's little cooperation?

Hello, Arthur. Let me start with -- this is Nicky. Let me start with the finance interest charge question. So the driver for this, #1, would be the interest rate hike in the market. And secondly, it's related to the timing of the cash flow. If you look at our net debt movement, we get significant cash inflow towards the end of the quarter through tower sale. So while you see a significant drop in our net debt, but it may not be able to give us interest savings right away.

On the industry, this is Vikram, I see a lot more constructive behavior from everyone. So I think the industry is moving in the right direction.

So, if I just can clarify with Nicky. With regard to the gain on sale of towers, IDR 0.6 trillion, is that fully done or is there any residual booking in the subsequent quarters?

It's fully done, we got all the cash in Q1 and also the gain is also probably reflected in the current quarter.

Next we have a follow-up question from the line of Piyush Choudhary from HSBC.

I wanted to check on your cash balance from the balance sheet is rising, right? And you have received proceeds from sale of towers also. So how are we thinking about the capital allocation? Would you be using the capital to repay high cost of high-cost debt? Or there could be a possibility of dividends? And secondly, we observed there was an increase in your 2G BTS quarter-on-quarter. Can you clarify, would that be a reflection of expansion of your network coverage post completion of integration?

Hello, Piyush, let me start with the easy one, 2G BTS. Yes, now I'm happy to share with you and everyone that we have more than 46,000, 47,000 physical site. And it has led to the IM3 brands specifically, it has more than 40 million new coverage. So this is a big plus for 3 brands. And for IM3 also, there's a gain of close to 15 million new coverage where earlier we were not -- they were villages where we were not there. And now we have our services. And then on 4G, there has been a quantum jump on the -- I spoke about 157, but there is a bit of a gain on 2G also.

Hello, Piyush. On cash balance, yes, it has gone up, but some of it is to do with timing. We are facing a hefty payment -- long due payment for tower payment as well as some loan repayment in quarter 2. So most likely in the second -- end of the second quarter, you will see cash wouldn't be as big as what we have. In terms of dividend, we haven't resolved to -- decided to pay any dividend. We will continue to look into it.

For dividend, you will have to wait for the AGM, which is 15 May. So you'll have to wait for that to listen what it is.

Our next follow-up question comes from the line of Hussaini Saifee from UBS.

Just a couple of questions. First is, any color on spectrum auction, any time line linked to that? And the second question is that if we see, your competitors are trying to make inroads or trying to differentiate themselves through converged services. What is Indosat strategy over there? Or are there ways and means to for the Indosat to play in the space, not just on the FTTH side, but through wireless means? So I just wanted to get some color on this side.

Hussaini, this is Vikram. I think this quick mobile convergence, if you look at Indosat, we have all kind of license. I think Indosat is one of the company, we have fixed license, we have mobile license, we have mobile money license, we have Artajasa, we have Lintasarta. So we are in a very good place. And with our home broadband strategy, we will make sure that we are able to give a seamless fixed mobile convergence experience to our customer, and then we are getting ready for that. On the 3G spectrum -- sorry, on the overall, especially spectrum, you are talking about 5G. I think, let's see, we are -- the way we look at it, we think that next year there might be 5G. But overall, the ecosystem is getting ready, and we are also getting ready. So we are not in a hurry for that.

Just going back to the response to the fixed mobile convergence. So is Indosat going to roll out its own network on the FTTH side? I mean, what's the strategy over there?

Yes, we have launched out our brand, which is High 5. We were very happy, we were one of the fastest to get to first 10,000 customers. And we are doing it through an asset-light model where we are -- we have an opportunity to create home pass by leveraging on our existing fiber footprint. We have close to 80,000 kilometers of fiber going around, connecting all our sites, which we have built over a period of years. But we are also working with all the partners, but our strategy is asset light for the home broadband, and we are getting very good interest from many of the partner. So the journey has already started.

Our next question comes from the line of [ Aurelio Setibuti from BNI Sekuritas ].

A couple of questions from my end. I would like to ask regarding the pricing. Can you please give some color relating to the pricing? When is the time line that you may administer another price increase in for mobile? And for that, also maybe on the longer term, if you can please give some color for 2024, how should we perceive Indosat's EBITDA margin outlook in the medium-term? And on my second question, for continuing the topic on FMC. Do you hear or see that customers are reducing their mobile data consumption due to switch to the fixed broadband. Are you seeing this already and maybe impacting to really mobile data consumption?

Let me start with your last one on customer switching consumption. I think we have not seen any such thing. Please understand, Indonesia home broadband penetration is only 13%, 14%. So we have not seen anything like that. And we very strongly feel that the ARPU will grow for us. We have an upside. Talking about EBITDA margin, I think we are in a very unique position. We are currently at a level of, Nicky spoke about in our guidance, mid-40s, which we are very confident. But from a 2024 outlook or a little longer-term outlook, we have already said that our synergy value, will be able to deliver it in a shorter term and at a higher number. So if you do your math, you can understand, we are heading towards 50% EBITDA margin. It's just a matter of time. So you can do your math and look at it by then. But this is where directionally we are heading towards. On pricing, I think Indonesia continues to be among the bottom, not only in the region, but across the world, if you look at it, the current level of yield and also ARPU is in the bottom. So there is an upside opportunity. And we want to make sure we are very transparent to our customers, and we are very consistent. We have a strategy of simplicity, keeping things simple. We have been reducing our pricing plan. We used to have more than 250, we have brought it down to less than 30, 40. We want to even bring it down. And we want to make sure that we have a simple and transparent product. We want to reduce complication. And what I can tell you is we feel more confident at the same time next year from a level of 34,000, 35,000 ARPU, we will get to 40,000. This is where we are.

Next we have a follow-up question from the line of Arthur Pineda from Citi.

Sorry, just one follow-up, please. Just to look back to the question on fiber, are you able to share any targets that you have on the fiber side? And who are you dealing with in terms of infrastructure? As I understand, XL has actually signed exclusive agreements with Protelindo. Are there any other fiber providers that you're dealing with?

We are getting a lot of interest, but I'll not be able to tell you the names. But we have everyone on our table and everyone is very keen to work with us, all the existing guys you know, and there are new guys also who are very serious on the Indonesia potential. There are a lot of PE guys who are ready to put more money on fiber. So that gives us a lot of confidence that we want to get to a 10% market share on home broadband by 2026.

[Operator Instructions] I'm showing no further question. I would now like to turn the conference back to Pak Indar for closing remarks.

Thank you, everyone, for joining us this quarter. As always, if you have further questions or you need further details, please feel free to reach out to us. And we'll speak to you guys again next quarter. Thank you very much.

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