Telekom Malaysia Berhad (TM) Earnings Call Transcript & Summary

[Audio Gap] is largely attributable to tax credits from the utilization of unrecognized tax losses recorded in 2023. However, excluding these tax credits, the PATAMI would actually show a growth trajectory year-over-year. Now I would like to provide some color on our customer segments and product performance for the financial year, beginning with Unifi. Unifi continues to expand its cumulative fixed broadband subscriber base, even amidst an increasingly aggressive and competitive fixed broadband market, our total fixed broadband customer now stands at 3.143 million, reflecting a 1.2% increase from quarter 2 2023. Unifi revenue for the current quarter is RM 1.39 billion, impacted by flattish in ARPU, along with lower voice and mobile revenue. However, we are actively implementing initiatives to grow and diversify our revenue streams, which we anticipate will bear fruit in the coming quarters. Despite these challenges, we are encouraged by positive trends in quarterly subscriber growth for both fixed broadband and mobile services. This momentum is a testament to the effectiveness of our customer-focused strategies and our commitment to providing value-driven offerings. Looking ahead, we will intensify our market strategies and remain optimistic about Unifi's outlook, bolstered by our enhanced retail offerings through the UniVerse campaign. Additionally, our continued investment in the network infrastructure will further strengthen our in-service quality, ensuring we meet the evolving needs of our customers. We are committed to continuously improving the customer journey and solidifying our position as a leading provider of true convergence solutions setting us apart in the market and driving sustained growth. TM One recorded a positive revenue performance with revenue increasing by 2.1% from RM 1.38 billion in first half 2023 to RM 1.41 billion in the current year. This is a direct contribution from our -- from one-off revenue collection from the recent arbitration settlement with MYTV. Recognizing the challenges -- the market challenges, particularly in this segment, TM One will continue to cater for industry-specific solutions, as shown through the various collaborations and partnership undertaken in the last few months. We are committed to pioneer future technologies while enhancing our core connectivity solutions. Moving on to TM Global. TM Global has sustained revenue growth in the first half of 2024 compared to the same period last year as well as on a quarter-to-quarter basis. This growth is largely driven by higher revenue from international and domestic data services during the period. The performance always reflect -- the performance also reflects global market challenges in the first 6 months of 2024, including international Voice decline impacting TM Global. Nevertheless, we have continued to secure IRU deals with Global Carriers, further expanding our international footprint and strengthening our positions in the global market. We also have completed network deployment for the Facilities-Based Operator FBO in Singapore, achieving significant cost avoidance for third-party outpayments. Moreover, our continuous upgrades of 4G and 5G infrastructure across Malaysia, along with provisioning HSBB Access ports are meeting growing customer demand and driving greater digital inclusions. We have also established a key partnership in Sarawak delivering fiber connectivity to enhance digital access in underserved areas. As we look forward to the second half of the year, we expect continued improvement and remain confident in the positive outlook for the wholesale segment, driven by ongoing infrastructure enhancement and our strategic international partnership. Now let's go through the revenue by product. On first half, of all our projects -- all of our products have reported positive performance with exception of Voice. Others revenues led the product performance with 7% increase attributable to higher customer project revenue from TM One, which include MYTV settlement with higher other telecommunication service at TM Global. Data services has increased 6% from RM 1.62 billion as at end June 2023 to RM 1.71 billion at end June this year due to higher domestic data and additional services at TM Global, whilst Internet was higher by 1.1% due to higher cumulative Unifi subscriber base in first half 2024. And our Voice was lower in 2024 due to contribution from Unifi and international voice at TM Global. Let's move towards the cost, investments and other financials. We remain committed to optimizing cost as a critical lever for maintaining our strong financial positions. Total operating costs have decreased from RM 4.71 billion in the first half of 2023 to RM 4.57 billion this year. This reduction has improved our cost efficiency ratio, which now stands at 79.6% for the first half of 2024 compared to 82.1% in the same period last year. Let's take a closer look at the breakdown. Direct cost was reduced by 8.8% in the first 6 months, primarily due to lower outpayment at our global business, mainly related to Voice and Other data products. We also see a reduction in commission expenses in line with our lower Unifi revenue. Operational costs saw a decrease or a decline of 3.7% in first half 2024, driven by maintenance costs for network, IT and general maintenance work, reduced rental expenditure, lower professional fee and traveling costs, while depreciation and amortization was lower by 12.1% during this period, primarily due to an impairment loss recognized in the first quarter of 2023, as previously mentioned. On the other hand, manpower cost has increased in 2024, partly due to higher separation costs and higher staff remuneration from the group-wide salary adjustment undertaken in September last year. There will be another salary adjustment scheduled in quarter 3 as we are steadfast in our role as a responsible employer and continue our investment in our people. We believe this will drive long-term productivity and innovation in the company while retaining talent and managing workforce mix. Additionally, we have implemented digital transformation initiatives that are beginning to deliver operational efficiency, further contributing to our cost management efforts. Moving on to the next slide on group capital expenditure. Our capital expenditure for the first half 2024 was at 8% of revenue or RM 460 million. Of the amount spend, 49% was for Access, 24% was made for our Core network and the balance were made for our Support system. Even though the amount spent for the first half of 2024 was lower than the same period last year, on committed spending basis, it is higher and closer to the guidance range, as mentioned earlier. We'll be ramping up our investment in the second half of the year following our previous year's trend. And I think on the last slide from me, our cash position and financial ratio. As of June 2024, our cash and cash equivalents have increased significantly to RM 2.64 billion, up from RM 1.9 billion in the same period last year. This improvement is primarily driven by lower CapEx despite higher borrowing repayments and dividend distribution during the period. Our financial ratio have also shown positive trends, reflecting enhanced return and a strong financial standing. Notably, our ROE, return on equity, improved to 19.85%, up from 17.4% in first half 2023, helping our ability to generate better returns for our shareholders. Similarly, our return on assets increased to 8.3%, a clear indication of more efficient asset utilization. Moreover, our debt headroom continues to expand, as evidenced by the improvement in our gross debt-to-EBITDA ratio, which decreased from 1.55 to 1.44 and our net-debt-to-equity ratio improved to 0.44 from 0.61 in the same period last year. This ensures that we are well positioned to capitalize on future growth opportunities while maintaining a healthy balance sheet. I would like also to highlight the following. Cash flow used in financing activities were higher due to loan repayments of RM 600 million, coupled with second interim and final dividend payments totaling RM 403 million in the first half 2024. Our free cash flow as of June 2024 increased to RM 1.3 billion, demonstrating strong operational efficiency and robust cash generation. This concludes the financial and operational highlights. I'll now hand over the session back to Amar. Over to you, Amar.

Thank you, Fairus. TM's financial performance in the first half of '24 highlights our resilience in a challenging market environment. Growing our core business remains our top priority, while we remain steadfast in optimizing cost and sustaining healthy financial standing. Testament of strong fundamentals, we have declared higher interim dividends as we strive to deliver optimal returns for our shareholders. We are continuously exploring new avenues for growth while strengthening our core operations. A prime example is our strategic partnership with Nxera, Singtel's data center arm to develop a sustainable hyper-connected AI-ready mega data center in Johor. This initiative, along with the development of the new submarine cables and the expansion of our existing data centers underscores our commitment to providing top-tier data center solutions and reinforces our leadership as the preferred digital hub in the ASEAN region. With regard to our latest announcement on DNB last Friday, we would like to reiterate that TM will continue to play a key role in supporting the national 5G ecosystem and transition to the 5G dual network, ensuring that the nation benefits from the latest advancement in the connectivity and digital services. The group is committed to providing high-quality converged digital offering across various segments of its customers. Looking ahead, we remain confident in our trajectory towards becoming a digital powerhouse by 2030. Our positive outlook for the year is in line with the market guidance we issued for 2024. Thank you for your time and attention. We now welcome your questions in the Q&A session.

Thank you, Amar and Fairus. [Operator Instructions] The first question comes from Prem.

Congratulations on your results. A couple of questions from me, please. So first of all, could you talk about connectivity opportunities, especially when it comes to data centers as well as 5G. I mean on the first one, is this a multibillion dollar -- or multibillion Ringgit opportunity for the industry, or is there sufficient competition in the space to mean that the telcos will not really benefit from this surge in data center capacity in Malaysia? That's one. Part two is essentially on the 5G, if we do get resolution on the 5G issues, what kind of opportunities are there for Telekom Malaysia? Or maybe if you could put it the other way, what percentage of your current wholesale revenues are actually coming from 5G-related connectivity? The third question essentially is, given where we are currently, your EBIT appears to be tracking well ahead of your guidance for the full year. Could you help us understand what would cause us to actually go back to -- down to your guidance rather than beat that guidance given the current results of the first half?

Prem, let me take the first question on the data centers. If I understand correctly, you are asking whether -- or how the demand for data centers correlates with the 5G -- I mean connectivity, yes? As we know, for data centers, the key drivers will be the utilization of the power that we installed for the data centers and the space provided with the hyper-connectivity that will link one DC to another DC. Based on our understanding of the market, that opportunities is going to be tremendous, as you can see the growth on TM Global in providing the DC-to-DC regional connectivities. So I hope I will answer the first question. And with the advent of 5G, certainly, the development of application, digital ecosystem, that will surely drive the demand or take-up of the DC space and also the power. So that both in combination really drives an optimism towards data center business. On the 5G issues, if I understand correctly, too, I would like to clarify -- yes, we will continue to provide service offering to our customers that will not affect or whatever that we offer at retail, our Unifi 5G campaign, our Converge campaign that will not be affected. And at the same time, on the wholesale side of it, our wholesale business still remains steady in supporting the fiber requirement to enable DNB 5G sites. So that remains consistent. We will not disclose the percentage of the 5G commitment -- 5G revenue of the backhaul revenue for 5G that we are supporting for DNB, but it is sizable as we know. We are the incumbent provider for DNB 5G backhaul. On the EBIT tracking and guidance, to your question, if I understand well, what will at least drive it down? Of course, in the next couple of months to come, there are forecast of cost that will be coming in, especially when we drive more campaign to drive our consumer and retail take-up among others. Maybe you want to add further Fairus?

I think on the last question, Prem, we remain committed on our guidance for EBIT between RM 2.1 billion to RM 2.2 billion as of first half 2024.

And just to clarify, on the data center connectivity opportunities, would you like to give a ballpark of what you think that revenue opportunity is over a 3- to 5-year period? Are we just talking of RM 1 billion to RM 2 billion or is this something that could be RM 5 billion to RM 10 billion on a 5-year basis?

We do not give a forward-looking guidance Prem. But certainly, we are optimistic in terms of the growth of the DC-to-DC interconnectivities. As you know, for example, for the Johor region, there will be multiple DC being connected. And most of the hyperscalers are requesting many kind of connections that connects among those DCs, including the one that in Singapore. So certainly, the demand will grow in the years to come.

Is there a lot of competition in that segment of the market from third parties?

Competition will be growing in the segment of the business. However, that's why it's very crucial for us to find the right partner in the circumstances. We have partnered with an incumbent from Singapore which will facilitate further a seamless connectivity from both 2 borders.

Luis, you're up next. Go ahead.

Three questions from me initially. In terms of the manpower cost in the quarter, we saw it's up 8% Q-on-Q, and you also mentioned that September is going to be giving a hike. Is this 8% during this quarter due to any pay increases already? Or was there any manpower retirement in the period? Second question is regarding the effective tax rate this quarter quite higher Q-on-Q, 29% versus 25%. What are you looking at for the full year? Do you have any tax credits coming by year-end? And last question is regarding a bit of clarification on what's happened with DNB. Is there no -- do you have any recourse to try to get a stake back in DNB or it's essentially case closed? And if you can remind us how long your 5G Access contract is with DNB?

Luis, Fairus here. I'll take the first two questions on the manpower and the tax rate. I think on the manpower cost, there's no hike rate for this quarter. As I mentioned there, it's driven by a couple of things. One thing, maybe not obvious, last year, we have actually one-off reversal make the comparable costs lower by circa RM 50 million. And of course, this year, we have a provision for our separation costs. And I see some salary-related adjustments. Of course, for the coming quarter 3, there is actually adjustment, but that will be compensated with our moving forward separation cost -- separation exercise actually introduced by the company. On the tax rate, I think it's suffice to say, we will compare to the 24% corporate rate. That is all here until now. Thank you.

On matters related to DNB, as what we have disclosed in the market. So we, at the moment, have appealed and requested for extension of our long stock, but we are not able to get. And yes, we are not part of the [ SSA ] anymore. So we are now still serving 5G by our Access agreement. So our wholesale Access agreement for 5G services with DNB is still valid and will remain for 10 years. That will be the contract that is signed on the AA. So I hope I will clarify that question.

Thanks Luis, Foong you are up next. Go ahead, and unmute yourself.

Three questions from me. Firstly, on the manpower cost, right? In terms of the second quarter, can you share with us what was the VSS cost that was booked in the quarter? And then Fairus, you mentioned the salary adjustments coming up in September. In terms of the percentage increase in salary, what are we sort of budgeting or if you have an absolute number, that will also be pretty helpful? That's question number one. Number two, on the international voice revenue, you mentioned earlier that there was a decline year-on-year in the first half. Is that structural in nature? Or is it seasonal? And therefore, do we expect it to pick up in the second half? And have you seen a more positive trend so far into the third quarter? And then my third question relating to the termination of the SSA with DNB. I wanted to understand if TM is still in the running for the second 5G network? Those are my 3 questions.

Let me pick up the question number four and number three, Foong. On the termination of SSA, whether TM is in running for the second network, we have participated in the AIP issued by MCMC and we will wait for the outcome of the review by MCMC. So at the moment, we are still pending the outcome from MCMC. So I hope I'm clear on that. With respect to the international voice revenue, the decline year-on-year, it is a deliberate intention for the management for Telekom Malaysia to continue reliance on voice. So yes, voice, we are expected to also gradually decline in the subsequent quarters. But we remain steadfast to grow our data business, especially on IRUs and manage wavelength.

All right. Coming back to the questions with regards to our manpower costs. First question is, how much was VSS cost book? We don't disclose the detail. This is on voluntary. And actually, I think suffice to say Ching Foong, this is pretty much aligned to industry standard. With regard to the salary adjustment, no number can be indicated, but the amount has been factored as part of our market guidance of EBIT RM 2.1 billion to RM 2.2 billion. Thank you, Foong.

Ranjan, you are up next.

Just one question from my side. You disclosed an one-off impact on revenues from the settlement. Can you please share the details of that?

Ranjan could please repeat the questions again?

So you disclosed a one-off impact on revenues in TM One from the settlement. If you can share the details of that? How much one-off revenues have been booked?

On this Ranjan, the settlement agreement actually quite clearly said that we cannot disclose any of the settlement between the parties. So yes.

Okay, I guess there are other project revenues are as well in there. Can you talk about like what is the recurring revenues for TM One?

Sorry, Ranjan, with regards to your questions regarding the recurring revenue for TM One, roughly, it's actually ranging between 90% to 95%. That is actually our current position for TM One.

Okay. So 90% to 95% of the RM 741 million?

Yes.

Luis you back for round two. Go ahead.

I just have 2 follow-up questions. One is if you can give us an update on the data center joint venture with Singtel. When would you expect to be able to announce or sign contracts for that? And second question, you've highlighted the interim DPS higher year-on-year. Should we also expect the same for the full year despite you not having any tax credits in this year?

Sorry, let me take up the question on DC. So the -- as you know, we have announced that we have engaged in the [ LAN ] broking of [ LAN ], Breaking of [ LAN ] event with Singtel, so that it will be follow-up with the completion of our JV agreement, which we target to be in quarter 4 this year.

Okay. So you should be finalized -- announcing contracts next year then?

Yes, yes. Yes, it's in line with what we disclosed to the market as well.

On the tax credit, it is a onetime utilization of tax credit for 2023. And as for 2024, obviously Luis, it will be the standard rate, 24% of corporate tax.

But will that -- but will you still have a higher DPS despite not having tax credit this year -- for the full year?

I guess -- I think on this note, Luis, we will announce when the time comes, based on our guided policy, 40% to 60% reported PATAMI.

We don't have any more questions -- or we have one? Okay. Go ahead.

First question is on Unifi ARPUs. Could you guide us on the trends going forward for Unifi ARPUs, maybe just directionally, are we going to be stable here? Or are we going to see some further softness in the coming quarters? Second question relates to data centers. Could you just share with us revenue contributions from data centers, both in terms of connectivity? And second, from [ colo ] revenue for perhaps TM One. Is there something TM can share? I think third question relates to dividend payout. So first half seems to be on the higher, the upper range of that 40% to 60%. What would make us maintain at a 60% rate going to second half.

Thank you for the question. On the Unifi ARPU, yes, there is currently a pressure on the ARPU. We hope to stabilize it in the month to come by introduction of our recent campaign, UniVerse and also the new mobile UNI5G WOW and also the [ mobile 39 plus 1 ] campaign. So we have seen good traction. So we hope that the ARPU will stabilize in the next subsequent quarters to come. On the DC share of revenue, we do not share the split between our connectivity and our [ colo ] for that matter, yes.

Ken, Fairus here. One the dividend payout, actually, the 12.5% is equivalent to our 58.4%, right? That is actually exactly within our 40% to 60% dividend policy. As far as second half, we maintain the same guidance, 40% to 60%. And I think based on our prospect, we clearly indicated that we will maintain our issued market guidance during the early of the year. Revenue of Voice low to single-digit EBIT RM 2.1 billion to RM 2.2 billion and CapEx of 14% to 18%.

Okay. Sorry, a follow-up on the data center contributions. Could you provide us with, say, a range of percent -- range or percentage of revenue from data center side out of your total group revenue. Perhaps you could share with us a percentage coming from data centers? A rough percentage would do actually.

Thank you, again, for the question, Ken. We do not share the breakdown of our data center unfortunately today. We are growing it as a portfolio. So once it's been fully stabilized, then we will split it -- the portfolio and report it accordingly. At the moment, it's still -- because it's clustered of TM Global revenue.

Upnext is Kylie, go ahead please.

just have two questions to follow up on what was reviewed earlier. So there was mention of our competition in the DC-to-DC connectivity space. So may I know who are these players that you're referring to? And second question would be still on DC connectivity. May I know if you would benefit more from your submarine cable or your fiber backhaul assets? That's all for me.

Thank you very much for the question, [ Kylie ] .For the competition on the DC-to-DC connectivity, generally the competitors will be the incumbent of both -- I mean, the operators of both side of the country. For example, Singapore, you have [ startup ] of the world, right? And for here, you will have other competitors too, for example, time.com. So these are -- and other fiber providers within that particular areas, yes. And that's why I've been telling just now. So it's important to have a unique value purpose in terms -- in terms of ensuring seamless connectivity from our DCs to the one within region and also cross-border. So that's where hyperscalers are looking at today. On whether the submarine investment will correlate very well with our DC investment? Certainly as we bring connectivity from international to Malaysia, so it's important to also make sure that all of this, apart from being connected via our short-range fiber between Singapore to Malaysia, we also need to ensure that we have ample capacity that can connect our DC to the region as well. Certainly, our investment in submarine cable system will complement the investment in DC.

So may I just follow up. So on the submarine cables, with the hyperscalers end up using -- building their own submarine cable infrastructure, would that be the case in future?

It's not in the future. Hyperscalers has been building their own submarine cable system and has been part of the consortium for new submarine cable ecosystem. And we see this positive will complement because at the moment, there will be no -- there will be needs for not only one, but multiple connection of submarine cable system. And by then investing into that, it will generally complement other consortium members, too.

Okay. That's very clear. But may I know if there's any global consortium -- global investments in submarine cables in the pipeline that TM would be part of ? Would there be -- should we expect an announcement on new submarine cable investments?

Yes, TM has been an announcement of our involvement in 2 major submarine cable system, one connecting to the European side of the world, which we call SEA-ME-WE 6. The other one is connecting to the Eastern part of the world going to the Hong Kong side of the world, which we call ALC.

Up next, Paul?

Just one question. Just trying to understand the slowdown in Unifi net adds during the first quarter and second quarter of the year. How much of that is driven by competition? And how much of that is mainly driven by the lower CapEx -- excess CapEx for the year? And then a follow-up to that is, can you remind me what the latest [ home premises [indiscernible] number of passes ]

Thank you, Paul, for the question. We don't share the number of home passes for the matter. On the slow net adds for Unifi, it's been attributed mainly because of the stiff competition in the current broadband market today especially post MACP announcement. And Unifi is looking into turning it around by offering a convergent package, which we -- I think recently, we have recently launched UniVerse campaign and bundle it together with other packages like content, mobile as well. So we have seen a positive traction on the [ cost ] is to come.

Okay. We'll take the last question. Martin, you're up next.

Just got two questions from me. One on the TM One. I understand that you guys cannot share the one-off settlement amount but If -- can we gauge -- look at first half number for this year and last year, in absence of this one-off settlement amount, will the revenue's take came in higher? That's question number one. And number two, on DNB. I understand that TM already committed the equity deal with DNB. But can TM revisit the equity deal at a later date?

For DNB, we can't comment much whether we can revisit the deal. What I can assure for today would be what we have announced that we are -- our appeal extension is not being granted by DNB, Hence, we are no longer part of the shareholder arrangement. And we remain steadfast in supporting the 5G ecosystem. And certainly, we will look up to any future opportunities if they may arise. For TM One for that matter, we will not disclose what will be the impact in absence of the one-off impact of this settlement of MYTV. Thank you.

Thank you, [ Amar ] and Fairus. Since we have no more questions at this point. Thank you, everyone, for spending your time with us today. If any further questions, don't forget to reach out to me or my team. And thank you very much, everyone, and we'll see you again next quarter. Thank you.

Thank you.