Telekom Malaysia Berhad (TM) Earnings Call Transcript & Summary

[Foreign Language] and a very good evening, ladies and gentlemen. My name is Delano from TM's Investor Relations team. Welcome to TM Group's 2023 Third Quarter Analyst Briefing hosted by our Managing Director and Group CEO, Encik Amar Huzaimi. Unfortunately, Encik Razidan is unable to join us due to pressing family matters. Hence, we have Encik Ahmad Fairus Rahim, our Financial Controller representing the group CFO today. 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's website under Quarterly Results. Slides will also be shown on the screen. [Operator Instructions] Without further ado, I would like to hand over the briefing to Encik Amar. Over to you, Chief.

Thank you, Delano. [Foreign Language] and a very good evening. Thank you, everyone, for making the time to attend the briefing today. I will begin with some latest highlights and updates for the quarter before providing some brief overview of our overall performance. Fairus will then elaborate on the operational and financial details. I will be back to conclude the presentation before we proceed with the Q&A session. The last few months have been remarkably positive and productive. We have been strengthening our retail offerings by introducing more attractive packages, adding new top-tier OTT contents and improving mobile coverage, all of which will contribute to our true convergence proposition. We are proud of receiving the recent Opensignal 5G global award for 5G download speeds, a testament to our efforts on this front. TM One has maintained its close strategic relationship with large enterprises and the government as the trusted partner for connectivity and digital services. This is clearly exemplified with the appreciation award received during the CyberSecurity Malaysia 2023 for outstanding contribution of national cybersecurity. TM Global, on the other hand, have also recently established collaborations with our prominent industry players to further enhance our wholesale services. This would augment our already strong global network to cater for expected increasing international data requirement. Now let's continue with the performance review on Slide 6. For the first 9 months of 2023 have been challenging as we continued to face headwinds from heightened competitive pressure, regulatory changes and other market dynamics. We have anticipated these challenges and factored them into our market guidance as announced last quarter. Just to recap, our 2023 market guidance are as follows: a flat revenue trajectory from the previous year; EBIT amounting -- amount of between MYR 1.8 billion to MYR 2 billion; CapEx percentage of between 18% to 20% of revenue. Our current third quarter year-to-date performance is tracking progressively well towards the full year guidance amid the expected challenges. Post MSAP, we are pleased with the performance reflecting our efforts in carefully managing the headwinds as mentioned earlier. The continuous increase of fixed broadband customers has maintained the growth trajectory of Unifi while TM Global continued to benefit from similar trends seen from domestic data in addition to healthy international data demand. EBIT is expected to achieve the guidance amount by the end of the year, despite the higher overall cost, while PATAMI continues to increase. We are seeing good synergy from the recent international -- internal restructuring exercises as we will expand this as we look to further improve the efficiency of our business structures. As for CapEx, it now stands at approximately MYR 1.4 billion or 15% of our operating revenue to date. This is currently lower than year-to-date amount spent last year. However, we are on track to meet our guidance of between 18% to 20% as we move towards the year-end. I'll now have Fairus to take you through our financial, customer segments and other operational details. Thank you. Fairus?

Thank you, Amar. I will now take through the key items for third quarter year-to-date 2023 as compared to the same period in 2022. Our operating revenue in the first 9 months of the year is at MYR 9.13 billion, which is flat compared to the amount recorded in the previous year. This is a positive performance amidst intensifying competition and regulatory changes during the period. In addition, we also saw EBITDA growing by 0.5% from MYR 3.75 billion in 2022 to MYR 3.77 billion in 2023, which were largely contributed by lower direct and manpower costs during the period as we continued to remain vigilant in managing our costs. However, due to the sizable impairment undertaken in the first half of the year and the continued access separation exercise, our year-to-date EBIT declined to MYR 1.68 billion in the current period. Our PATAMI for the first 9 months of 2023 has improved by 46.2% to MYR 1.44 billion from MYR 983.1 million in 2022, attributed to lower net finance costs and tax impact. Let us now examine some of the normalizing items recorded in the third quarter year-to-date 2023. As seen throughout the year, the largest normalizing item would be the impairment loss recognized during the first half of the year on IT infrastructure facilities at MYR 121 million. In addition, there is an accelerated depreciation for certain network elements, which has now expanded to MYR 77 million for the total 3 quarters. This quarter also saw some manpower optimization costs at a net amount of MYR 23 million. And excluding all these normalizing items shown in the slide, our third quarter year-to-date 2023 underlying EBIT is higher relative to the reported EBIT at MYR 1.81 billion. Now I would like to provide some insights on the segmental and product performance for the period. As mentioned earlier, the retail space has been heavily affected by regulatory changes and intense competition in the last 9 months. Despite this, Unifi continued to be resilient and has managed to maintain the growth trajectory for new Unifi and fixed broadband subscribers from the previous quarter and the previous year with our total subscriber exceeding 3.1 million across the country. Unifi ARPU is also stabilizing as we saw better take-ups of higher-value packages. This has contributed to Unifi revenue increase of 1.8% recorded in the third quarter 2023 at MYR 4.26 billion from MYR 4.18 billion in the same period last year. Unifi will continue to differentiate as a true convergence solution with stable high-speed connectivity, enhanced OTT content, improved mobile coverage and voice for both homes and SMEs. We remain optimistic with the outlook of Unifi with our improved retail proposition moving forward. 2023 continued to be a challenging year for TM One as we saw revenue decrease on all performance horizons. This was mainly due to the impact of new contracts with different business model, coupled with lower price positions. Customer [indiscernible] very cost-conscious and selective with their investment due to the changing market condition as TM One continued to navigate the competitive landscape while building capabilities in new growth areas. Moving to the next page on TM Global. TM Global recorded a 6.4% revenue jump for year-to-date third quarter 2023 to MYR 2.27 billion from MYR 2.13 billion recorded in the same period last year. This was underpinned by strong domestic data demand, mainly from HSBA and international data primarily from our new offering [indiscernible] plan. Overall, TM Global continued to drive Malaysia's digital economy through comprehensive wholesale data solution for domestic service providers, global carriers and hyperscalers. Now let me take through an alternate view of our revenue breakdown from a product perspective, which would follow the segmental earlier. Despite the flat revenue, Internet registered a 5.1% increase from the previous year due to the higher cumulative Unifi fixed broadband subscriber. At MYR 3.43 billion as at third quarter, Internet still formed the largest product of our revenue breakdown. Our second-biggest revenue contributor is data, which has declined by 2.5% to MYR 2.51 billion, impacted by challenges at TM One and lower seasonal IRU revenue at TM Global. Similarly, voice and others were also lower on a year-to-date basis. Let me now elaborate on our operating costs. On absolute amount, total operating costs has slightly increased by 2.7% as at year-to-date third quarter from MYR 7.36 billion in year-to-date 2022 to MYR 7.56 billion in the current year. This is due to the higher operational costs and depreciation and amortization during the period under review. The increase in operational costs were largely coming from our network, system and software maintenance as well as licenses costs, driven by the group initiative to better serve our customers and as part of our network and IT modernization and digitalization. We are allocating resources to improve our system to support our convergence proposition, which will enhance customer experience, go-to-market speeds and retail ecosystem. Our fixed and mobile networks are also now fully integrated, which will require some harmonization. In addition, post-COVID normalization are also seen on utilities costs, A&P, TNT and a few others. Depreciation and amortization rose by 11.1% from year-to-date 2022 due to one-off impairment recognized on IT infrastructure facilities and accelerated depreciation on certain network elements. We are concerned that cost of doing business has increased. Nevertheless, we continue to control cost on a quarterly basis and manage our structural costs. Direct costs on a year-to-date basis was lower by 7.5% due to lower international payment at Global, lower customer project, ICT, BPO at TM One. Manpower cost, lower in third quarter 2023 by 4.6% due to lower separation costs during the year. Moving on to the next slide on group CapEx. Our total capital expenditure for the first 9 months of 2023 was at MYR 1.38 billion. This is equivalent to 15.1% of operating revenue. By asset type, CapEx were largely for excess at 66%, followed by core network at about 18%. And the remaining 16% was for support system. The amount spent for third quarter year-to-date 2022 was 4.7% lesser from the same period last year as we prioritized spending on more critical areas of our business. And finally, my last slide for today, our cash position and ratios -- to discuss on our cash position and ratios. Cash and bank balances at the end of September 2023 was substantially higher at MYR 1.94 billion, reflecting our stable cash generation ability. We also like to highlight that cash flow from operating activities has risen considerably in the current period and the free cash flow has also improved. As we continue to lower our borrowings, debt headroom remains ample and our healthy financial positions have allowed us to have access to multiple financing options to support the business if required. That's all for the financial and operating highlights. I will now hand over the session back to the GCEO. Over to you, Encik.

Thank you, Fairus. Before we proceed with the Q&A, let us wrap up the presentation with some key takeaways. We are pleased with our current performance that is reflective of our efforts in navigating the regulatory changes, intense competition and other anticipated headwinds during the last 9 months. Expanding on our recent successful internal restructuring, we have also consolidated our consumer business effective 15 November this year. We are now merging the different units into one converged unit, including sales touch points, product, ecosystem and customer experience support. This will allow Unifi to continue offering converged solutions and lifestyles with more attractive packages, improved mobile coverage with 5G, enriched entertainment content and other competitive offering to homes and SMEs. TM One maintains its focus on next-gen connectivity, smart services innovation, cloud, 5G and cybersecurity while providing fit-for-purpose solutions to enable industry digital transformation and economic growth. TM One is positioned to support the recently launched NIMP by the government, which I think by the banner of NIMP 2030, to unlock technological opportunities whilst driving innovation for the nation and key economic sectors. TM Global will drive Malaysia digital economy through comprehensive wholesale data solutions for domestic service provider, global carriers and hyperscalers with extensive international connectivity and data center solutions. Moving forward, TM business and financial outlook for '23 remains positive. The group will continue to pursue industry growth through digitalization and emerging technologies. Based on our current performance momentum, the group is on track to achieve the 2023 market guidance. With that, I thank you for your attention. We shall now move on to the Q&A session.

[Operator Instructions] The first question comes from Ranjan.

Two questions from my side. Firstly, on your guidance, you're maintaining EBIT guidance at MYR 1.8 billion to MYR 2 billion, right? But you have already achieved MYR 1.8 billion in the first 9 months, implying fourth quarter will be an EBIT loss of MYR 12 million to MYR 188 million of EBIT, which is still substantially down with this third quarter. So if you could just share your thoughts around the guidance that you have given. And the second question is on your ARPUs that you disclosed for Unifi. Streaming, a significant jump and some improvements in Unifi. Is there any hardware sales being recorded under these revenues to calculate the ARPU?

Sorry, Ranjan, let me answer the streaming first. So the jump in streaming is more from the enterprise or business utilization, right, in terms of the revenue. With respect to the guidance, I trust, as mentioned earlier, we just launched our packaging with respect to the post MSAP or post regulatory change. So we're still observing the market. So we believe the guidance that we give is still within range. So there was still a growth priced within that range as well.

Up next, we have Ken.

I have three questions. My first question is sort of a follow-up to Ranjan's question. I know it's still fairly early since the price reductions for Unifi in October. But could the management team give us some updates on customer down-trading or even ARPU for that matter? So that's the first question. Second question is could you remind us how much unutilized tax losses remain from TM Tech? Third question is on dividends. How can we think about dividends going into Q4, given that earnings are up quite a bit and so are cash flows as well as net cash?

With respect to the customer down-trading, of course, when we do the repricing, there will be some risks that we factor in as well. And we have been tracking it very diligently. So far, the trend looks pretty much positive to us. In a way, it's within manageable range for -- in respect to down-trading. On the unutilized tax losses, we do not disclose the total amount as per what we updated in the last quarter as well. For the dividend, we will maintain our dividend policy. And we will review it as we see fit in the next quarter when the whole total financial outlook is being quantified.

Luis, you're next.

I have three questions as well. The first was if you could give us an update in terms of the status of your wholesale contract negotiations. Are they like 50% done? Or do you expect that all the negotiations will be done by year-end? Second question is regarding the results. For manpower, even if we exclude the exceptional retirement costs in the quarter of about MYR 5 million, it seems to be still up double digit Q-on-Q. Is there a seasonal reason for that? Or is there really an increase coming through? And third question is regarding the tax benefit. How much did you book for first 9 months in terms of benefit or in the third quarter?

I will take up the first question, Luis. The status of the wholesale contract negotiation with respect to the wholesale broadband, the outcome is very encouraging. We have come to a principal agreement for our key customers. And we will be signing formally the major ones within this year as well. I will pass to Fairus to take up on the manpower Q-on-Q increase and also the tax benefit for the first 9 months.

Thank you, Luis, for the questions. On the Q-on-Q trend, we have actually one-off separation cost, access separation exercise, which accounted in quarter 3. And this will be -- this should be normalized as part of actually the remaining quarter trend. On the tax benefit in the first 9 months, we don't disclose. But you can -- I can actually relay, as of year-to-date September, as discussed in our Bursa announcement, we reported credit tax charge is about MYR 30 million.

Foong, go ahead, you are next.

A couple of questions from me. Firstly, on the Unifi subscriber net adds, that slowed down quite a fair bit into the third quarter. Could you give us some color as to what drove that slowdown? And then what have you seen in terms of net add development so far into October and November? And also, in terms of churn rates, any changes you have seen in recent months, whether up or down? And then second question, just going back to the manpower cost. I know there was a reversal of MYR 18.5 million in 2Q and then there's a VSS charge of MYR 23 million in the third quarter. And if you add them together, it's about MYR 42 million in terms of the one-off going from second quarter to the third quarter. But there was an increase of MYR 100 million Q-on-Q. So I'm just trying to get to what's the reason why we have like an additional MYR 58 million increase on a Q-on-Q basis. And also, what is the run rate going forward for manpower costs into next year?

Thank you, Foong, for the question. On the Unifi subscriber net add, yes, the rate is slowing as we entered into the third quarter. This is why we navigate through the regulatory headwinds. So we are not able to come out with packages as yet. But as you know, we have launched our new packages post September. And that has been very encouraging is what I can update you for today. On the manpower cost, I will get Fairus to work it out.

Foong, during the quarter -- during quarter 2 and quarter 3, it's actually two different actually transactions. One is the reversal. Of course, it's a negative sign. The other is actually an additional cost impact -- one-off impact in quarter 3. So I think comparing the two, it's not a difference. But it is actually really the minus plus the positive that's actually driving the huge impact if you have to actually make a comparison.

And if I can just put in a follow-up question, in terms of like the manpower resources for TM, how many staff do we have as of the third quarter? And where do you think the ideal staff force is over the next 2, 3, 4 years down the road?

We do not share the ideal numbers, Foong. However, what I can say, we are very, very, I would say, conscious in terms of managing the overall structural manpower costs as well. And to date, I would say that we have been very effective in managing our costs with respect to the structural manpower. So I mean, we will not disclose our ideal manpower state.

Prem, you're up next.

Congratulations on a good set of numbers. A few questions from me, please. First of all, with the wholesale pricing agreements about to be concluded, could you clarify whether there will be any massive adjustments to the revenues or EBITDA for the lower wholesale prices, given that the MSAP came into effect on the 1st of March and we are signing these at the end of the year? So that's one. Number two, in terms of your mid- to longer-term CapEx aspirations, yet again this year, we've come in below -- we look like we're going to come in below what we have guided. Is there some color on what -- in terms of an absolute dollar value what one should be looking for going forward? And thirdly, with regards to 5G, could you once again reiterate your aspirations with regards to the 5G? And to what extent Telekom Malaysia must be a shareholder of one of the networks? And to what extent do you need control over the 5G network rollout?

Let me take up number one and number three, Prem. So with respect to the adjustment on the MSAP vis-a-vis RAO, certainly we will be reviewing the final figure once we have -- once upon our conclusion with our wholesale partners. And so we will review the net position of the amount that we have clocked in earlier as per what we have prudently anticipated what the outcome would be versus what we have landed with the -- our partners upon negotiation finalization. So there will be some reversal as well. But the amount, we will not be able to disclose. And that's still under -- I think under review as well as we finalize the final agreement. On the 5G aspiration, yes, 5G is going to be very key for our convergence aspiration, as you understand earlier and, hence, our restructuring as well. In terms of our extent of participation, it is still under negotiation with the DNB at the moment. We will declare or make an official announcement once we have reached a certain position with DNB and the government as well.

Okay, I just want to elaborate with regards to your statement that you anticipated the lower rates, can I assume that, therefore, you may not have been -- while the final rate may be lower or higher than what you had anticipated, but we have already used an anticipated rate in the first 9 months of the year in calculating our revenues rather than the full rate that was pre-MSAP adjustment in 2023? Would that be a fair statement?

Prem, if you noticed that our RAO is positioned slightly higher than MSAP. So naturally, there will be some reversal with respect to the amount that we are copying as well because we are prudent in terms of how we assess the engagement with our partners as well.

Okay, understood. And on the CapEx?

Yes, Prem. Can you help to clarify on your questions on CapEx...

Yes. So essentially, we keep having these generous CapEx targets. And in most years, we seem to come in below that number. Now I was just trying to work out in terms of an absolute dollar value for CapEx, how should one look at TM's spending going into the future years? If I had to look 3 to 5 years out, should we be looking at MYR 2 billion a year? Or should we be looking closer to MYR 3 billion a year? Just some color around that would be very helpful.

Okay. I think we never -- in any engagement, we don't actually mention explicitly the absolute value. It's always a proxy of our revenue. Nevertheless, I think from a capital allocation strategy, we want to actually keep our CapEx minimal but at the same time, continue to invest in the growth area and modern network and -- infra and network modernization as well. So on that note, we'll see what will be the balance -- we will have to balance between the need to spend versus actually managing our overall investment and return.

Maybe a follow-up on that. How much of the miss -- we're tracking well below what the guidance is at the moment. How much of that is because we have been able to be more efficient in the rollout? And how much of it is just that we will have a bumper fourth quarter in CapEx? And how much of it is stuff that maybe we decided we weren't going to -- we decided against rolling out or a delay has caused this?

If I may, Prem, we will plan our CapEx deployment optimally. And as you know, there are a couple of projects being planned and be delivered in the last quarter, including the month of December as well, right? So it is still ongoing. Some of the key projects are still ongoing. So tracking will be done very consistently. But in terms of optimizing, we will always peg our CapEx optimization based on the revenue that it contributes. For example, there will be possible, not to see a delay in projects, but we will have to reprioritize some of it, for example, to make way for future investment. So there could be some of those prioritization that we will do to ensure that we are optimally investing optimal amount of CapEx for current business and also for the future. So that's why I think as what Fairus was trying to mention, we peg our CapEx deployment through to the revenue projection that we are having as well. So that, in a way, allows us to plan it very optimal vis-a-vis prioritizing what is going to be important for now and what's going to be important for the future.

Okay. Ben, you're up next.

I don't think you properly answered the question on churn rates. I'm curious to know, from your perspective, whether or not you're seeing the price response from your competitors start to drive up those churn rates. I appreciate that you may not have a lot of great time series on this because it just kicked off, but they did respond after your price cuts. So trying to separate out that initial maybe boost in net adds you had when you first cut prices versus after your peers have had a chance to respond and your thoughts on whether any further promotional activities on your side may be forthcoming.

Well, Ben, thank you for your question. Let me clarify further. With respect to the Unifi churn, yes, there will be a very stiff competition even until today. The difference would be prior to our launch of our new competitive packages, we are not able to maneuver much in the market until we are able to finalize the wholesale agreement. But post that, we are being very, very competitive in terms of responding to the market. And definitely, the tick-up -- or the churn rate is being very, very well managed post introduction of our new packages. So I hope that will clarify -- we understand, previously, we are not able to move much within the market. But post announcement of our new repriced package, we are able to be more nimble with respect to how we respond to our competitors as well. And this is an ongoing battle. And what we have today, we are able to respond. To your point, I will follow through to the second question, yes, it will be followed through by more attractive packages, bundling with our content, our mobile, too. So our arsenal now will be not only fixed broadband but comprised of quad play to our mobile, voice, content and also broadband. And today, we are the only one who can do quad play.

Okay. Let me switch, sorry, just a very quick one. Your receivables stepped up this year. What's driving that? And is there room that it may come down, like normalize back to sort of your 2022 kind of levels?

There will be major contribution from our large OTTs and also some of those from government contract as well. So that's why you can see an increase in the receivables that we clocked in for quarter 3.

Okay. When you say government contracts, does this refer to DNB?

Maybe I can add. We don't disclose all that. So the increase in receivables is actually cyclical for TM, right? And especially when we deal with actually public sector and enterprise. We hope actually the receivable will actually improve before we end as we intensify our collection efforts.

Okay. And then one more question. When you -- with your new pricing and sort of the way the packages are structured now, which segments do you see selling very well, you see maybe even up-trading? And my thought process here is that there is sort of a ceiling on how much bandwidth users typically need. And now that's sort of become compressed versus your minimum pricing and sort of minimum bandwidth offerings, right? And I'm just curious whether this makes you vis-a-vis some of your competitors, right, a lot more competitive.

Okay. Can you repeat the last part of the question, Ben? I didn't quite get it.

Yes. Basically, because these -- most users typically have a certain ceiling on how much bandwidth they need, right? And you've sort of raised the floor on the minimum speed you're offering. You sort of narrowed that gap with some of your peers that maybe previously captured a more premium segment. So are you becoming more competitive and taking market share in some of these segments? Or maybe you can share with us where you're adding the -- you're seeing the most net adds in terms of the bandwidth segment?

Well, most of the net adds, of course, is coming from the broadband largely, our consumer, right? And of course, there will be additional take-up from the SMEs and businesses, too, with respect to the repricing. And in terms of the bandwidth, the logic will be it's being aligned when we -- for this comparison pricing, it's being aligned with the natural utilization trend of our customers, too. So that's why you can see we are able to manage well in terms of the down trade and also offer well the value proposition with respect to the needs of the bandwidth by the customers of the consumer segment.

I'm asking about your bandwidth. Like specifically, is it 100 Mbps packages or maybe 300? Are you seeing more traction maybe like 300 Mbps packages now that the price has come down?

At the moment now, we see a lot of interaction at the 100 and 300 level. And of course, we are pushing more for the 500 and the 1G as we have been introducing last year -- or this year for the 1G.

Ken, you have more questions?

I have one more. My question is actually on TM One. Can we know that -- for the price reductions from large contracts, can I know how much more reductions are we expecting? Have they been fully reflected? And are we going to see typical Q4 seasonal strength for TM One? Or are things still quite slow for Q4?

For TM One, in terms of the price reduction vis-a-vis the regulatory headwinds, I believe it's pretty much stabilized. But of course, as a routine negotiation, as you know, TM One operates in a very competitive enterprise market. So the propensity for tough negotiations still happens. So we can see in terms of the physical numbers, it's very encouraging. Of course, in terms of the volume, in terms of the pricing, it's quite challenging moving forward due to the competition. And it's also contributed by the incoming of other operators into this space, too, as we open up Malaysia.

Any seasonal strength in Q4, sorry?

It's pretty much stabilized for Q4.

Okay, thank you very much. We don't have any more questions on the line. Do we have one more question? Otherwise -- no? Going once, twice. Thank you very much, everyone, for spending time with us today. If you have any further questions, please do not hesitate to contact the IR team. Anybody wants to ...

Yes, Thank you very much all for spending time here, and for the support as well. Thank you. Thank you very much.

Thank you.