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

Good day, and thank you for standing by. Welcome to the PT Indosat Tbk 9 Month 2023 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Pak Indar Dhaliwal, Head of Investor Relations. Please go ahead, Pak Indar.

Thank you, Amber. Good afternoon, everyone, and welcome to the call today. With us on the call, 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. Over to you, sir.

Thanks, Indar. Good afternoon, everyone, and thanks for joining the call today. We kept up our strong performance in the first 9 months of 2023, where we saw revenue increase by 8.5% year-on-year to IDR 37.5 trillion. And most importantly, our normalized EBITDA is growing more than 2x of the revenue increase, close to 22% to IDR 17.5 trillion. We have also managed to deliver consistent net profit of IDR 9.2 billion this quarter, bringing the 9-month normalized net profit to IDR 2.2 trillion. This is our 11th consecutive quarter of generating a strong normalized net profit. Some of the other highlights for the first 9 months of 2023 years, our EBITDA margin, which increased by 5.1 percent point to 46.7%, while we added close to 1 million subscribers to last year, and our ARPU is also growing 2.5% compared to the previous year. Our own app is also seeing good traction as we have seen the number of monthly active users increased by 9 million so far this year. We are on track to reach USD 400 million annualized synergy by year 3 post merger, as we have completed most of our big-ticket integration initiative, which is mainly around network integration. As of 9 months 2023, we have reached a synergy run rate of just above 1/2 or around USD 205 million in recurring synergies. We continue to focus on several initiatives, which is completing the phase dismantling, which we would be done by year-end as well as core integration as well as ICT system and business process improvement. With this, I will now hand over to Nicky for more detail on financial presentation.

Thank you, Pak Vikram, and good day, everybody. I'm delighted to present our strong financial performance for Q3 2023. As mentioned by Pak Vikram, our overall revenue for the 9 months grew 8.5% from IDR 34.5 trillion last year to IDR 37.5 trillion this year. This growth was underpinned by the enlarged customer base as well as strong uptick of data services and cellular revenue. On top of that, media and fixed telecom also contributed good growth. More details to be shared later. On the back of strong revenue momentum, realization of synergies and optimal cost management, EBITDA after normalization is up by either 21.7% from IDR 14.4 trillion to IDR 17.5 trillion this year. EBITDA margin escalated by 5.1% from last year, achieving 46.7% this year. At the bottom line level, normalized net profit after stripping out tower sale gain and other one-offs jumped 2.5x from last year to IDR 2.2 trillion. This massive improvement was driven both by both our top line growth and cost synergies realization from merger. In the balance sheet, our net debt-to-EBITDA ratio had dropped sharply from 0.75x to just 0.36x, reflecting strong cash flows generated from operations as well as from disposal of towers. Going to the next slide, I have highlighted our year-to-date results, and will focus more on our quarter-to-quarter performance. We were able to continue top line growth of 0.5% despite Q3 is generally a lower season than Q2. EBITDA improved 0.9% on a quarter-on-quarter basis as extra revenue triggered down to the EBITDA line. Continuing with our EBITDA improvement journey, EBITDA margin edged up further by 0.2 percentage points to 47.8%. Normalized net profit dropped from IDR 986 billion to IDR 942 billion, reflecting mostly additional depreciation expense from capitalization of new fixed assets and some other one-off adjustments. Going to the next slide. All of our 3 business segments did well in Q3. Despite MIDI revenue fell by 4.1% quarter-on-quarter, it has still generated double-digit growth in the 3 quarters year-on-year. The quarter-on-quarter results are somewhat distorted by the timing of revenue booking and projects. We had a very strong growth for MIDI in Q2, and there were also some government projects completion that got delayed. Fixed Telecom revenue continued its traction and delivered 20% quarter-on-quarter improvement lifting the year-on-year uplift to 26.8%. Moving on to cost. OpEx reduced 2.2% year-on-year and up by 0.4% quarter-on-quarter. In Q3, apart from cost control and synergy effect, we also benefited from some staff cost and bonus provision reversal, which, to a large extent, offsetting the additional marketing spending for the festive season, mostly on Indonesia's Independence Day. In terms of other operating income expense, we booked a one-off profit for data center sale last year of around IDR 3.5 trillion, whereas the one-off gain for this year for tower sales is much smaller of IDR 0.7 trillion. Next slide. We are catching up on CapEx booking as capitalization stood at IDR 7.7 trillion year-to-date, which is 11% more than the same period last year. Our CapEx booking tends to be back-end loaded, so expect to see larger CapEx in Q3 and Q4. Same pattern is observed in 2022. Our net debt has been trending down. This is reflected in the reduction from IDR 13.8 trillion to IDR 8.2 trillion. In fact, if you look at how our net debt has come down from beginning of the merger, it has come down by less -- more than 1/2. So the amount of net debt we have at the end of Q3 is less than 1/2 of what we had at the beginning of the journey after merger. So we are definitely doing the right thing to deleverage our balance sheet, and that helps to lower our interest cost. So that is a quick summary of finance section. I'll pass the time to Pak Ritesh.

Good morning, and good afternoon, everyone. I'm Ritesh Singh. I'm handling commercial division here. Going to Slide #1, commercial. For the first 9 months, we have been able to add around 1 million customers over last year. And the next big opportunity for us was how do we make sure that we are giving power in the hand of consumer by increasing self-care application penetration, and also making it a lifestyle app for customers. So not only they can do some telco things there; they can also download some movies and also can get connected to e-commerce platform through our app. So making it a lifestyle app [ sharing ], we have seen around 32% increase. And as we speak today, we are sitting at 36.4 million app users onto our own network. We have seen a growth of around 16% on our traffic. And as a result of this app download and more people using our app, we have seen the higher ARPU on the people who are using applications or 1 app. And hence, our ARPU has also increased 2.5% year-on-year. So we are adding -- not only adding subscribers; we are also improving our ARPU per subscriber through network uses. Next slide, please. This month -- this quarter has been good for us. So in first 9 months, the major development is happening. We are going to the areas where we had lesser presence. And we have launched our services in eastern part of Indonesia, and we see lots of opportunity there. And we have added around 44,000 4G BTS overall. But the highlight is the launch of Eastern Indonesia, where we are having lesser presence. And we keep the learning from here and keep on launching some new areas like Nusa to make sure we are not only monetizing the untapped potential of Indonesia, and also we are actually giving a message to customer in Java area that wherever you go, our network will follow.

Okay. Thanks, everyone. I think that the next few slides is on our achievements and also the guidance. We'll now go into the Q&A session. Operator, can we have the first question, please?

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

Congrats on the results. A couple of questions. Maybe I go one by one. Firstly, if you can share what has led to drop in the subscriber base quarter-on-quarter? And also, we observed prepaid ARPU has fallen 1.3% sequentially, so any kind of insights over there what is leading to the same?

Yes. Thanks a lot for the question, Piyush. So if we see -- we have seen the industry voice things moving towards drop in quarter 3. Quarter 3 is always the leaner month riding on the hike in quarter 2 because quarter 2 is Ramadan month wherein people get 1 month additional salary and hence, the disposable income is quite high during Ramadan and the people tend to spend a lot. And that is why quarter 3 always is lower than quarter 2 across the industry. So that's the reason why quarter-on-quarter ARPUs are dropping. And in the month of July, people generally go for holidays. And in the month of August, school restarts and people spend more money towards their holidays and school restart, that's how this is all about seasonality impact. The subscriber drop is primarily because of seasonality and also because of people are actually -- we can see lots of people are actually making SIM card users as a 1 SIM card. So main SIM card is becoming 1. So that's the phenomenon which you have seen in the last 3 to 5 months. But we'll observe another 1 quarter, and then we'll come back to you how things are on subscriber addition. And second thing, Piyush, is 1 more thing. Now I think if you remember our last call, we always talked about that our subscriber acquisition will -- cost will be higher than the rebuy. So we are also trying to vacate a place wherein people were using the SIM card as a washing machine impact, when people were rebuying the SIM card in place of buying the recharge. That phenomenon has been -- I think we have been taking a conscious call, and that's where we have seen some impact on gross adds. However, our 30-days base and 90-days base more than 90-days base continues to improve, Piyush. Yes.

Got it, Ritesh. So may I just confirm that ARPU drop has nothing to do with any increase in competitive intensity or drop in tariff plans? Because my observation was you have increased the tariffs during the quarter. So can you shed some light? And what is the exit ARPU in third quarter?

Third quarter, we have increased the ARPU. I think September month was -- we have recovered. As I said, July, August are the months wherein we see a drop. At September, it was better than even March. So we have seen ARPUs bouncing back towards the end of this quarter. And it has got nothing to do with -- it is purely because of seasonality, Piyush. Yes.

So Piyush, so just to confirm. This is Vikram. You are absolutely right. It has everything to do with seasonality. And we are seeing things coming back very strong, and market also continues to improve in the right direction.

Got it. And second question, can you shed some light on what is leading to 65% increase in marketing costs quarter-on-quarter? And is there kind of any one-off seasonality spend again over here, which should kind of drop going forward?

Yes, yes. So of course, there is some seasonality. We have launched our Ramadan campaign and also this Merdeka campaign and also some accounting shipment. But let me tell you one more thing. This marketing expenditure, we are actually investing lots of money on building rural distribution. And if you look at our distribution strength, it's going to be 5x to 6x more distributed we are going to have in coming quarters. And we are investing lots of money in building the distribution in the areas where we are not present before and also building a service retail point. For example, a customer had to walk around 100 kilometers or maybe 50 to 100 to replace their SIM cards. So we're building a service point in the rural area wherein we are going to follow our philosophy of being closer to the customer. So customer will not have to travel more than 3 to 5 kilometers a get his SIM card replaced. So we are building distribution infrastructure rigorously across Indonesia, riding on the back of network investment. That's why we have seen some cost. And also we are -- FTTH business is getting launched, and we are going to -- be investing some money in building distribution and the marketing into FTTH business. So that explains the increase in cost, but it is well within the limit. Yes.

So can you kind of split like what is one-off seasonality-driven cost increase? And what is going to be more structural because there was a massive increase right this quarter? Is it possible to know what is the one-off element?

Piyush, this is Nicky. I think I've indicated in the last call that we are going to ramp up. First of all, the Q2 spending is below the index. So -- and then coming into Q3, we do need to spend more marketing costs for activities like Independence Day. So when you compare the 2, that's why the variance would stay now. So you're definitely asking the right question. There is some one-off element included in the increase, but that is a small proportion compared to the overall increase. Most of it is because of timing and also incremental spending in ramping up our channel program and the rest is, I think, it's like 1 million or 2 million on the channel and the rest, most of it is to do with seasonality promotion program.

Our next question comes from the line of Sachin Mittal from DBS.

Congrats on a good set of numbers. Just 2 questions. Firstly, we have seen some news about infra sale -- infrastructure sale by Indosat. Could you update us what is the rationale behind such kind of sale? And what kind of assets are these, which could be potentially sold in the future? That's number one. And number two, yes, very impressive cost savings so far. So could you give us some more details on which are the programs which are completed so far? And what else do we have over the next few months in terms of cost-saving initiatives?

Sachin, this is Vikram. On this infra sale, I think that we continue to stay focused on what we have been talking about, our asset-light strategy. So you must have seen in the last 3 years, it was our -- we did some strategic move on data center. And now we are also looking at fiber. We have our own fiber, which is close to 90,000 kilometers. So we are looking at some of these things, and we are trying to do and create a platform where we also have a strategic say on those assets. So this is work in progress. Nothing has been finalized. But yes, we were in the process of appointing the financial adviser. The whole focus is when we talk about fiber, how we can create a platform where we have the strategic fit because at an IOH level, we might have equity. If you look at BDX, we kept 25%. Here, we will look at all the options. Our fare holder, which is Ooredoo Group and TK Hutchison, they are also very keen and looking at some of these opportunities. But we are still in the process of evaluating all the options of the fiber asset. That is first. Second, on cost savings, let me start, and I'll ask Nicky to build on that. I spoke about our synergy value, recurring synergy. When we started the merger, we said 300 to 400 in 3 to 4 years. Again, happy to share with you and everyone that we are heading towards the higher end, 400, and we will get there in 3 years, not even 4 years. So the big-ticket item on network, which contributes to 80%, we have seen very good results. There are some long-tail items there. I spoke about dismantling and all. Once we are done with that, we see a little more. And there are a lot of other things around Europe, IT platform. We have a lot of such things which still have 2 platforms. So we are not only looking at it from a saving and getting the integration done. We are taking this opportunity to use it as a transformation, how do we get to best-in-class. So you will see some more benefit and results coming in the coming quarter. But I'll request Nicky to build on this.

Sachin, thank you for your question. On the cost, yes, we have been able to strip out a lot of costs and most of it is to do with realization of synergy effect, as mentioned by Pak Vikram. If you recall, we gave you a quantitative analysis on our synergy realization in Q2 with our announcement. Just to refresh it, we mentioned USD 180 million of synergy realization, USD 60 million of which is one-off and USD 120 million is recurring. So for Q3, we have managed to build on that and bring the total to over USD 270 million. But what's different is a larger split is going into recurring. So about USD 200 million is recurring and USD 70-odd million is one-off. So we're having more proportion of it going into recurring. So the next steps for us, we are working on other areas. IT is one of the key areas where we're integrating duplicated system, and there will be more synergies from having -- from dispensing some of the systems from our ecosystem.

The question is now that we have seen more than USD 200 million out of the USD 400 million, so are we talking of long-tail items being longer than 12 months from here on or bulk of that could be realized actually over the next 12, 15 months? So is there a chance of earlier than our projections in terms of time line?

Yes. Already, we are -- yes. If we compare the number I'm highlighting to what we have in the numbers supporting the USD 400 million -- USD 300 million to USD 400 million, we have already -- even for the 9 months, we are very close to the lower range, right, lower end of the range of USD 300 million. So taking Q4 into account, we will be getting close to the USD 400 million. So definitely, we are already quite a bit ahead of our original plan, and we will be getting more synergy into book. Some of the other synergies, the effect will require a bit of time to be realized. So as I mentioned earlier, the one-off synergies are also going up in Q3. So we are getting additional synergy savings continuously into the book. There's no doubt about that.

Just to add to what Nicky said, at least in the next 12 months, 12 to 15 months, we are more confident of hitting that USD 400 million number.

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

Several questions, please. Firstly, can you provide us with any update on the 5G licensing process? We have 2 months left to go for the year. Is this still scheduled for the fourth quarter of this year? Second question I had is with regard to the synergies. You mentioned that most of the USD 400 million target has been realized. So are these also being reflected already on the P&L? Or does this pertain mainly to the contracts that you've signed, which is yet to show up on the P&L? So basically, I'm just trying to figure out, do we still see margins improving into the next year? Last question I had is with regard to the question on marketing spend. I know that you've mentioned it on seasonality with the National Day and all. But a lot of this is not really seasonal, right, because up 50% on a year-on-year basis, when a lot of the same factors have been present in the same year. I'm just trying to figure out what would be the benchmark going forward? Is this now the recurring level that we should expect?

This is Vikram. Let me start with 5G spectrum. I think we don't expect 5G auction to be this year. I think we see this more after election and end of next year or early 2025. Yes, 700 might come and that too will be next year, early next year. So this is how we look at 5G on the spectrum side. 700, we are looking more from a 4G. For 5G, it will be more of 3.5, which we expect end of next year or early 2025. And we see this as a good thing for the industry and for Indonesia because we have seen learning from other market. The ecosystem needs to be ready. And then this time, we want to make sure that we are also ready before we start investing serious money on 5G. Coming on to synergy. Let me start, and I'll request Nicky to build on that. So for sure, you will see margin improving. We -- on an overall basis, while we have crossed USD 300 million and the next 12 to 15 months, we will get to USD 400 million. And in terms of P&L impact, directionally, for sure, you will see margin improvement, but I'll request Nicky to build on that.

Yes. For sure, synergy will continue to improve. Maybe not to the extent of like 5%, 6% a year kind of EBITDA margin improvement on a yearly basis, but it will continue to improve. On the P&L booking, yes, all the numbers I mentioned already reflected in the P&L.

Yes. On marketing spend, let me -- there are 2 parts to it. One, between quarter-on-quarter when you see 65% increase, it's a bit of a booking and seasonality. But the fundamental change, which we are doing, is, one, investing on rural infrastructure. I think a lot of our CapEx are going into rural area. We want to make sure we are able to monetize that by having the right infrastructure. When I talk about infrastructure, service and distribution point, which they've spoke about, which will help us do basic things like [ FIN to app ] and all because in rural, it really matters. Second, also having the right model to extract value from every BTS. We have this program called Site Equal to Factory. And we want to make sure that every investment we do in rural in terms of putting up the site or getting the advantage because of integration, we are -- we will be covering. Just to give you 1 perspective, one of our brands, 3 brands will have close to 40 million incremental coverage, and that is all coming mainly in rural. So we want to make sure we have the infra ready to monetize those. And that is where you see that year-on-year increase. But overall, if you look at our marketing spend as a percentage of revenue, we are below 2.5%, 2.6%, which is in terms of benchmarking and all, it looks good. But the real learning is we need to show whatever investment goes on CapEx. you see a lot of CapEx on network, we are able to monetize that, and that is where you see that.