Telekom Malaysia Berhad (TM) Earnings Call Transcript & Summary

Salam Alaikum and good evening, ladies and gentlemen. Welcome to TM Group's First Quarter 2023 Analyst Briefing hosted by our group CEO Dato Imri Mokhtar and the CFO, Razidan bin Ghazalli. My name is Delano from Investor Relations. If you are in our distribution list, you would have received a copy of the analyst briefing presentation by e-mail from the TM IR team. The presentation is also available on TM's IR website under our quarterly results. [Operator Instructions] And without further ado, I would like to hand over the briefing to Dato Imri and over to you.

All right. Thank you, Delano. Salam Alaikum, and a very good evening. Thank you, everyone, for making the time to attend this session and to those who participated in our 38th AGM this morning. I will initially start with some of the latest updates and a brief review of our quarter performance, before our group CFO, Razidan, takes over to elaborate on the operational and financial details. I'll be back with updates on our ESG efforts and the presentation with some concluding remarks before we proceed to the Q&A session. So let's begin the presentation with the latest updates on 5G as implementation in Malaysia. On May -- on 10th of May 2023, yes, we have announced that TM has issued a termination notice to DNB pursuant to the lapse of the long stop date for the condition precedents of the share subscription agreement, SSA, for the equity stake in DNB. Moving forward, we do look forward for further discussions with the government and the industry on the 5G participation across Phase I towards the 80% service coverage by DNB and subsequently Phase 2, as the industry shifts to a dual 5G network. As the next step for TM, we will participate and work together with the dual network implementation task force that is co-chaired by KKD as well as MOF to ensure objectives for Phase 1 are achieved and a smooth transition to dual network under Phase II. For us at TM, we remain committed to continue playing an active role in Malaysia's 5G implementation, leveraging on our nationwide fiber infrastructure, extensive digital platforms and our rollout experience. Now let's continue with the quarterly review on Slide #6. 2023 will be a challenging year for TM. As we face headwinds from regulatory changes, heightened competitive pressure as well as change in market dynamics that are expected to affect our business and consequently our results. As we embark into the final year of our 3-year transformation program, we are also now more prudent in terms of our assets and unlocking the future value to our shareholders. Against this backdrop, we continue to embrace opportunities with these challenges. Our first quarter performance remains promising as we recorded revenue -- higher revenue levels against the same period last year, driven by positive achievements at both Unifi and TM Global. Profitability, however, was marginally lower. With Unifi and fixed broadband customer base continued to expand beyond 3 million and this is a similar trend seen for TM Global, [indiscernible] stable Internet for their homes to enrich the digital lifestyle. On the other hand, TM One is navigating market challenges and shifting customer demands, which will be elaborated in our slides later. CapEx investment for the first quarter of 2023 stands at Ringgit Malaysia, MYR 413 million or 14% of our revenue. We anticipate that our CapEx spending will increase in the coming quarters as we continue to invest in sustainable network rollout for our customers. I'll now have Razidan to take you through our financials, our customer segments and other operational details. Over to you, then.

Thank you, Dato. I will now take you through the key items for Quarter 1 2023 as compared to the same period last year. Our operating revenue grew by 2% against last year from MYR 2.89 billion to MYR 2.95 billion. And as mentioned earlier, this was driven by steady performance at Unifi as well as TM Global balanced by the contractions faced at TM One. Without the depreciation and amortization, we saw EBITDA increasing by 7.3% from MYR 1.16 billion in quarter 1 last year to MYR 1.25 billion in Q1 this year, and this was contributed by mainly lower direct cost and manpower costs during the period. However, during -- due to an impairment exercise undertaken in the current quarter and the accelerated depreciation of certain assets, our EBIT declined by 15.5% to MYR 473.3 million in the current period from MYR 560.4 million recorded last year. Despite improving net finance cost and taxation, the lower EBIT has also impacted our bottom line as PATAMI slightly dipped by 2.9% from MYR 339 million in 2022 to MYR 330 million this year. As shown in the next slide, Slide #8, there are a few normalizing items for the current quarter. Firstly, the largest would be the impairment loss recognized during the quarter on IT infrastructure facilities, and this stands at about MYR 121 million. In addition to that, there is also the accelerated depreciation of certain elements of the network assets. In the current quarter, we have charged out MYR 42 million. Excluding the above and the FX changes in the quarter, our Q1 2023 underlying EBIT is higher at MYR 630.9 million. Now I would like to provide some color on the segmental and product performance for the financial year beginning with Unifi. For quarter 1, 2023, despite the intense competition, Unifi has maintained the steady growth trajectory for the last 12 months and even from the previous quarter. Cumulative fixed broadband customers continue to increase from the aggressive sales efforts and also attractive bundle packages that we offer. Similarly, our ARPC for both SME and Home continue to show encouraging improvements, which is a testament to our intense efforts to continue digitizing our customers' lifestyle. We also continue to focus and implement initiatives to elevate our customer experience and have recently launched the Unifi Ultra package, which is a high-speed 2 gigabits per second package that is bundled with the router and mesh WiFi 6 router as well as content. All the above has contributed to the revenue jump of 4.3% recorded for the first quarter 2023 at MYR 1.44 billion from MYR 1.38 billion in the same period for '22. The trend is also similar on a quarterly basis with a 0.5% increase from the previous quarter and reflecting our consistent efforts. On Slide #9, we see Unifi fixed broadband subscribers have increased by 8.1% from quarter 1 last year and by 1.4% from the previous quarter, now it stands at 3.08 million customers in the current period. Unifi ARPU also continues to stabilize, and this is contributed by the balancing higher-end packages. Fast and reliable Internet will continue to be in demand for homes and SMEs with the current enriched digital lifestyle of all Malaysians and TM is committed in providing technology that is accessible to all in this digital era. Moving on to TM One. TM One's revenue was down by 6.7% year-on-year from MYR 773.7 million in the first quarter last year to MYR 721.9 million in quarter 1 this year. The performance has been hampered mainly due to, firstly, the impact of new contract for MyGov Net 2.0 with new business model and also price reduction. Secondly, the lower customer projects due to reduction in one-off revenue realization as well as project delivery and lastly, the lower smart services revenue. We know that 2023 will be challenging, especially for this segment of the market. Nevertheless, we remain optimistic on our capabilities and also in building blocks to focus on some of the growth areas such as cybersecurity, smart services, while doubling down on our core connectivity strength. TM One has launched its 5G sphere partner program in quarter 4 last year, where we saw more than 90 leading partners who were registered. And this encouraging response led to TM One launching its Sandbox platform that provides secure and controlled environment for TM One's customers and partners to develop co-creative text and commercialize innovative smart service solutions. Next slide, we talk about Credence. Since inception in February last year, our business-to-business cloud and digital services venture Credence has continued its efforts to expand our total digital portfolio. We see promising opportunities in analytics as well as new services, and as we continue to engage the market, understanding the different digital requirements of our B2B customers. Moving on to TM Global, they have recorded a continuous steady year-on-year performance for quarter 1, 2023 as the revenue increased by 3.9% from MYR 625.1 million last year to MYR 649.2 million in the corresponding quarter this year. And this was underpinned by escalating domestic data demand from 5G fiber leasing as well as HSBA together with the higher global colocation and voice. Similar trends seen on a quarter-on-quarter basis as the current quarter revenue is 0.9% higher than the previous quarter. We saw some slowdown on the international revenue, which will -- which we anticipate will pick up again in the subsequent quarters. TM Global continue to be the trusted wholesale infrastructure provider to capitalize the digital industry and the 5G ecosystem in positioning Malaysia as a digital hub in the region. Now let's take an alternative view of our revenue breakdown from a product perspective from a year-on-year basis. For quarter 1, 2023, the other segment led the product performance, which grew by [indiscernible] from MYR 436.4 million last year to MYR 476.5 million in the current year. And this was due to 2 things. One is the higher ICT revenue at TM One. And secondly, due to the higher colocation revenues at TM Global. The Internet segment also improved by 5.9% from the same period last year. And this is a result of the consistent expansion of our fixed broadband customer base, leading to an Internet revenue increase from MYR 1.08 billion last year to MYR 1.14 billion in the current year. Data, however, declined by 3.5% from MYR 794.6 million as at the end of March 2022 to MYR 766.4 million as at the end of March this year. And this was due to 2 things. One, firstly, is the lower IRU deals at TM Global, which we anticipate will come in next quarter instead. And secondly, due to the lower data services revenue, which were impacted by the GovNet 2.0 with its new business model and price reduction. Voice was also lower in quarter 1 this year by 2.7% at MYR 568.1 million from MYR 584 million in the same period for the previous year, and this was due to the lower international voice at TM Global and also the lower rental and usage from Unifi SME segment together with the enterprise and government at TM One. I will now elaborate on our operating costs. That's shown on Slide #17. For quarter 1, 2023, the total operating costs, including depreciation and amortization has increased by 6.1% to MYR 2.49 billion from MYR 2.35 billion seen in the same period last year. The total cost to revenue ratio has also increased from 81.3% in 2022 to 84.5% in 2023. Nevertheless, this is a significant improvement from the previous quarter cost to revenue ratio of 94.4%. Now let's take a closer look at each of the line items. Firstly, we start with direct costs. And this was lower year-on-year, mainly due to the lower international out payments, and this is in line with the lower IRU revenue at TM Global. And secondly, on the lower customer project costs following the lower revenues at TM One. Manpower costs has also declined in quarter 1, 2023, as quarter 1, 2022 had included separation costs, which was not offered in the current period. On the other hand, operational costs increased in quarter 1 of 2023, and this is due to 3 items here, higher maintenance costs, higher utilities costs due to the ICPT surcharge increased from [ MYR 0.037 to MYR 0.20 ] per kilowatt hour and also increase in licensing costs. D&A, the main contributor for total operating costs, this time was higher due to the impairment loss recognized during the quarter on IT infrastructure facilities. We also did an accelerated depreciation of certain elements of our network assets that the group commenced both first quarter and the fourth quarter of -- first quarter '23 and also the fourth quarter of last year. And we will continue to review and reflect estimates our network assets in ensuring that these remain comparable to the industry at large. Moving on to the next slide, which is on group CapEx. Our CapEx total spending for the first 3 months of 2023 was at MYR 413.1 million equivalent to 14% of revenues. By asset type, the lion's share of the amount is for access at 71%, followed by core network at 19%, and the remaining 10% was for support systems. The amount spent for first quarter 2022 was 14.4% increase from the CapEx spending in the same period last year, indicating our higher execution cadence. And my final slide for today is on our cash position and financial ratios. Our cash and cash equivalents at the end the first quarter 2023 stood higher at MYR 2.1 billion from the MYR 1.7 billion last year, and this is despite the higher CapEx and dividend amounts for the period. This is mainly due to the improved cash flow from operating activities and contribution from the disposal of the staff housing loan in the financial period, which is in line with our transformation program of focusing on core business areas. Moving on to the group ratios. We observed that the improvement from the previous years has been consistent, indicating enhanced returns and healthy financial standing for the growth. Our gross debt to EBITDA has fallen to levels that were last seen in 1996. And our net debt to EBITDA has fallen below 1x. Therefore, we also now have a larger headroom for future borrowings to support the business if required. That's all for the financial and operating highlights. I'll now hand over the session back to Dato Imri. Over to you, Dato.

Thank you, Razidan. Now I would like to provide some updates on our ESG efforts thus far. We've made great strides on ESG, especially last year in 2022, where we improved -- made good improvements. And also, this was very much reflected in the ESG rating score. For first quarter 2023, we continue with the programs we've had and further reducing our carbon emission with 12.38% reduction compared against our 2019 baseline, but one notable achievement as far as the publication of our first TCFD report showing our commitment in the agenda. And this release of this report is 2 years ahead of the Bursa Malaysia requirement. So that's a milestone that I'm very pleased to share with everyone. Next on the social front as at first quarter 2023, we have covered 71% of premises in Malaysia connected with -- we have covered 71% of premises with high-speed Internet access. And this is above the 70% MyDIGITAL blueprint target of 2025 of 70%, yes. Concurrently, we are continuously working also with our suppliers to ensure that they are also similarly is pushing the ESG agenda as well. Under governance, we continue to uphold our zero-tolerance approach to all forms of corruption, driving improvements and disclosures on anticorruption as well as other corporate governance agenda. Our effort in fighting corruption covers both our employees as well as our vendor suppliers with the aim to uphold integrity and good values. The IGA Award, the National Integrity Governance and Anticorruption award that we received earlier is testament to our commitment to allocate a higher standard of ethics, integrity and transparency. We'll continue to improve our sustainability efforts towards creating more value, better ESG rating, and upholding our promise to our shareholders. Now let us wrap up the presentation for today with some key takeaways. 2023 is expected to be a challenging year, with the challenges that we've outlined from a regulatory perspective, the competition and so forth and the change in the market dynamics that we're expecting. But I do believe that this will be offset by the momentum, the momentum that we have built over the past 24 months, the growth from other parts of the business across our -- all lines of business of Unifi, TM Global whilst we try to navigate our best with TM One this year. As the national connectivity and digital infrastructure provider, TM will continue to push our fiberization expansion in line with the JENDELA. Just to share, TM, we have completed the POP or the point of presence project installation of Phase I across the three regions in the northern region, Sabah and Sarawak, where this fiber optic network will contribute towards improving Internet experience for schools as well as the public areas surrounding it. TM, we are committed, as I've mentioned earlier, to continue playing an active role in the 5G implementation across both, Phase I as well as Phase II, and we are very much engaged in the discussions with the government as well as with the industry. And whilst these discussions are ongoing today, I mean, it's important also to highlight that we are continuing in terms of providing the 5G service to our Unifi mobile customers as well as to TM One customers, especially on the solutions space as the 5G wholesale access agreement remains in place. Next, to maintain our commitment to strengthening our core business despite the challenges posed by the current economic as well as this regulatory policy development, as I said, the core business of what we have seen over the past 2 years have been registering continuous growth, revenue growth. And those are business areas that we do expect to offset these challenges that we expect in 2023. And to manage the MSAP, we will be continuing with our exercising prudence in our operational spending and the investments shall continue. We'll be prioritizing in areas that will drive our business growth. We're looking at data centers, cloud services and also the subsea cables. Those are some of the key investments that we are looking at for 2023. And as TM as an organization, transitioned from a converged telco to this human center telco, we are committed to fostering a sustainable Digital Malaysia through technology that empowers communities, businesses and the government. And with that, I thank you for your attention, and we shall now move on to the Q&A session.

Thank you, Dato Imri, and Razidan. [Operator Instructions] The first question comes from Ranjan.

Thank you for the presentation. A bunch of questions from my side. Firstly, if you can elaborate on the source of impairment. The second thing is that I noticed the finance costs have come down. If you can share that what's driving that? And lastly, the disposal of housing loan, can you just share more details around that?

Thank you, Ranjan, for your questions. First and foremost, the impairment is arising from a review of our operations of our data centers. First and foremost, we have developed our blueprint for our data centers. We have -- as you know, we have 11 -- 10 data centers in Malaysia. Some our own assets, some lease assets. So based on the review and the -- what you call -- and development of this data center blueprint and our data center business, we see that some of the assets are not performing. So in view of the nonperformance of some of these assets, we have decided to take an impairment hit on those assets, which are not performing. So it's an asset impairment in general. Secondly is on the finance costs. If you remember last year, we paid down some of our Sukuk. If I'm not mistaken, the Sukuk was about MYR 300 million. And we also paid down USD 50 million of our [indiscernible] program. So that in a nutshell drove the finance cost down. Lastly is on the disposal of housing loans. These are our staff housing loans. We do give housing loans to our staff. So instead of taking this on the balance sheet, we can actually monetize this and transfer the risk to the local financial institutions. So it's now off our balance sheet.

And I would just like to jump in just to add a bit more to that first point just now that from the explanation that Razidan had given on the data centers, right? Broadly, in terms of our next area of growth, we do see data center being one of it. If I may frame it from an analogy perspective, right, in terms of the production of energy, right, what we have from this portfolio of data centers that we have today are the assets of past investments, right, that produce facilities that's, say, what, the core base, right? Coal-powered facilities, right? But we will also be investing in much more renewable energy, right? So as an analogy, right? So hence, any investments that we're going to do, expansion that we will be pursuing will be more of that next generation of data centers. I think that's an important point that I wish to impress to everyone, right? Because I can imagine that some of you may be thinking, here, we're looking at that impairment, but then Razidan mentioned just now in that we are looking at also investment, right, in data centers. So I think it's important that I come in and provide that context to everyone.

Maybe one follow-up question on that. So what is the reason that these data centers which have been impaired are not performing? Was the location, power consumption, size?

Yes. It's -- it's very much, I think, in terms of the share from the business mix, right? In terms of when it was invested, we back then -- this data centers, we were hoping it for it be -- we were expecting it to have a mix of more of enterprise customers. But as we know, a lot of the demand today are being driven by hyperscalers, right? So it has shifted from enterprise to more wholesale model. So I think that's one of the main reason. And with the rapid takeup of the existing facilities and so forth, where it's -- it meets the requirement of these hyperscalers, that is where we are potentially looking at further expansion of that -- of this -- our facilities.

If I can just ask one follow-up, right? So in the data centers that you have remaining, can you share what is the utilization rates on those data centers?

No, it is high. So hence, as I had mentioned, that is why in terms of some that we do -- that we are looking at consolidating and we are also looking at the expansion.

Next we have on the line is Luis. Luis?

Can you hear me now?

Yes. Yes.

I have 2 questions. The first is regarding accelerated depreciation in the quarter. Do you expect this to be recurring for the rest of the year and onwards. Second question is more forward looking. Now that the DNB is pushing the 80% coverage more aggressively, are you expecting to win new contracts from that? And third is for your existing contracts, have any been renegotiated just based on the new MSAP guidelines? And if yes, when would the impact of these have shown in your P&L?

On the accelerated depreciation, if you can remember in the last quarter of last year, we did a review of asset useful lives. We cover almost 80% of our total network assets. So if you remember, in the last Bursa reporting, we did mention that this would cover the last mile components of our network assets as well as fiber optics, cable -- fiber optic cables. So these were -- this covered almost 80% of our total network assets. For the first quarter of this year, we actually reviewed the balance of the network assets, which is 20%. And again, the big bulk of the review was actually on rectifiers. So we actually benchmark the useful life of rectifiers against industry benchmarks. And based on that, we did this accelerated depreciation. So to your question whether there will be further reviews, No, there will not be, because we have already covered 100% of our total network assets.

To clarify, the MYR 42 million will only be this quarter. So next quarter, we're not expecting another MYR 42 million.

There will be some minimal depreciation increase.

The second question is, does DNB pushes the 80% coverage target has been set by the government, is that new contract, no. We don't need a new contract. We do have the existing contract that we've signed, and it will be within the current contract that we have with DNB. And certainly, I think anchored on that it is something that we are continuously working together with DNB to ensure that the 80% is met. And secondly, what -- and thirdly, Luis, if you could repeat, there was a question on MSAP? What was it?

Yes. Have you been able to renegotiate any of the existing contracts? And if yes, when would the impact of those negotiations be seen through your P&L?

So we are yet to negotiate. I think just to provide a bit more clarity on this, once the MSAP has been set by the regulators, TM would need to provide -- to publish our reference access offering. And thereafter, we would use that as a basis to finalize the new access agreements with all the other telcos as the access seekers. So as of today, we are yet to finalize that reference access offering the ROU and we are still continuously engaging with the regulators before finalizing and publishing that. So it will take a bit of time.

Just a follow-up. Is there like a deadline for the route to be published coming from the MCMC or other parties?

Yes. That is something that will be soon, yes. And if anything, it will be very much to be provided that timing by MCMC as we continue for our discussion with them.

Up next, we have Prem.

I have a few questions, please. First of all, just to clarify on the MSAP and the ROU. Typically, how different is the ROU versus the MSAP pricing, right. And do you think that this is another 3 months before we get some clarity? Or is this something that is imminent in the next month or so? That's the first question. Two, with regards to 5G, is there a difference to the revenue generation capacity of Telekom Malaysia from having 1 network versus 2 networks? If you could provide some color there, that would be great. Three, with regards to CapEx in terms of a long-term trend, how should one be looking at that CapEx spend going forward, in light of 5G in your -- the successes you're getting in the broadband side of the business? How is that CapEx trend vision changed? And finally, I noticed in one of your slides, you talked about separation costs not being here in this quarter, but potentially coming in future quarters. Some color there would be great.

So the first question with regards to MSAP and ROU, right? There would be, if any, would be a difference in pricing. I mean we have seen that in previous arrangement. And hence, that is what is -- that is the gist of it, right, of what we are clarifying, what we are in final discussions with MCMC before we announce and publish the ROU, yes. As I said, it would be coming soon, and it's very much the function of how the discussion goes. But I don't foresee that to be dragging for too long, too far out. So that's on the first one. 5G, yes, how would it look like the revenue generating, whether it's SWN and DWN, certainly, the more mobile networks they are the larger customer base we would have for the fiber backhaul as how it is today, right, in terms of BS even before 5G, on the 4G backhaul we are serving. We do have several mobile operators as our fiber backhaul customers, right? So certainly, it would be more positive I think, right, in that scenario of dual network. But we'll see, as I said. The task force today is very much discussing the transition plans and so forth. So I think we'll get more clarity over the next few months. CapEx trend, I think what would be guidance would be of our past trends of 14% to 18% of the revenue. And as I shared earlier today even at the AGM, if anything, any variation there or anything that could change that would be probably when it comes to this fiberization for 5G rollout as DNB pursues its 80% coverage target and possibly if there are any customer projects as well, right, that could come from TM One, so those are things that we normally would get clarity probably a few months ahead. And that would normally would possibly shift our CapEx profile, yes? That's on the CapEx. And what was the fourth one?

On the separation costs.