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 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to hand you over to our first speaker today, Pak Indar Dhaliwal, Head of Investor Relations.

Thank you, Amber. Good afternoon, everyone, and thanks for joining us today. With us on the call today, we have Pak Vikram Sinha, our Chief Executive Officer; Pak Nicky Lee, our Chief Financial Officer; and Pak Ritesh Kumar, our Chief Commercial Officer. I will now hand over the call to Pak Vikram for his opening remarks.

Thanks, Indar, and good afternoon, everyone. I would like to start my presentation by giving a recap of our strategic goal that we presented at our Capital Market Day. If you all remember, as we said, we have 4 key focuses. #1, double down on core. And when I say so, especially beyond metropolitan cities. #2, growing our home broad business. #3, unlocking the potential of AI. And that is linked to what we always say, whatever is connected need to be secured, which is securing the nation. With the ultimate focus on putting the power in the hand of our customers as we seek to empower Indonesia, in the first half, I am pleased to report we have made progress on all 4 initiatives. Our cellular revenue grew by 13.4% year-on-year to IDR 28 trillion. This was led by strong growth in rural. And importantly, we are growing both our subscriber base and our ARPU. Our home broadband customer base has increased to 345,000 customers with our home passes at around 1.5 million homes. We have signed strategic partnership with both NVIDIA and Google, and this will drive us on our AI NorthStar, which I will walk it in more detail later. Finally, with our partner, Cisco and Mastercard, we have taken a step along the journey to securing the nation. On our financial numbers, I'm pleased to report that our focus on sustainable profitability has seen our EBITDA increase double-digit by 18% year-on-year to IDR 13 trillion. Our normalized net profit in the first half is at IDR 2.7 trillion, showing a strong year-on-year increase of 112%. Since the merger, we have spent $1.6 billion on cumulative CapEx, building a world-class network experience and keeping customer at the heart of everything we do. This has led to a reputable third-parties such as Tutela, Opensignal, recognizing our strong network, which is now very strong in core, excellent consistency and quality, very, very strong on gaming experience as we also see our Net Promoter Score, which is a measure of customer satisfaction, increased steadily. We are blessed to be in Indonesia where we still see a huge opportunity for Indonesia and IOH. Indonesia remain under-indexed relatively to other nations. As you can see from this slide, as both ARPU as a percentage of GDP and mobile data consumption is the lowest among regional peers. As customers increasingly focus on reliability and experience, we are committed to deliver that world-class experience to realize Indonesia potential. Finally, I want to share our AI NorthStar, which will continue to see drive our business forward in next few years. We are well on our journey to become an AI-native telco where we embed AI in core of everything we do, which will allow us to move forward becoming an AI-native TechCo where we will establish AI business line for enterprise companies in Indonesia. Finally, we will play our role in becoming an AI nation shaper where we will develop national capabilities through center of excellence and talent development to bring Indonesia on the forefront of AI revolution. This ends my introduction, and I'll now hand over to Nicky for the financial presentation.

Thank you, Pak Vikram, and good day, everyone. I'm delighted to report our strong results for the first half in 2024. Our revenue grew 13.4% from IDR 24.7 trillion to IDR 28 trillion. This growth was underpinned by robust demand for data and connectivity services, driving revenue growth in rural and we also get a significant uplift in home broadband revenue. We have been consistently delivering this proportional growth in EBITDA. And there is no exception to this period as the expansion in EBITDA was up to 18%, adding IDR 2 trillion year-on-year to IDR 13.4 trillion for this period. Our continued efficiency drive helped to raise EBITDA margin further by 1.7 percentage points from last year to almost 48% for the first half. Below EBITDA, our net normalized profits more than doubled from IDR 1.3 trillion to IDR 2.7 trillion. This massive improvement was driven both by top-line growth as well as cost efficiency realization. We are also continuing to deleverage our balance sheet with our net debt to EBITDA being trimmed further from 0.45x to 0.36x, reflecting strong cash flows generated from operations. If you go to the slide and focus on -- just on our quarter-on-quarter numbers, we were able to deliver growth, as mentioned by Pak Vikram, earlier at both revenue and EBITDA levels with a quarter-on-quarter improvement of 2.2% and 6% respectively. Both normalized and reported net profit was significantly higher than those of the first quarter. The improvement was 14% and 11% respectively. Moving on to cost. While we are generating good growth at the top-line level, we have put -- continue to put a tight squeeze on our cost. Total spending on cost of services and OpEx dropped 1.2% quarter-on-quarter. Comparing to last year, the increment was 9.6%. This has reflected mostly a 3% impact from cost gross-up due to new distribution model and another 3% for the extra lease line required to deliver enlarged home broadband revenue services and also to meet other additional demand. These things are not new for this quarter, but it will show up in the year-on-year and create some distortion. Below cost of sales and OpEx, G&A is up by 7% quarter-on-quarter. It has included a one-off adjustment of IDR 150 billion. The delta would become around 3% excluding this adjustment. You would have noticed other operating income dropped year-on-year from IDR 624 billion to IDR 81 billion. That's because of a one-off income relating to our tower sale in first half of last year. On a quarter-on-quarter basis, the movement is to do with FX volatility. And there's also a little bit of equity results pick-up from our associates and JV. On to our CapEx. CapEx capitalized tends to be a bit slow in H1 and it shows in this semester too with a CapEx capitalization of IDR 4.5 trillion. We are fairly confident that we will catch-up as we have done in the previous years and get closer to our IDR 20 trillion guidance for the full year '24. As mentioned earlier, we have trimmed our net debt. It was down from IDR 9.4 trillion to IDR 9.8 trillion, falling to IDR 9.24 trillion, which represents just 0.36x of our EBITDA. On a quarter-on-quarter basis, the net debt has grown and it was to do with a number of items. There's a dividend payment of IDR 2.2 trillion. There were also a number of lumpy payments totaling around IDR 3 trillion relating to a new tower lease payment giving towards the first half, final income tax for 2023 and also spectrum fee payment of approximately IDR 146 billion. There's a quick update on our financial performance. Happy to pass the time to Pak Ritesh.

Good morning. Good afternoon, everyone. I will just talk about consumer business, how it's progressing. Very happy to announce that we have been able to increase our subscriber base this year as well, 5.9 million. With subscriber base increase, we also have seen a growth of our ARPUs by around 10.5% to stand at 38,000. And as we keep on talking about empowering every Indonesian and giving power in the hand of consumers to decide their usage and what to buy and how to play into digital arena, we have introduced our app, which is focusing on super app kind of thing, and now we have increased this app around 5.9 million in the first half of the year. So data traffic continues to grow by 13.4%, which is a sustainable growth in line with our revenue increase. On next slide, please. So what we have observed, whenever customers are shifting towards our application, we have seen lots of digital services getting sold through app and that's resulting into higher ARPU. So on an average, the ARPUs on app is 1.8x than the overall ARPU. So the more number of customers getting into our own app, we'll continue to see ARPU growth and that strategy is working well for us and we'll continue to focus on own app penetration. Next slide, please. Very happy to announce, as Vikram also said that and Nicky also talked about realization of our capital expenditure, we are keeping customers in center of our all the investment. And that is how we have consolidated our core and happy to announce that we have completed that consolidation. And as a result, customers are getting faster download speed, lower latency for a better gaming and live video experience. To make sure that we are getting closer to our customer when it comes to higher Internet speeds, we are happy to announce that we have reached to 1.5 million home passes and our subscriber base increased over last year has been from 17,000 to 345,000. So that's all from a commercial side, we'll give it back to Indar.

Yes. Thank you. Amber, can we move to the Q&A?

[Operator Instructions] Our first question comes from the line of Arthur Pineda from Citi.

3 questions, please. And congratulations on your numbers. We've seen very good performance operationally. I'm just wondering what can be done to improve the liquidity of the stock given that its people are just relatively limited. So the challenge is that we do find a lot of global investors as is reluctant given the liquidity. I'm just wondering what can be done to address that? Second question I had is with regard to 5G licensing in Indonesia. If you can just provide us with an update what are your expectations on timing and terms? And last question is with regard to broadband. I'm just wondering why we're not seeing pass rate pick-up on broadband? You actually mentioned you have 1.5 million homes passed. But when you look at net adds on a Q-on-Q basis, it's only around 0. I think it's only around 6,000 net adds on a Q-on-Q basis. What are your bottleneck here? What's -- where can we see that acceleration to your targets?

Arthur, this is Nicky. Thank you for your question. For the first question, management team have been looking at different ways to improve the liquidity of the stock. And in fact, we have also engaged our shareholders in the discussion. To address this, we will really need the shareholders taking some actions. I don't think we can announce anything here at the moment, but you will find out more later on. So we are trying our very best to look at all the different initiatives and we are open to any ideas.

Yes. Arthur, this is Vikram. Just to build on what Nicky said, I think we also get a lot of requests and then we are working with our shareholders to see and before end of this year, you will see at least some steps in that direction. Now coming on to your next question on 5G licensing in Indonesia, the way we look at things is that we expect the 5G license to be somewhere next year, but the real investment cycle will start from 2026 which is good for Indonesia. We have seen from all over the world that 5G, the ecosystem play, the more and more ecosystem is ready. And then from our side, from ensuring that readiness in terms of our back haul fiber, we will be ensuring that all those things are there. But I have to say, the policymaker in Asia have been looking at it in a more mature manner. What we want to ensure is whenever 5G comes, we are ready to monetize it, it should not be just a speed game. But on timing, specifically, it is looking like license and all next year and then we'll see how it goes.

Yes. Arthur, for the question on home broadband, we continue to expand in new areas and some of the home passes have come later this year. And what we have done also we are trying to make sure that we are building a robust sales system, which is actually giving us profitable customers. So we have taken some actions and we see from now on some proper increase on our subscriber base in coming months. And we have already completed the distribution infrastructure and we are taking some corrective steps to make sure that we are building build-to-suit kind of home passes are coming in the areas wherein the competition is lesser and we are going to brownfield or greenfield kind of area. But first half of the year, we have seen around IDR 500 billion revenue coming from our broadband already.

Just to add to what Ritesh said, first 6 months, our focus was on consolidating what we brought from MNC Play. So I think that is all in place. In quarter 3, we'll consolidate the whole billing system. That will give us a lot of power for us to add value to the customer and our engine on the sales organization and all is ready. So we are in a good shape now, but you will see the scale-up happening especially from quarter 4.

Our next question comes from the line of Marissa Putri from UBS.

So I have 2 questions. Firstly, we used to have 40,000 Q2 ARPU target. And given how the last 2 quarters have been trending, are we still keeping this target for the year? What's management's strategy to achieve that? And is there any price increase done on the ground, especially given increasing competitive intensity recently? Secondly, apologies, I seem to miss out on the one-off cost that you mentioned for Q2 '24. Can I get details on all of these and their impact on the EBITDA and profit as well once again, please?

So thanks, Marissa, for good question. So actually, we had set initial target -- ambitious target 1 year ago when our ARPUs were around 33,000. Now we are close to around 38,000, 39,000, which is around 20% increase. We'll get to a 40,000 ARPU level. This is a milestone and actually we're going into rural areas to get the customers and our majority of the growth is coming from rural area and that's where customers are actually a marginal customer. They are actually testing our network. And what we have seen here, they are getting enough confidence to get -- convert our SIM into a primary SIM. And that's where we are quite confident. But I think this is the journey not the destination. We continue to improve than yesterday. And all the levers are in place, for example, more digital services, better customer service. And giving what customer wants rather than what we want to sell to them. So we'll continue doing that. And this is a journey I'm sure that we'll reach 40,000 soon and 45,000, 50,000 coming years. But that's a journey not the destination, Marissa.

Marissa, on cost, first of all, if you look at the number on a Q-on-Q basis, our cost of sales and OpEx overall actually dropped by 1.2%. So we're in a good place. On a year-on-year basis, there were some -- there have been some development. We changed our business model and the way we book those costs also need to be followed. And as a result, certain costs are required to be built-up and booked accordingly. So there's around 3% impact on the -- hitting our year-on-year comparison out of that 9.6% delta. And then there's another 3% purely because of more lease line requirements to support our home broadband business as well as other demand from our customers. So those are the key reasons explaining why they are delta between quarter-on-quarter and year-on-year OpEx and cost of sales.

Our next question comes from the line of Henry Tedja from Mandiri Sekuritas.

So perhaps 2 questions from me. First, regarding the marketing expense that increased quite a lot in the past few quarters. So just curious, how does the management review all the marketing expense spend in the past few quarters? I mean, does the subscriber app metrics become the priority or is there any metric that the company see from this higher marketing activities? And my second question, perhaps related to the ARPU question from the Marissa. So just curious whether IOH has increased the product price in the first half? And then related to that, just curious whether -- basically, how do you sustain the ARPU uplift trend if IOH hasn't increased the product prices in the first half? So that's my 2 questions.

Yes. Good question. Yes, there is a plan to increase our prices. And we have been able to increase ARPU by providing customers the products which they want to buy. And that's where we are focusing more on high value base. And that is why if you look at our subscriber base growth is also there. At the same time, we are growing ARPU. So both denominator is also increasing and our revenues are also increasing. As I said, it is basically coming from the rural area. So it's bringing down the overall ARPU because of new acquisition, but the existing customer continues to believe and trust in us and we see healthy improvement in ARPU. But if you look at our EBITDA, it is growing 18% year-on-year. That means we have been able to be more efficient in the market. And coming back to the cost, I think there's home broadband, which is also coming into picture as part of the cost. And as Vikram also talked about many times that we are building our distribution into deep rural areas, wherein we are coming up with 2,000 -- we have already rolled out around 2,000 small distribution points and that's where we see the cost, but the results will be fruitful in coming quarters and years, wherein we will have a sustainable growth that will also help us in bringing our ARPUs up, because what we are trying to make sure is that even the deep rural area customers should be able to replace their SIM cards. So that's the investment which we are making, which we believe is the right way of doing business for sustainable growth.