Telekom Malaysia Berhad (TM) Earnings Call Transcript & Summary

[Foreign Language] so good evening, everyone. Welcome to TM's 2024 First Quarter Analyst Briefing hosted by our Managing Director and Group CEO, Encik Amar Huzaimi, together with our Deputy CFO, Encik Ahmad Fairus. I'm Delano from TM's Investor Relations team, and thank you for your patience. If you are on our distribution list, you will have received a copy of our analyst briefing that we just recently e-mailed to you. Slides are also available on our IR website under Quarterly Results and will be shown during this session. During the Q&A session, you can raise your hand and ask your questions. 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 time to attend this briefing and to those who participated in our 39th AGM this morning. I will start with some of our latest updates and a brief review of our quarter performance before handing the session to our Deputy CFO, Encik Ahmad Fairus, to elaborate on the operational and financial details. I will be back at the end of the presentation with some concluding remarks before we proceed to the Q&A session. We started the year looking to sustain the positive growth trajectory from the previous year. Unifi recently launched its UniVerse campaign, providing the best convergence plan to date that enables customers to better customize their package. Unifi Mobile also launched its newest UNI5G wow prepaid with unlimited 5G and 4G data and uncapped 5G speed, while Unifi Business unveiled its latest digital business offering with [ Kunyaga ] [Technical Difficulty] e-Pharmacy Solutions. During the quarter, TM One launched its innovation lab and Enterprise 5G lab platforms to co-create tailored solutions with its customers and partners, especially on key growth areas such as Enterprise 5G and innovative AI-powered industry solutions. TM Global recently clenched top honor in 2 prestigious categories at the Asian Telecom Awards 2024 held in Singapore, namely for Telecom Company of the Year, Malaysia, and for Wholesale Company Initiative of the Year, [indiscernible] category. This marked the second consecutive year TM Global being awarded, solidifying its position as a leader in shaping the telecommunication landscape within Malaysia and across ASEAN. TM is also proud to receive the prestigious Platinum Award in the Communication Network category, together with Multimedia University, MMU, which also secured the Platinum Award in the Education and Learning category at the recent Putra Brand Awards 2023. These accolades reinforce TM's dedication to maintaining the highest standard in both its telecommunication services and education endeavors. Now let's continue with the first quarter performance review on Slide 6. Entering 2024, the operating environment remains challenging due to the increased competition and evolving market dynamics. Nevertheless, I'm pleased to report that the group has shown positive growth trajectory in the first quarter of 2024. We recorded higher revenue levels driven by strong performance at TM Global and a higher Unifi broadband customer base. With continuous cost optimization, our profitability has improved. Our CapEx investment for the first quarter of 24% was RM 204 million, or 7.2% of revenue. This is slightly lower than what we earlier anticipated. However, we remain focused on expanding the group network infrastructure nationwide and regionally via submarine cable systems. Overall, our achievements closely track our previously disclosed market guidance. Now, I will hand over to Fairus to walk you through our current financial customer segments and other operational details.

Thank you, [ Encik ] Amar. Before I start, I would like to update you that we have restated the comparatives in our financial statement due to a change in how we account for government grants. The change stems from the proposed internal reorganization that consolidated all telco businesses in Malaysia effective 1st March last year. The revised accounting policy commencing in 2024 allows full year comparison and further reinforces our focus as a champion of fixed [ and mobile convergence ]. This change is in line with accounting standards and does not affect the reported total profits or significantly impact other financial indicators of the company. Please refer to our notes to the accounts in the Bursa announcement for further details. I will now take you through the key items for quarter 1 2024 as compared to the same period last year. Our operating revenue grew by 1.8% against last year from RM 2.79 billion to RM 2.84 billion. This was driven by the steady- state -- steady performance at TM Global from both Domestic and International segment. Together with lower operating costs during the period, EBITDA has increased by 4.1% from RM 1.14 billion in first quarter 2023 to RM 1.19 billion in first quarter 2024. EBIT has increased by 37.5% from RM 473.3 million to RM 650.9 million in the current period as we had a sizable impairment and asset depreciation undertaken in the same quarter last year. All the above has led to a PATAMI growth of 28.7% at RM 424.8 million compared to RM 330.1 million recorded in the first quarter of last year. Now I would like to provide some color on the segmental and product performance for the financial year, beginning with Unifi. Unifi continues to grow its community fixed broadband subscribers despite the increasingly aggressive and competitive landscape of the fixed broadband market. Our total fixed broadband customer now stands at 3.135 million, which is a 1.8% increase from quarter 1 2023. The Unifi revenue now stands at RM 1.4 billion in the current quarter due to lower utilization of our voice and mobile services. Unifi ARPU only marginally declined to RM 130 post the repricing exercise as [indiscernible] is still manageable. Despite the challenges, 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 on the outlook of Unifi with our improved retail propositions offered through the UniVerse campaign. On TM One, TM One continues to navigate persistent challenges and our RM 670 (sic) [ 673 ] million revenue recorded is a marginal drop of 0.8% compared to the same period last year. We knew 2024 will be challenging, especially for this segment of the market. Nevertheless, we remain optimistic on our capabilities to focus on new growth areas such as cybersecurity, smart spaces and other new digital solutions while maintaining our core connectivity business. On the next slide, TM Global delivered a strong year-on-year performance in quarter 1 2024 with a 12.1% revenue increase from RM 662.4 million to RM 742.8 million. This growth was driven by higher managed Wavelength, HSBA and IRU revenues. Recently, TM Global was honored at the 2024 Asian Telecom Awards, winning Telecom Company and Wholesale Company of the Year. This recognition underscores our commitment to being the trusted wholesale infrastructure provider, capitalizing the digital industry and 5G ecosystem and positioning Malaysia as a regional digital hub. We remain optimistic about this segment's prospect as wholesale data demand continues to rise, reflecting the increasing digitalization of Malaysia and the world. Now let's take an alternate view of our financial year revenue breakdown from a product perspective in comparison of the previous year. The revenue increase recorded in 2024 was supported by data, Internet and Others. Data led to product performance with a 7.9% rise from higher international and domestic data revenue at TM Global. Others revenue also saw improvement by 6.7% from the financial period last year, attributable to higher other telecommunication services at TM Global together with higher customer project revenue at TM One. Internet was higher by 1.5% due to a higher Unifi subscriber base in first quarter 2014. Voice, however, declined by 8.4%, mainly from lower usage at Unifi and TM1 One, along with decreased international voice at TM Global. Moving on, our total operating cost has reduced from RM 2.33 billion in quarter 1 last year to RM 2.21 billion in the current period. Consequently, our cost efficiency ratio has improved to 78% in quarter 1 2024 from 83.7% in the corresponding quarter last year. Let's take a closer look on each of the line items. Direct cost was higher year-on-year due to higher [indiscernible] in line with the IRU revenue at TM Global, increase in roaming costs at Unifi and higher content costs due to the full impact of new channels and OTT. On the other hand, operational costs has decreased in quarter 1 2024 due to an increase in ForEx gain in the quarter, lower maintenance cost for network and equipment, decreased professional fees and lower rental. Depreciation amortization was lower during the quarter as there was an impairment loss recognized in the first quarter 2023, as mentioned earlier. On the CapEx, our capital expenditure total spending for the first 3 months of 2024 was at RM 204 million, equivalent to 7.2% of revenue. By asset type, the biggest share, the amount is for Access at 41%, followed by Core Network at 34% and the remaining was for Support system. Even though the amount spent for first quarter was lower than the same period last year, on the committed spending basis, it is higher at 14%, which is within our guidance. And my final slide today, on our cash positions and financial ratio, cash and cash equivalents at the end of the first quarter 2024 stood higher at RM 2.2 billion from RM 2.1 billion last year. This is mainly due to lower CapEx despite higher borrowing repayments and dividends recorded in the period. Our financial ratio has also been improving, indicating enhanced returns and healthy financial standing. Our debt room continued to grow to [indiscernible] for any growth opportunities. And I also wish to highlight that cash flow used in financing activities was higher due to loan repayment of RM 300 million, coupled with the second interim dividend payment in March. Free cash flow for quarter 1 was higher at RM 629.8 million. That's all for the financial and operating highlights. I'll now hand over the session back to the GCO. Over to you, Amar.

Thank you, Fairus. Growing our core business remains as our top priority while we continue strengthening our efforts towards driving new growth areas and digital solutions. In addition, we will continue to optimize costs and enhance profitability to ensure better returns for our shareholders. Towards becoming a digital powerhouse by 2030, our focus for '24 includes protecting our core businesses, enhancing beyond connectivity business through new ventures and capturing new business growth via a business model shift and people transformation. We are optimistic about our prospect for 2024 staying aligned with our market guidance and strategic priorities. Thank you for your time and attention. We will now proceed to the Q&A session.

Thank you, [ Chair ] Amar and Fairus. We will now begin the Q&A session. [Operator Instructions] and we will invite each one of you based on the order shown. The first question, Izzati.

Hello. Can you hear me okay? Sorry.

Yes, go ahead.

Yes, just one question from me. Can you elaborate more on the strength that's coming from the TM Global segment? Is this coming mainly from the subsea cable side of the business? And also just a quick follow-up on that, maybe some comments from TM on the influx of [ DC in ] Johor and whether or not TM's existing subsea cable has the capacity to take on the additional volume that basically these hyperscalers or these DC guys will wind capacity. And what's the plans in terms of the future subsea cables investment? I do note that you have the SEA-ME-WE 6 coming up live in 2026. Do you think that capacity will be enough, or is there room for additional capacity for subsea cable investment? I'll stop there.

Thank you, Izzati. Let me address the questions one by one. In terms of the revenue mix for the increase or for the strong TM Global performance, it does not come only from [ submarine ] cable system. It is a good blend of a domestic increase in revenue as well coming from our domestic broadband business and also the transmission [Technical Difficulty] business as well. And a couple was from International, including the subsea cable business. So it is a blend of both. With respect to the DC, certainly, the demand for DC does have a positive contribution to our business of data business, too, which now TM Global is experiencing. And to your point on the submarine cable system, absolutely correct, we have invested in SEA-ME-WE 6 and we do foresee the demand to grow. And we will always review or assess the possibility of having an investment for new capacity or increasing capacity requirements in the future for both on the route going to Europe and then going to Hong Kong and the U.S. Thank you.

Thank you. And the next question is from Prem. Go ahead, Prem. You need to unmute. Go ahead, Prem. Okay, Prem, we'll come back to you later on. Luis, maybe you can go next.

Congrats on the results. I had just 2 questions. And apologies, the first one is actually a housekeeping one. Just confirming that, with the revenue recognition, the bulk of the government grants seem to, in the past, have been in other products when I'm looking at the previous slides, so it's not voice, Internet, or data, but the bulk is others. And it's a smattering between TM Global and TM One. I just wanted to confirm that. And the second question is if you have any guidance for, by year-end, what are you targeting for UNI5G sub base? Thanks.

Fairus here. I'll take the first question. On the revenue segment -- sorry, on the grant revenue treatment, you are right. We only -- it just only affects the other segment and does not actually affect the other main business cluster.

Good.

On UNI5G or Unifi Mobile, we are optimistic in terms of the growth of the Unifi Mobile, yes. However, from our perspective, you're looking more from a convergent offering. So as what we have launched recently, our UniVerse campaign, it is expected to increase the take-up for Unifi Mobile as well. So we are optimistic and this will build towards the guidance that we have published earlier for year 2024.

Thanks, Luis. Up next is [ Fung ]. phone. You may unmute yourself.

Three questions from me. Firstly, on the Unifi broadband business, you noted on the intensity in terms of competition in the first quarter. But could you share with us a little bit more in terms of the trend for Unifi net adds so far into April and May? Because I know you have launched a couple of convergent offerings and all that. So I wanted to understand if the outcomes from those, what have they been so far into April and May? That's the first question. Second question, could you provide us a bit more color on the cost-saving initiatives for this year? Are there any VSS planned? And the first quarter EBITDA margin was pretty good. Happy to see that. Do you see that as a sustainable level going into the remaining quarters of 2024? And then my third question, are there any exceptional items in the first quarter results? There's usually a waterfall chart that you show underlying versus reported EBIT, but it's not in the slides this time around. So I just want to check whether there are any exceptional items. Those are my 3 questions. Thank you.

Thank you for the question. For the Unifi broadband, the trend is encouraging, especially for the net adds, despite the challenging market situation for the competition. The net adds has been positive thus far. And with the introduction of our UniVerse campaign, we expect the net adds to be much better, yes. With respect to the cost savings on the -- there was a question on VSS. Yes, Telekom Malaysia has recently announced its VSS program. And we have certain take-up as well for the VSS. I would pass for the EBITDA and the EBIT question to Fairus.

I'll just add a bit more on the cost-saving initiative. It's actually -- it's our annual initiative. We continue to optimize our costs to ensure that we remain competitive in the market. And as actually what our group CEO has mentioned on the VSS [indiscernible], that's just one of the initiatives that we have continued to optimize our manpower and cover our costs. With regards to EBITDA margin, I think we never actually make any disclosure in terms of our market guidance. We remain steadfast on what we have guided revenue, EBIT and the CapEx. So I'll keep that on that matter. And last, on the exceptional items, for normalizing item, this year or particularly for this quarter, we don't have that money. We don't have any, in fact. So whatever we reported actually exactly is the underlying EBIT.

Okay. I note that. Can I just follow up with a question on the VSS plan for this year? How big is it? How many staff is involved and how big in terms of the budget that we are allocating for this [Technical Difficulty]

Okay, [ Fung ], let me try to answer that. For the VSS plan, it is based on the demand. So there is an encouraging demand from our staff for a VSS plan. Hence, we are introducing our VSS package. With regard to the amount, we do not disclose our total amount, yes. And it is voluntarily. So you can benchmark against the trend of last year.

Understood.

Ranjan, you are up next.

I just have questions on -- regarding Slide 14. The management mentioned a few things on a year-on-year comparison basis. But if you could also share more color on the movement in the cost items from fourth quarter to first quarter? So you see direct costs down 16%, operational costs down 41%, D&A down 13%. I mean these are pretty major moves. So if you can explain, please, what's behind these cost movements from fourth quarter to first quarter. Thank you.

Thank you, Ranjan. Fairus here. A bit of comment, on the direct -- I mean, typically, we have a seasonal cost. Actually, some of that pretty much aligns to what we have -- what is the reported revenue, especially our data cost. And if you recall, as far as direct cost is concerned, we do have actually a spike or a high in our last quarter. That's very much aligned to the revenue. As far as operational costs, we do have some preventive maintenance, [ NSE ], a few less - a few licenses in terms of our business operations. So that pretty much [Technical Difficulty] some of the big ticket items that we have from the preceding quarter.

So if I may, like if I at direct costs, right, it's not just fourth quarter, which is high, right? If I look at second quarter, third quarter, these are all more than RM 700 million. So with higher content costs, I would assume that the direct cost would not decline by 16% quarter-on-quarter. So is this the timing of cost recognition or there's some savings somewhere?

Like I said earlier, it's actually very much aligned to our revenue. If I can just be a bit more precise on that, we do have some -- last quarter, we had some lower net adds, and that will align in terms of actually the -- sorry, in this quarter, we have actually lower net adds, and that aligns actually with the reduction in cost for the first quarter.

Did you also mention something around FX gains?

No, we didn't have that.

Okay. And sir, it's going to be also coming back to the operational cost, 41% decline quarter-on-quarter. Can you just elaborate on what are the major movements in cost items? Is it preventive maintenance and licenses? If you could elaborate on the changes in operational costs from fourth quarter to first quarter, it's 41%. It's a significant move.

As I mentioned earlier, Ranjan, there are some preventive maintenance business license requirement to support our growing business. There are also one-off items with regards to our other costs and the operational cost. But that being said, now the cost has been normalized to the normal trend based on first quarter 2024.

Okay. And coming to the depreciation and amortization, RM 540 million is again much lower, even though you're saying you're growing the business. So what explains the 13% drop in D&A expense from fourth quarter to first quarter?