Telekom Malaysia Berhad (TM) Earnings Call Transcript & Summary

Ladies and gentlemen, good evening, and welcome to today's conference. You are now participating in Telekom Malaysia Berhad Second Quarter 2020 Analyst Briefing Call. [Operator Instructions] I will now hand over this session to the conference leader, En. Imri Mokhtar, Managing Director and Group Chief Executive Officer of Telekom Malaysia Berhad. Thank you, and over to you, sir.

Thank you very much. [Foreign Language] and a very good afternoon. First and foremost, thank you all for attending today's session. I'm certainly proud to be part of this wonderful group again, and I promise you that there will be interesting times ahead. TM, as you know, has always been at the forefront of providing connectivity to Malaysia since 1940s. For the course of time, the technology, the form of connectivity has evolved. But what we do, our purpose remains is to continue to become the -- to be the technology enabler for the country. Today, we actively seek to focus towards attaining high standards of customer excellence, to retain the customer confidence and capture the hearts and minds of the nation. We would like people to think of TM first when it comes to connectivity and all that involves changing the way we do things at TM. Clearly, we need to be leaner and nimbler than where we are so that our proposition can continue to be attractive with the various offering that we have across the 3 business lines: unifi and TM ONE and then also TM WHOLESALE. When -- 2018 through part of 2019, and I was the acting CEO, I had championed the PIP, the performance improvement program, a cost optimization program that still bear fruit until this day. We are confident that this initiative will continue to yield positive outcomes and which will translate into higher margins in the coming quarters. Clearly, the second quarter had proved challenging for many of our customers and the customers that we serve in many industries as we saw the country's GDP drop by 17%, where the contraction was deeper than those experienced by other regional economies. However, I'm pleased to announce that during this challenging period of the second quarter, TM has managed to recover quickly and thereafter grew from strength to strength on a quarter-on-quarter basis. And it's very encouraging to see that we've cemented our place as the #1 fixed line operator here in Malaysia. But before we get into the performance review, we'd like to remind all of us here to continue to remain vigilant wherever we are as we adopt the new norm, going about with our lives today. I will start off the overview of the quarter with our current performance. Then our Group CFO, En. Razidan, will then elaborate on the financial and operational details. At the end of this presentation, we'll be more than happy to open the floor for Q&A. So yes. So let's start. COVID-19 continues to influence the landscape -- the operating landscape affecting all of our business lines. While our revenue has contracted from the same period last year, we are heartened by the quarterly revenue improvement, reflecting our resiliency in the new norm environment. The cost optimization program that I had mentioned earlier on here, a program that we had started and continued since 2018, continues to yield results and boosted the profitability as both our second quarter EBIT and PATAMI has shown the double-digit improvement from the previous quarter. CapEx during the first half of 2020 is well within our earlier guidance, stands at about 9.3% of revenue. This is on track as we continue much more targeted and sustainable investments for the business. We did see an uptick in demand from our fixed products as many people started to work from home and realized the need for a much more stable and consistent connectivity to work at home. At the same time, our products are suited not only for people working from home, but also the family members, the various demands of entertainment of games and so forth and streaming. At the retail front, we closed the quarter -- on the retail front, yes, we did close the quarter with an encouraging unifi subscriber growth as compared from the previous quarter. And to demonstrate our commitment to shareholders, we are declaring an interim dividend of MYR 0.068 per share, which is the maximum dividend payout in line with our dividend policy. So now it's time for me to take a short breather, and I'll pass over to Razidan to take you through our financial and operational details. Over to you, Razidan.

Thank you, Imri. I will now take you through the key items for quarter 2 2020 as compared against the previous quarter. Our second quarter operating revenue was MYR 2.59 billion or 1.4% higher against the first quarter of 2020, and this was due to the improvement in TM WHOLESALE products in the quarter. With total operating costs declining by 3% in quarter 2 from quarter 1 this year, reported EBITDA showed encouraging improvement of 5.7% compared to the last quarter. If you look at depreciation and amortization for quarter 2, it was also lower by 8.2% due to the lower depreciation for PPE. However, net finance costs, excluding ForEx, for quarter 2 was higher at MYR 95 million, contributed by lower interest income due to lower deposit base and interest rates. Taking into account all of the above, our PATAMI in quarter 2 2020 rose to MYR 274.7 million from MYR 152.5 million in the previous quarter. By normalizing the impact of the one-off nonoperational items, our normalized PATAMI stood at MYR 267.6 million in the second quarter 2020. And we hope to build on the current positive quarterly trend, and we'll further our efforts in serving our customers. I'll now take you through our operating highlights. From a products perspective, data and voice has emerged positively by 10.8% and 5.2% compared to the last quarter. From a year-to-date perspective, all other products have declined due to the challenging market conditions in the first half of 2020. And I will now give a brief insight on revenue by product cluster from a quarter-on-quarter view. Looking at voice, voice revenue was higher by 5.2%, contributed by higher global voice at TM WHOLESALE due to increased utilization of traffic minutes. Internet was lower by 1.7% mainly due to lower Streamyx revenue, and this is in line with the lower overall cumulative Streamyx subscribers. This was, however, partially offset by higher IPTV content revenue from unifi. Data has risen by 10.8%, mainly contributed by TM WHOLESALE, particularly from higher IRU revenue. In addition to that, the increase in domestic data revenue was mainly from the domestic Internet services. Others. The other revenue declined by 10.6%, mainly at TM ONE and VADS subgroup, and this is due to the lower ICT revenue and reduction in BPO outsourcing revenue. We will now move on to the performance by business cluster. Overall unifi revenue was down by 0.3% for second quarter 2020 compared to the last quarter, and this decline was mainly due to the lower Streamyx revenue due to the lower customer base. From TM ONE perspective, the lower revenue by 3% was mainly at VADS subgroup due to lower ICT revenue and decline in customer projects in second quarter 2020 compared to the last quarter -- first quarter 2020. TM WHOLESALE revenue has surged by 20.7% in the second quarter as compared to the previous quarter, and this was driven primarily due higher to -- due to the higher IRU and domestic data revenue. For others, there was a reduction of 24% in revenue by Q-on-Q comparison, and this was mainly due to the lower fees from MMU and lower ticket sales from Menara KL. Let's move on to Slide #9, which is our physical performance. We continue to see expansion for fixed broadband in 2020 as our total customers as at second quarter grew by 2% to more than 2.22 million from 2.18 million in the previous quarter. The growth is contributed by the net additions of our unifi customer base, which has now increased by 4% to 1.55 million from the 1.49 million in the previous quarter. And we are optimistic that this progressive trend will continue as demand for fast, stable and reliable connectivity remain a priority for many households. And we expect the Streamyx ARPU to further stabilize in the coming quarters. Convergence penetration for 3P and above was at 53% compared to 55% in Q1 as customers prioritize spending on core products during the MCO period. I will now elaborate on our operating costs, which is shown on Slide #10. On a quarterly basis, the total OpEx has reduced by 3% in absolute terms at MYR 2.2 billion from MYR 2.3 billion recorded in the previous quarter. And our cost efficiency has also improved as the total cost percentage to revenue has declined from 88.1% in Q1 to 84.3% in Q2 2020. Similarly, for the first half of the year, the total cost also contracted by 7.8% at MYR 4.4 billion from MYR 4.8 billion in the same period last year. On a quarter-to-quarter basis, direct cost was higher mainly due to 3 things: First one, the increase in international outpayment and leased circuit charges at TM WHOLESALE; secondly, higher costs for ICT-related services for projects at TM ONE; and the third thing is higher customer installation and acquisition costs. Manpower was recorded lower due to contraction in salaries and staff benefit, which is in line with the lower headcount in Q2 2020. However, other OpEx was slightly higher on a quarterly basis due to the increase in other materials, and this was mainly due to purchase of personal protective equipment and disinfection work in second quarter 2020. However, this is partially offset by the lower fuel, traveling and maintenance expenses. Lower depreciation and amortization in Q2 2020 as compared to Q1 2020 was mainly due to net lower depreciation expense for PPE. Moving on to CapEx. Our capital expenditure for the first half was at 9.3% of revenue or MYR 479 million. This is within our 2020 full year CapEx guidance of low to mid 20% of revenue. Out of that amount spent, 59% was for access; 23% was made for core network; and the balance, 18%, was made for support systems. We are hopeful for our CapEx to accelerate since the government has started to reopen sections of the economy, thereby effectively allowing us to continue with our CapEx rollout. The actual spend of the CapEx will largely follow the same trend and be spent on building access networks. Moving on to the group cash flow and financial ratios. Cash and bank balances were higher at MYR 4.27 billion, and this was mainly due to lower payments to suppliers and payment of finance costs. So that's all in summary for the financial and operating highlights. I'll hand over back to Imri for the concluding remarks. Over to you, Imri.

All right. Thank you very much, Razidan. Moving forward, TM, we are committed in maintaining our business profitability throughout this uncertain period created by the pandemic. We are now able to resume our ground sales activity, and we do expect we are able to provide the quality service as well as customer experience in the remaining quarters of 2020. Clearly, our efforts are evident through the resilient financial performance recorded on the current financial period to date, year-on-year and even more so in the current quarter ended being the first full quarter at the MCO. unifi subscribers recorded positive traction as people working from home are more reliant on the fixed broadband. The WHOLESALE continued to grow, attributed to higher IRU as well as domestic data revenue. We remain positive that TM ONE will further contribute to the group with their innovative solutions in the coming quarters. We continue to ensure that our network is always on so our customers can stay connected, productive and entertained. Our customers will always come first as we strive to enrich our customer experience moving forward. As the new CEO of TM, over the last couple of weeks, I have been looking into the various areas to improve or enhance as we build and set the strategic direction of the company over the coming years. The process is currently underway, and once finalized, be rest assured, we will be sharing that with you. And with that, I do thank all of you for your attention. And Razidan and I shall now be taking on the -- any questions that you have for us with respect to our second quarter 2020 results.