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

Good day, and thank you for standing by. Welcome to PT Indosat Tbk First Half 2023 Earnings 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, Pal Indar Dhaliwal. Thank you. Pak, please go ahead.

Thank you, Desmond. Good afternoon, everyone. Welcome to the call today. With us today, we have Pak Vikram Sinha, our CEO; Pak Nicky Lee, our CFO; and Pak Ritesh Singh , our CCO. I will now hand the call over to Pak Vikram for his opening remarks. Over to you, sir.

Thank you, Indar. Good afternoon, everyone, and thanks for joining the call today. We recorded another strong quarter in quarter 2, with our revenue rising 7% quarter-on-quarter while EBITDA grew 2x of revenue growth, 14% quarter-on-quarter. This brings our H1 '22 (sic) [ H1 '23 ] revenue to IDR 25 trillion, with the EBITDA of IDR 11 trillion, both driving double-digit year-on-year. And importantly, our focus on profitability means that our EBITDA continued to grow 2x than revenue. We also continue to be net profit positive for the 10th consecutive quarter, recording IDR 983 billion (sic) [ IDR 986 billion ] in normalized net profit this quarter, bringing our first half 2023 normalized net profit to IDR 1.3 trillion. Some of the other highlights in the second quarter are our EBITDA margin, which increased by 3 percentage points to 47.6%, while we added 1.5 million subscribers this quarter, with our ARPU growing 9% quarter-on-quarter. As we mentioned in the last quarter, our network integration is complete. But we are still yet to realize the full synergy benefit, and we are on track to realizing the full benefit by year 3 post merger. We continue to focus on the initiatives we highlighted last quarter, which are core integration as well as ICT system and business process improvements. Finally, allow me to give some more additional flavor on what we are doing to grow our ARPU, which rose 9% quarter-on-quarter in quarter 2. Aside from organic growth, we are also implementing some initiatives which we believe will add value to our customer and help to increase ARPU further. We are driving higher usage through our own app, where customer is using the app tend to be higher ARPU than average. We are heading towards 35 million app customer, and we see a very strong traction there. Our customer value management tool, powered by data analytics, enhance the value proposition to our customers, such as unique offer. And finally, our digital service offering, which adds a lot of value to customers, especially customers deciding what they want. With this, I will now hand over to Nicky for the more detail on financial presentation. Over to you, Nicky.

Thank you, Pak Vikram. Delighted to present our stellar financial performance for quarter 2 2023. Our overall revenue grew 6.6% from IDR 11.9 trillion to IDR 12.7 trillion. This growth was underpinned by the enlarged customer base as well as strong uptake of data services, particularly over the Ramadan festive season. We also have all of our cylinders firing as MIDI and Fixed Telecom also provided very good growth both on year-on-year as well as on quarter-on-quarter basis. More details on this will come later. On the back of strong revenue momentum, realization of synergies and optimal cost management, EBITDA is up by 13.6% to IDR 6.1 trillion from IDR 5.3 trillion in first quarter this year. It is also the highest quarter-on-quarter EBITDA growth after our merger with Tri Indonesia. As mentioned by Pak Vikram earlier, our EBITDA margin reached new highs to 47.6%, 3% change point improvement from the first quarter. Our net profit, on a normalized basis, after stripping out tower sale gain and other one-off, is IDR 986 billion, improving by 243%. This massive improvement basically captures the entire EBITDA improvement, meaning that our costs below EBITDA stay flat while business continued its expansion. Net debt-to-EBITDA ratio increased a bit from 0.33x to 0.45x. This reflects the payment of the dividend of around IDR 2 trillion and some seasonal tower lease payments made in the second quarter. Moving on to the next slide. I'm going to move on to our first semester results versus the same period last year. Our top line year-on-year grew 9.5%. And once again, this was driven by growth from all 3 business segments. EBITDA improved much higher rate at 24% compared to last year, thanks to the 9.5% revenue growth as well as keeping OpEx at the same level as last year. With the improved profitability level, EBITDA margin widened by 5.4 percentage points to 46.1%. We have conducted one-off disposals relating to data center and towers, respectively, in 2022 and 2023. If we look at our normalized profit summarized on the slide, it has grown a massive 7.5x from IDR 149 million first half of '22 to IDR 1.3 trillion. Really pleased with our all-around strong performance from top to bottom line. As mentioned earlier, all of our 3 business segments are performing very well. Cellular attained 6.5% quarter-on-quarter growth while MIDI and Fixed Telecom, for the first half, grew 16% and 26%, respectively, over the same period last year. Moving on to cost. Our OpEx was flattish for the first half of '23 against last year as well as on a quarter-on-quarter second quarter versus first quarter basis. Apart from cost control and synergy effect, we also benefited from some timing difference in our spending pattern as our spending this year will give more towards the second semester. We will be completing more projects in the second half. And as a result of that, we will spend more sales and marketing charges -- expenses when we roll out new areas, and also, more project costs are expected to be incurred to support new enterprise projects. These costs will bring in extra revenue for sure, but the favorable impact will be fully felt in the next semester and going forward. In terms of our other operating income expenses, as mentioned earlier, we booked one-off profit for data center transaction in last -- in the first half of last year. It amounted to IDR 3.5 trillion. For this year, we also had one-off gain to a smaller amount of IDR 0.7 trillion, which is related to tower sale. And that explains why the other -- the net other operating income drop this year. Let's take a look at our CapEx spending so far this year. First half spending stood at IDR 4.3 trillion, which is 9.2% more than the same period last year. For second quarter, it was a bit subdued with booking of IDR 1.9 trillion, smaller than IDR 2.4 trillion in the first quarter. This is more an issue of timing difference. You'll probably recall we had a similar pattern last year, and we expect CapEx spending and booking to catch up in the second semester of this year. For the same timing difference issue, our CapEx to revenue ratio is quite low for both first half and second quarter this year, and we expect the ratio to rise in the second half. On to our balance sheet. As mentioned earlier, our net debt has grown a bit because of dividend and seasonal payments. Our net debt-to-EBITDA ratio has gone up a little bit, 0.33 to 0.45x but still at a very, very comfortable level. And that's the quick summary on the financial performance. I'll pass the time to Pak Ritesh.

Thanks a lot, Nicky. Good morning. Good afternoon. I'm Ritesh, I'm part of the management team here at Indosat. As a company, we are focusing on adding more subscribers to our base and [indiscernible] fiber base in quarter 2 or quarter 1, and we have crossed 100 million mark. While we increase our customer base, our another focus is how do we extract more from the consumer. And that is why we are focusing them more towards our digital services. And for that, it is important that we should keep on pushing app, and that's where we have seen a growth of around 2.5%, which is higher than the subscriber base growth. And by doing so, we are not compromising our pricing strategy. Our pricing remains stable, and we have seen a data traffic growth of 8.2%, and ARPU parallelly increased by 8.6%. So not only we're focusing on depth of our subscriber, and also, we are focusing with [indiscernible] the subscriber to make sure that we are having a long-term sustainable business. With that note, I will give it back to Vikram to take it forward.

Thanks, Ritesh. I think overall, we feel more confident. We see that the industry is moving in the right direction. With this remark, I'll hand over back to Indar.

Okay. Thanks. Desmond, can we move to the Q&A?

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

Congratulations for very strong results. A couple of questions. Firstly, on mobile ARPU, which has increased sharply quarter-on-quarter, could you help us to break up the component of ARPU increase, like what -- firstly, like how much? Is it driven by tariff hike? And secondly, how much is driven by this organic increase where customer is spending or these digital initiatives that you are taking? Secondly, like within this ARPU, has all the initiatives already reflected in the second quarter? Or there is a residual impact and we should see further ARPU improvement going forward? That's the first question. Secondly, Telkomsel has launched their fixed-mobile convergence product. So what is the likely impact of that for the industry and Indosat? Could it pose a risk where high-value customers of Indosat might churn out? Or how do you think this evolution?

Piyush, this is Vikram. Let me start on ARPU, and then Ritesh can add to it. I think in my opening remarks, I spoke about one of the most important driver is app customer. And then we have seen that we are growing very fast on our customers from the overall base using app customers. And this is one of the things. Second, on the network side, with integration getting completed, with the kind of experience and capacity. We saw it during [ the brand ] month also. We were able to cope up and also the improved indoor experience. So that is also driving. Third, I think the initiative which Ritesh spoke about, the digital services, we have started looking at how many of our customers is using digital services. And that is something we believe will continue to grow, and it will give us upside. Coming on to price. I think as I said in my remarks, we see the whole industry moving in the right direction when it comes to price. And there is a lot much more opportunity to make sure that we focus on value to customers. And with all these things, I'm more confident that we have more room for ARPU growth. We had taken a target of 40,000 milestone by first quarter next year. And I think we feel more confident that we are heading in the right direction. Ritesh, you want to add anything?

So Piyush, thanks for the question. It's coming from all across, as Vikram said, data services users, and driver is app users from where we can sell more data services. And the second one is our customer value management. So what we have seen the percentage of customers in our base who are we charging more than 2.5x of average ARPU is growing up rapidly. And that's where we'll continue to invest more to get the most from the existing customer, apart from adding more subscribers to our base.

So to your next question on fixed-mobile convergence. I think these are all opportunity for us, and we see this as a clear opportunity. I've spoken earlier also that Indonesia has 75 million homes. And today, the penetration is only 13%, 14%. And there is a need to make sure that when this goes up from a level of 14%, 15% to 30%, IOH played its part. And we have started this journey with our HiFi product, and we see a lot of upside opportunity there.

Got it, Pak Vikram and Ritesh. This is very clear. If I may ask one more thing just on the margin side, EBITDA margin side, which has improved quite healthily. Any kind of risk or potential headwinds to this margin improvement in the second half or which you are foreseeing any kind of cost pressures, which we should be aware?

Piyush, this is Nicky. As mentioned earlier, some of our spending may go up a bit in the second half of this year. But then we will also have our synergy -- more synergy effect getting into the book. But in terms of risk, if we only focus on the downside, there will be more OpEx, some of which you can look at it as like an investment when we expand our distribution footprint. And we will be getting some benefit, more subscribers, which will benefit not only the second half of this year. But it can have a negative impact on our short-term results.

Just to add, Piyush, I think on our guidance, we have increased -- we are more optimistic that we will be on the higher end of 40s. When we started the year, we were looking at mid-40s. So and then also synergy value, there is a lot of more opportunity for us, and that is progressing very well. But what Nicky said, we are also investing on growth, so we want to make sure whatever is needed to ensure that we have sustainable growth on 2024 onwards, we will invest on those things.

Next up, we have the line from Hussaini Saifee from UBS.

And again, congratulations on a very good set of results. Three questions from me. First is on the nonmobile revenue growth, MIDI and Fixed Telecom, which posted a very strong growth. So can you add some color what drove that growth and what we should expect going into second half and maybe next year within those segments? The second question is on the guidance. And again, good to hear that you raised your EBITDA margin guidance. But on the revenue side, which is expected to grow in line or above industry. So just wanted to get your view on what is your expectation of industry growth. And lastly, on the second half increased spending. So maybe a bit more color that if the marketing spend or the distribution spend is increased, what is the risk that it may trigger some competitive reaction from your competitors?

This is Vikram. Let me start with the industry. I think we believe that the industry is heading towards 6% to 7% growth, and there is more upside opportunity. We believe that Indonesia had an opportunity of double-digit industry growth as we go along. But this year, we are looking at 6% to 7%. And the way things are for us, for sure, we are confident of growing in line or a little higher than the industry. Now coming on to your question on marketing and distribution. I think the point which Nicky was highlighting, after integration, suddenly, we have close to 48,000 to 49,000 sites. And for us -- and then just to give a perspective, what that used to be 27,000, 28,000 physical site. From there, we have moved to close to 50,000. So you can understand how many much more infrastructure sites we have, and these sites are all fully loaded after integration with all the spectrum which is needed, 900, 1,800. So we are investing on the rural area to strengthen our presence. So it has nothing to do with competitive intensity. It is all about serving each site. It is about making sure that we monetize every site. So -- and that is the right thing. So this is nothing called risk. These are the right things. We are not in a shortcut quarter-on-quarter business. So we will not cut corners on doing things. And that is what Nicky highlighted. So it is nothing to do with any competition or any distributor margin. All those things keep moving it in the right direction. On your MIDI, I think Indosat and both Lintasarta is a very strong brand. In fact, we are seeing some good traction there, and we believe that these growth are sustainable. And there are some seasonality, some big accounts, some big deals. But on an annualized basis, we believe that this kind of growth will continue to happen in the 2024 also.