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 2024 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 first speaker today, Pak Indar Dhaliwal, VP, Investor Relations. Please go ahead, sir.

Thank you, Amber. Good afternoon, everyone, and thank you for joining us today. With us on the call today, we have a 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. Over to you, sir.

Thanks, Indar. Good afternoon, everyone. Before I get into the highlights of -- for the first 9 months of 2024, I'd like to talk about staying true to our greater purpose, which is empowering Indonesia. This continues to be guided by our key pillars: number one, double down on our core business; number two, become the premium home broadband partner; number three, leading sovereign AI. And as I said earlier, whatever is connected need to be protected, which is our focus on security. While we focus on these pillars, we also embedded AI in everything we do. Our continued focus on executing this pillar have led to strong performance in 9 months of 2024, where we have maintained double-digit growth across all financial metrics as we continue to deliver positive returns to our shareholders. In the first 9 months of 2024, our revenue has grown by 12% year-on-year and our EBITDA continues to grow faster than revenue, increasing by 15% year-on-year. And our net profit, if you look at normalized for one-off had grown even stronger, increasing by 73% year-on-year. We are also benefiting from the merger synergies that we have delivered above what we promised at around USD 450 million of recurring annualized synergies. Delivering this strong growth is our core business, mobile, which remains stronger than ever. We continue to invest to build out our network to deliver a world-class network experience. This year so far, we have added around 3,000 new sites, which means adding 2.1 million customers of additional population covered and covering around 370 new villages in rural Indonesia. Our digital leadership through our digital app, which are IM3 and bima+ have seen an increase of 5 million new app users year-on-year. As we bring more customers to our digital platform, this is having a positive benefit to us as the average ARPU of our app users are 50% higher than our overall base ARPU. And our apps are highly rated with a 4-plus star rating on the app stores. Our investment in our distribution to continue the expansion means that we now have more than 2,000 new rural distribution points and around 2,500 new service points to be able to better serve our customers across the country as the perfect complement to our network where the population covered has now reached 92%. Finally, our new growth engine are set to lift off where we have secured customer for our AI cloud services and will start contributing more and more over the coming quarters. We have seen positive momentum, especially with the partners we have bought onboard along with NVIDIA, being Google and Accenture, we are committed to our goal of being a sovereign AI cloud leader. We will have our landmark national Indonesia AI Day in November, which will further drive growth to our AI ambition in Indonesia. That ends my introduction, and I'll now hand over to Nicky for financial presentation.

Thank you, Pak Vikram, and good afternoon, everyone. I am delighted to report strong results for the first 9 months period in 2024 for IOH. Revenue grew 11.6% from IDR 37.5 trillion last year to IDR 41.8 trillion. This growth was underpinned by robust demand for our services, data connectivity across B2B, B2C and home broadband. We have been consistently delivering higher growth at EBITDA level, as mentioned by Pak Vikram earlier. And there is no exception in this period as the expansion in EBITDA was 14.5%, adding IDR 2.5 trillion to IDR 20 trillion EBITDA for the 9 months in '24. Our continual efficiency drive helped to raise EBITDA margin further by 1.2 percentage points from last year to 47.8%. Below EBITDA, our net normalized profit improved by 73% from IDR 2.2 trillion to IDR 3.8 trillion. And this improvement was driven by both top line growth as well as cost efficiency realization. Our gearing level continue to be low and comfortable with net debt of 0.37x of EBITDA. Going into our -- comparing our third quarter performance against that of the second quarter. Revenue reduced by 2.2%, due largely to seasonality reason, as Q3 is usually the softest quarter for the industry. This has led to a fall in EBITDA by around IDR 300 billion, and for NPAT, also dropped by a similar amount. Moving on to cost. Our overall spending on cost, cost of services, OpEx, et cetera, together, actually same as Q2. On a year-on-year basis, marketing expense is up by 40%. It looks glaring. As explained in previous meetings, this is largely due to [ growth up ] in commission and costs payable to distributors, following adoption of our new business model. If we strip out all of those adjustments and normalized the actual marketing spending, it has gone up by only 6% on a like-for-like basis. Moving on to CapEx. CapEx lending is tracking fairly close to last year. As you have seen in these years also, more CapEx is expected to be booked in the fourth quarter. My final slide is on net debt. It has edged up by around IDR 1.5 trillion year-on-year. This is only due to the timing of CapEx payment as we catch up on some of the invoice payments relating to last year. And that's a quick summary of the finance presentation. I'll hand over the time to Pak Ritesh.

Good afternoon. For 9 months 2024, we have seen a drop of around 0.7 million customer base, and our ARPUs have increased around 8.7% year-on-year. As Vikram explained, as our ambition to give power in the hand of consumers and making sure that we are empowering every Indonesian, we have actually been able to increase our MAUs by 5 million, which is also attributing towards our better customer satisfaction. And on top of that, we are saving some cost of distribution, and that is actually helping us improve our EBITDA faster than our revenues. Data traffic continues to grow double-digit, 12.6%, but this is more sustainable. And we continue to grow our revenues in line with our data traffic growth. As I said, 5 million additional users are actually helping us monetize our digital services and now our customers in a much better way. We have been able to empower more Indonesian by giving them loans, the people who are unbanked or underbanked. And that's also actually helping us brining more ARPUs. That -- the customers who are using our app is 50% more ARPU than the U.S. average. So we'll continue to invest a lot of money and time and energy on developing our app because that helps us bringing more ARPUs and more customer satisfaction. And as Vikram also talked about, we are trending around 4.5%, which is one of the best in Asia and our best of our knowledge, second best in the world. We are the first company in Indonesia to launch Telco Agnostic SuperApp. What does that mean? That means a customer who is not having Indosat SIM card can still download our app, and they can use the facilities available. And we have seen around 3 million to 4 million such customers on to our base that shows that our apps is much attractive for the normal customers as well who are not our users. Next slide, please. And we continue to have a mindset which is a maximizing mindset and being closer to the customer, giving better service to the consumers. Because we do believe customers are looking for better services. So we continue to invest into our network, and we have added around 21,000 4G BTS. And 2G BTS also continues because we wanted to capture some of the voice data -- voice traffic. And hence, we'll continue to look at some technology which is empowering every Indonesian. So that's all from commercial side.

I think just to conclude, this is Vikram. In spite of a lot of micro challenges, softening on consumer demand which we have seen not only in telco, across the industry, in fact, we are least impacted. We stay committed to the guidance which we have given in the beginning of the year for 2024.

Thanks, Vikram. Thank you, Pan Nicky. Thank you, Pak Ritesh. We can have the first question now. Let's go to the Q&A. Thank you, operator.

[Operator Instructions] We will now take our first question from the line of Piyush Choudhary from HSBC.

Several questions, actually. Firstly, on subscriber base. This has been continuously declining. On the one side, you have been expanding coverage in rural areas. So what factor is attributing to subscriber loss, if you can highlight that and the outlook for the same? Secondly, on ARPU, we have seen some weakness on a quarter-on-quarter basis where ARPU has declined sequentially. What is driving that? And if you can, again share the outlook. And thirdly, on the EBITDA margin outlook. Your guidance still states EBITDA margin inching up closer to 50%, but third quarter, you're around 47.6%. So could you highlight what cost elements you are expecting efficiency? And is this more of a fourth quarter target or it's more kind of next year target now on 50% EBITDA margin?

Piyush, this is Vikram. Let me start with the customer base. I think first, what you see now is because of the softening consumer demand and micro challenges, especially during the transition period from one government to another, there are a lot of social security schemes and a lot of things which was put on stop during transition, which led to a lot of SIM consolidation. So what is happening is people who have 2 SIMs, they are consolidating and spending only on one SIM. And this is coming from low value and very low value kind of a customer. So this is more of a SIM consolidation phenomena which we have seen in the market. But our underlying health, what you heard me and also Ritesh talking, whether you look at our data unique users, whether you look at our app users, whether you look at our daily VLR, is all getting more stronger. So that is why when I say we stay more confident, what we have seen during the time where macroeconomics are challenging, consumer demand are soft, still we -- our fundamentals have been getting stronger. And on the rural customer, we are seeing more base -- serious base first-time users coming to us because of the rural expansion. And then we'll keep getting benefit of that.

To add on to what Vikram said, Piyush, we are also looking at higher growth coming from non-Java market. So we have seen subscriber base growth. And basically, we report 90 days base. So what Vikram said, our VLR is growing, our data unique user is growing year-on-year. So all underlying parameters are in place. On ARPU, it is a seasonal one. Quarter 3 has always been softer, as Nicky also spoke about, softer quarter for entire telco industry, number one. And number two, with the SIM consolidation happening, what just Vikram explained about, people are spending more on primary SIM rather than using both the SIMs. So that's how our ARPUs have been declining for quarter-on-quarter.

Piyush, on EBITDA margin, as you know, it's a function of a few things: the top line growth, revenue mix, of course, also how much money we are spending on the cost of services and OpEx. So we've been seeing more B2B revenue getting into the book, right? So in a way, diluting the overall EBITDA margin. But we still see a lot of optimization opportunities for us to improve our efficiencies, adopting AI and the latest technologies to reduce the spending on not only cost of services and OpEx, but also on our CapEx investments. So we will continue to do that, and you've been seeing we make very good progress in the last 2 years in achieving EBITDA margin percentage growth, right? While we are not there at 50%, we -- like what we mentioned in our guidance, we are confident we will get closer to 50% in the current quarter. So thank you for your question, Piyush.

Just following up on subscriber and ARPU question. So the softness is more pertaining to 3Q. Are you seeing trends improving in October where subscriber base is improving, ARPUs are improving? Could you share some light on how you're expecting on both subscriber and ARPU going forward?

So we cannot talk about our quarter 4 numbers. But what we can tell you that in the September month, our month-on-month revenue as against August, it increased after fall of July and August. And we see similar trends in the last 2 weeks also. So what we can see that we have growth in September over August on EDB basis on revenues. And also, we have also seen we have increased the prices. That is also giving us some impact on ARPU, and also data yield also improving in the month of September. Of course, in quarter 2 -- quarter 3 basis -- quarterly basis not wherein but in September or August, it is all positive, what you just spoke about.

Right. And just last one. The price increases were already reflected in September, or it will show in the fourth quarter? And how much price increase you have taken across?

I think, Piyush, what Ritesh said, the trends are looking good. What we need to understand, quarter 3 was a very unique quarter from a government transition, which was very more unique. While overall quarter 3 seasonality is always lower than quarter 2. But this year, because of the transition from the current government to the new government, a lot of social security, a lot of support, which is more administrative, which was put on hold, and again, it will get started. So we are seeing good traction because our fundamentals are strong on quarter 4. And that is why we are confident on staying committed to our guidance.

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

Several questions, please. Firstly, can we get some color on the broadband user growth and revenue momentum? I'm not sure why this is trending lower Q-on-Q, year-on-year. Where are we in terms of net adds for this space? And second question I had is with regard to pricing, which I think was raised by Piyush earlier. Can we get any clarity on when this was implemented and what delta had been seen on the pricing side? That's the second question. Third I had is with regard to the MIDI service. I do know that it's gone up a fair Q-on-Q and year-on-year. I'm just wondering what are the nature of this contracts? Are they chunky contracts? Or are you seeing this as a recurring in nature and should expand going forward? And maybe just the last one, sorry, it's a fourth question. With regard to the issue on the distributors on reactivating SIM cards, I was wondering what is this covered upon further examination? Is this just a one-off? And is the scope quite limited?

Okay. Thanks a lot for the questions, Arthur. First of all on HBB. HBB, last 3 months, home broadband, we have been growing our revenues 1% on revenues. In the month of September, we did some IT transformation, and that's where the activations are not happening. And because, as you know, that we took over MNC. And after the IT stack was getting transferred, and that's where some glitches were there. But on subscriber base growth, the last 3 months, we are seeing subscriber base growth. And also on revenues month-on-month, it is increasing, and we have seen positive trend this month also. On coming back to price increase, that full impact will come in quarter 4. We'll continue to increase price. But yes, we have done some price changes already increased in the month of -- third week of August. But that's not on the entire channels. But maximum impact will come in quarter 4 in terms of price. And we have increased around 5% to 9% on online channels and our own channels. So that's -- and coming back to pre-activation of the SIM card. We never -- we have an agreement with the distributor, and it's part of our clause that every month distributor gives us a commitment that they are not getting any SIM card getting activated at their location. And we continue to monitor that and we'll continue to have very clearcut guidance on that. And we'll continue to give them the guidance that they cannot activate the SIM cards there. And it was a one-off thing which was happening and we'll continue to improve from here in our distribution. As we said, we are going to have a smaller distributor and in the deep rural area, wherein the distribution can bring us the face behind every SIM card will continue to drive that. And that is why for the last 5 to 6 quarters, we have been hearing us talking about expanding distribution and bringing small, small distributors getting into direct distribution model rather than working with only 10 to 15 to 20 big distributors. So as we speak today, I think in last meeting also, I've just talked about these to have 50 distributors amongst IM3 and Tri brand. As we see today, we have about 2,060 distributors, small and big distributors across Indonesia, that will make us having much better control on distribution. On MIDI?

On MIDI, the increase in revenue is organic. It's not so much one-off. So we do expect the revenue in the B2B space to grow continuously. So as I mentioned earlier, we get better contribution from the B2B side in the current quarter.

I think -- this is Vikram, I think to your point on B2B, especially on our AI cloud, AI factory, all the contracts which we are getting is minimum 2-year, 3-year contract. So it is building up a very strong recurring business.

Understood. So if I could just clarify, what kind of margins do you realize on these services?

These services, EBITDA margin is in the range of 30%, 35%. But what close to net profit is a very strong 18% -- 17%, 18%. So that is why what Nicky was explaining, our mix of revenue is changing. Especially on B2B and FTTH, it comes with a lower EBITDA margin, but much higher net profit. Because below EBITDA, it has no impact. But on B2C, the EBITDAs are higher. There is a lot of cost around depreciation because of CapEx loading and all. So overall, if you look at our net profit, that is why we are getting a very healthy growth. If you look at our normalized net profit, it is close to 73% growth year-on-year.

[Operator Instructions] We have a next question from the line of Henry Tedja from Mandiri Securities.

Perhaps 2 questions from me. First one, I think, Pak Vikram and also Pak Ritesh mentioned about the challenging macro. So just curious, can you provide us some color on how bad is the impact of the consumer purchasing power in the first half or 9 months? And how do you see the trend in the fourth quarter and perhaps next year? That would be my first question. Second question, perhaps more about a housekeeping question. I think Pak Vikram mentioned earlier about the synergy from the merger of Indosat and Hutchison, which now stands around like USD 450 million, right, which is above the initial guidance. Just curious where those all the synergies that -- the excess synergies comes from? And do you think we can still see some synergies excess in the future as well? So those are my 2 questions.

So on -- Henry, thanks for this question on macroeconomic challenges. I think this is more specific for last 5 months, I'll say. Generally, quarter 3 seasonality is softer than quarter 2. But this year, because of the transition in the government, we have seen especially lower middle class. And last 45, 60 days, especially August and September, we saw people who were on the social security net because some of these things was stopped. We were seeing that in our Artajasa because we see all the transaction, which goes through that. There also, we saw the impact. So the impact is across the industry. This is something which is whether it is FMCG, banking. When I talk to my bank CEO friends or FMCG, it has been felt across. So the good news is, what Ritesh spoke, I think September was a little. But October, we are seeing more. And November, again, we expect this to get better. So I think quarter 4 will be better in terms of -- especially the government transition things will take a little more time to get the full positive impact, but it is getting better now.

Yes. And thanks, Pak Henry. See, we all are operating in an environment wherein we get benefit for the economic growth or slowdown, right? And so if you're getting credit for everything, we have to take debit also. During the election day, government pumped lots of schemes in the market and people are having lots of disposable income before elections, and that's where we see quarter 1 was stronger than what we expected. And I just want to tell you, Pak Henry, I think we have been talking about infrastructure building. We are talking about long-term sustainable growth. We, as a management team, always focus on doing our basics right. Just to give you a color, last year quarter 3, we grew 9% over 9 months 2022. And this year, you're also there in this market, you see despite of onslaught where consumer behavior was not also good and also competition activity was heightened. Despite that, we are growing around 12% this year year-on-year. So that shows that we are able to withstand any kind of storm is coming in front of us. Of course, we are part of the industry, we'll also get impacted. But if your basics are strong, then probably we will be able to do much better when things improve. So that's what I want to say here. On synergy value?

Yes. Let me take on the synergy value, Henry. I think when we started this journey 3 years back, the guidance which we gave was a recurring value of $300 million to $400 million range we had given. And we said anywhere between 3 years to 4 years. I'm happy to report that in 33 months, our recurring value is more than what we had said for. It is around $450 million. And 80% of that comes from network, integrating the network. And then balance, there are a lot of initiatives. Now this month, we will be closing down our integration office. I think we are moving towards more on transformation and making sure we leverage from our scale. But what the scale has done, it has helped us to get more disciplined and also get to a cost leadership. So there are even more opportunity on sharpening our cost leadership, which you will see in the coming quarters and next year also because we have got to a scale. Once you get to a scale, your ability to work with vendors and partners and the synergy goes to a very different scale. And we are seeing this in all our RFPs and all our tender process and all. So that will help us on the cost leadership. But the integration office will get closed this month.

Okay. I think that's very clear. Perhaps 1 follow-up question, a quick one. Can you provide some updates perhaps on the spectrum auction from the government?

The new cabinet has just been formed, so we have to give a little more time. But overall, at IOH level, we are in a very good position in terms of spectrum holding. So we will wait for more clarity on this. And then overall, we are getting ready for our 5G cycle. And we want to make sure that our fibration program, our long-tail program, our radios are fully modernized. So we are ready for it. But I'll be able to, maybe in the next quarter share more, the more we see from the current cabinet and the government.

Our next question comes from Niko Margaronis from BRI Danareksa. We are not getting a response. Our next question comes from the line of Ranjan Sharma from UBS -- sorry, from JPMorgan.

I'm sorry, I joined a bit late so I might have missed this. But can you provide an update on the fiber restructuring that Indosat is pursuing? Where are we in the process? And what is the end objective?

Ranjan, this is Vikram. I think we have seen very good interest level on our fiber project. So we are still in the process. But what I can tell you now, what we have seen, the interest level is extremely high. But in terms of detail on time line and all, you'll have to wait for more. So maybe end of next quarter, we'll be able to share that.

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

There were mentions about some consolidation and increase in pricing for the online channel. So how big was the impact on the consolidation to your numbers in Q3 and the total online channels subscribers to your total subs as well?

Yes. So we contribute around 54% revenues coming from those channels where we have increased the prices. And last quarter, monthly online acquisition -- SIM card acquisition, I'm talking about, not airtime and packages. Airtime packages contributed 54% of our total revenue. But SIM card new acquisition, we closed around 74,000 activation per month for the month of September. But quarterly average was around 65,000. And these customers are primarily giving us 2.5x more ARPU and around 6x more survivability onto our network.

Do you have any follow-up question, Marissa?

No, I guess just a consolidation thing. I think you mentioned that there was some kind of a negative impact to revenue to overall telecom industry.

No, I think it was -- consolidation was talked about SIM card, Marissa. I think, Vikram talked about. As a result of consolidation, people -- let's say, in Indonesia, many of the customers are having dual SIM. And what they do, he may be paying $2.5 to me but he might be paying $1 to other opcos and vice versa. They can be paying $1 to me, but they might be paying $2 to other opcos. So what they have done, they have -- what we report here is a 90 days base. So what they have -- they've become silent, the people who are the marginal low-value or no-value customers. So that contributes some base on our -- but the VLR number and data pack purchases and data units just continues to grow even in quarter 3 year-on-year. So that is stable. But what we are losing here is the marginal customer who are having absolutely no value or very low value. So that's where we have lost the customer because they're not recharging anymore for 90 days, and that's why they have churned out of our network. But we have been able to hold on to our base, which is producing us results.

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

A couple of questions. Firstly, you have started a kind of lending business also, right? So may I clarify if you also include lending revenue in mobile ARPU? And what's the contribution?

Yes. So we are not booking all the revenue, We book only revenue which is flowing to our bottom line. And we are working for banks as a channel primarily, and we are providing the data for them to do scoring and all. So this entire year -- I think last quarter, I cannot give you the result for. But as we speak today, I think USD 7 million to USD 8 million net profit has been flown in the first 9 months of this operation. Yes, It flows into our -- yes, It flows into our ARPUs?