Telkom Indonesia (Persero) Tbk PT (TLK) 2015 Q1 法說會逐字稿

Thank you for standing by, and welcome to the PT Telkom first quarter of 2015 results conference call. (Operator Instructions). I must advise you that this conference is being recorded today, May 7, 2015.

I would now like to hand the conference over to your first speaker today, Mr. Andi Setiawan, Vice President of Investor Relations. Please go ahead, Mr. Setiawan.

Thank you, Natalie. Ladies and gentlemen, welcome to PT Telkom Indonesia first quarter, ended March 31, 2015, conference call.

We released our results on April 29, 2015, and the reports are available on our website, www.telkom.co.id. Today's presentation is available on the webcast, and an audio recording will be provided after the call, for the next seven days. There will be an overview from our CEO; and after that, all participants are given the opportunity to participate in the Q&A session.

Before we start, let me remind you that today's call, and the responses to the questions, may contain forward-looking statements within the meaning of Safe Harbor.

Actual results could differ materially from projections, estimations, or expectations voiced during today's call. These may involve risk and uncertainty, and may cause actual results to differ substantially from what we discuss in today's call. Telkom Indonesia does not guarantee to any actions, which may have been taken in reliance of the discussion held today.

Ladies and gentlemen, it's my pleasure to introduce you the Telkom's Board of Directors, who are joining with us today. Mr. Alex J Sinaga, as President, Director and Chief Executive Officer; Mr. Abdus Somad Arief, as Director of IT Network and Solution & Chief Technology Officer; Mr. Honesti Basyir, as Director of Wholesale & International Services.

Also present are the Board of Director of Telkomsel: Mr. Edward Ying Siew Heng, Director of Planning & Transformation.

Before Pak Alex delivers his remark, I will take this opportunity to give a brief overview of Telkom Indonesia.

Telkom is the single largest communication company and network provider in Indonesia. Telkom provides a strong business portfolio of TIMES, telecommunication, information, media, and entertainment, directly, or through its subsidiaries. We also deliver services to multi-customer portfolio: retail, enterprise, wholesale, and international.

As of March 31, the majority shareholder of ours was government of Indonesia with 52.6% ownership, and the remaining 47.4% was under public ownership.

I now hand over the call to our CEO, Mr. Alex J Sinaga, for his overview. Pak Alex, the time is yours.

Thank you, Andi. Good afternoon, ladies and gentlemen. Welcome to our conference call for the first quarter 2015 result, ended March 31, 2015. We sincerely appreciate your participation in this call.

Until end of the first quarter of 2015, we continued our excellent performance, both in term of operational and financial results. I would also like to update you on the progress of our cellular and fixed line business, as well as other business portfolio.

Ladies and gentlemen, let me start the overview by sharing the highlight of our first quarter of 2015 results.

Telkom's first quarter of 2015 consolidated revenue grew by 11.1% year on year, with EBITDA and net income grew by 13.9% and 6.4% year on year, respectively, while our cellular subsidiary, Telkomsel, revenue grew by 12.1%; EBITDA by 9%; and net income by 11.3% year on year.

Data, Internet, and IT services, excluding SMS, recorded the highest revenue growth with 27.6% increase from first quarter last year.

Telkomsel digital business grew by 37.4% as data traffic jumped 110%, supported by 3G and 4G-capable devices, which grew by 55.2% to IDR43.7 million.

Telkomsel expands its 4G LTE services in several key cities, including Jakarta; Bali; Bandung; Surabaya; and Medan.

Ladies and gentlemen, our strong result in first quarter of 2015 was in line with solid performance for our cellular business.

And in terms of operational aspects, Telkomsel gained 877,000 net additional customer during first quarter of 2015, brought customer base to 141.5 million, amidst relatively high SIM card penetration.

Mobile data payload jumped significantly to 89.6 terabytes, or increase 109.8%, mainly supported by fast-growing 3G and 4G-capable device adoption, which grew by 55.2% to 43.7 million users.

Telkomsel continue expanding its network infrastructure by adding 5,132 new BTSs during first quarter of 2015, with around [89%] 3G and 4G BTSs, including 667 4G BTSs, and it is reflecting our focus on data business.

In the meantime, our fixed line subscriber increased to 9.8 million, from 9.4 million, while fixed broadband users increased by 11.4% year on year to 3.5 million, supported by our newly launched IndiHome triple play.

Ladies and gentlemen, our excellent operational achievement has resulted in strong financial performance. Consolidated revenue grew by 11.1% year on year, mainly supported by our cellular subsidiary with around 60% contribution.

We successfully maintained healthy level of profitability with EBITDA margin of 52.3%; improved from 51.4% in the first quarter last year.

While net income margin was recorded at 16.2%, slightly lower than 16.9% in first quarter last year, partly attribute to accelerate depreciation for our fixed wireless business.

On the expense side, it increased by 12.8% to IDR16.2 trillion.

Operation and maintenance expense grew by 20.2%, in line with the acceleration of network deployment, both in our cellular and fixed line businesses, in particular, to support digital businesses.

However, we are disciplined to manage the other expenses, including personnel, general and administration and marketing expenses, which grew by 0.7%, 3.6%, and 1.1%, respectively.

In the meantime, depreciation and amortization increased by 29.1% to IDR5.1 trillion, in line with additional asset, as a result of accelerated network deployment, as well as accelerated depreciation for our fixed wireless business.

Ladies and gentlemen, for the first quarter 2015, our cellular subsidiary, Telkomsel, continued its strong results as revenues, EBITDA, and net income grew by 12.1%, 9%, and 11.3% year on year, respectively. Digital businesses remained the growth drivers with 37.4%, increase year on year. And, as a result, its contribution to total revenue increased significantly to 27% from 22% in the first quarter last year.

On the other hand, Telkomsel successfully maintained its legacy business as voice grew by 7.9% year on year, and SMS grew by 5.1% year on year. This is, again, the result of cluster-based pricing strategy, coupled with market segmentation, and stable competition environment.

During first quarter 2015, we continued our effort of building our digital business' infrastructure to maintain our leading position in term of coverage, capacity, and also capability.

By end of March 2015, BTS on-air totaled to 90,552 units; grew by 21.8% year on year, of which 48.1% are 3G and 4G BTSs.

Data traffic jumped 109.8% to 89.6 petabytes in the first quarter, mainly fueled by fast-growing smartphone, which increased by 55.2% year on year to 43.7 million users.

Following 4G LTE commercial launch in Jakarta and Bali on December 2014, we continued rolling out 4G LTE network and service, and until [April] we had expanded to Bandung, Surabaya, and Medan. Today, we have close to 1,000 4G LTE BTSs serving those five cities.

Until end of March, we successfully migrated 1.3 million Flexi subscribers to Telkomsel. And we put a lot of effort to complete the migration process earlier than expected, schedule of December 2015. The sooner of the migration could be completed, the sooner the frequency could be utilized by Telkomsel.

Ladies and gentlemen, a notable progress of Indonesian digital network for the first quarter 2015 that I could share with you is in February 2015 we have connected our nationwide fiber-based backbone network from Aceh until Papua as we completed Sulawesi Maluku Papua Cable System, we call it SMPCS, until Jayapura city.

Furthermore, we will put more effort to strengthen our access network to support the development of IndiHome triple play. Until March 2015, we had 245,000 IndiHome triple play subscribers, and we expect to have aggressive additional subscribers until the end of the year.

Let me now share the update of our tower company share swap transaction with Tower Bersama Infrastructure.

Until now, we still carry on the transaction process, based on conditional share exchange agreement that we signed in October 2014, which is still valid until June 2015. And we can assure that the transaction process complies to the all-required rules and regulations. And Telkom management's obligation is to follow the accountable and transparent process and make all documentation, according to the best governance.

Ladies and gentlemen, let me reiterate guidance for 2015 as a wrap up. We focus on three main programs for 2015. First is to maintain Telkomsel double-digit growth; second is to drive digital business through Indonesia Digital Network 2015; and third is to stretch and expand international business by strengthening current international footprint, and seeking new opportunities.

We expect both Telkom and Telkomsel's revenue to grow in line with, or slightly better, than market by continued effort to grow digital business revenue.

Our growth will be on the back of strengthened mobile business, and rejuvenated fixed line business.

For EBITDA and net income margin, we expect to slightly decline, both for Telkom and Telkomsel, in line with continued broadband infrastructure development in mobile and fixed line businesses.

Our consolidated capital expenditure spending for 2015 is expected at around 25% of revenue, with 60% to 65% of CapEx will be allocated for mobile-related business; around 20% to 25% for fixed broadband-related business; and the remaining will be for other businesses.

Finally, in terms of M&A aspiration, our inorganic growth initiatives have to enhance and increase digital business portion of Telkom Group with guidelines of 80/20 rules, where 80% is representing digital or new wave portion of inorganic programs.

To support financing for our capital expenditure and M&A, we are currently in process of issuing local IDR bonds, with first tranche value of up to IDR7 trillion. And the bond issuance is expected to be completed by the end of June 2015.

That's ending of my remarks. Ladies and gentlemen, thank you.

Thank you, Pak Alex. We will now begin the Q&A session. When raising your question, please speak clearly, and state your name and your company. Operator, may we have the first question?

(Operator Instructions). Luis Hilado, HSBC.

Thanks for the call. I had three questions. The first is regarding, for Telkomsel, the competitive environment. Now that one of your competitors seems to have -- seems to no longer be flooding the market with SIM cards, do you see room for pricing to improve, whether it be in wireless data, or SMS and voice, in the coming quarters?

The second question was just a follow up on what the CEO spoke about with the tower deal. Is there any decision yet by the Board of Commissioners regarding the deal, and whether to proceed?

And the third question is a follow up to the CapEx disclosure. Just wondering if part of the CapEx includes investments overseas, or is that a separate item? And if it's a separate item, what's the maximum amount you would be spending this year, or over the next few years, for international investments?

Luis, this is Edward Ying from Telkomsel. Just to answer your first question is now you are saying that the competition, will we get better pricing and competition will be less going forward as they reduce flooding the SIM cards.

Frankly, I only saw what's written by XL, and I notice that's true, the market now is more controlled, more regulated. Including, the regulators are also asking operators to actually ensure they register all their new prepaid users. So this will actually have some effect on the ground, and starting [have better] more and more aggressive and stringent. So this [will kick] in the next six, nine months.

So -- but I have to say, the competition continue to be aggressive in terms of [plucking] customers, attacking the business. I think that continues to grow. So, that's one part.

The other part, also, I'd like to say, yes, competition are more rational, they don't simply top price. They observe, and they're actually looking -- if you look at the report that both XL and [us] just announced were actually more -- you will see that prices actually raise in terms of per use in SMS, and also data as well.

So, those are my short answers to your question.

Okay, regarding the tower deal, so, as been mentioned by Alex, currently, we still keep to [expect] (inaudible) the conditional share exchange agreement that we signed, and that the CSEA will be valid until June.

And the progress -- one of the progress in the end of February, the TBIG just do the general shareholder meetings to report about this potential corporate action. And we will continue to complete all the process, and our obligation is to follow the [accountable], and also (inaudible) process, and we will report at a certain point to our BoC to get approval.

Luis, this is Heri. Regarding the capital expenditure for the international expansions, actually, the numbers included in the guidance around 25% of the revenue. It's --

Is any of that allocated for international investment?

Yes, included on the CapEx guidance that our -- the CEO mentioned.

Okay. And, sorry, one follow up is I saw in one news article that the guidance was 25% to 30%. Is 30% still the maximum possible, or it's really just 25%?

Around 25%, actually. We already mentioned around 25% of the revenue.

Okay. Thank you.

Anand Ramachandran, Barclays.

Thank you for the call. I had three questions. Firstly, if I look at wireless realizations, or rupiah per meg, it has gone up slightly quarter on quarter. But then, I also see wireless data volumes, as you report, that's also hardly grown quarter on quarter. In fact, it's grown really very slowly relative to the last five or six quarters. I was just wondering whether there's any correlation between, I guess, higher pricing and then lower volumes, or is this just a one-off?

Second question is on wireless, again. Telkomsel's margins are weaker again, I guess on account of the higher network operating costs. So, should we expect some improvement into the year, given that your guidance is only for a slight decline in margins?

Thirdly, and lastly, bookkeeping, I was wondering if you could highlight specifically how much the accelerated depreciation on the fixed wireless assets were in the first quarter number; I did not pick that up in the release.

Sorry, can I answer the number three, first? Regarding the accelerated depreciation of the Flexi, is actually IDR872 billion (multiple speakers).

Okay. Is there any left on the books, or is this it?

No, that's it.

Okay.

Anand, I think you asked is it because we raised price, slightly went up on broadband, and our -- the customer [has really] declined? Actually, that's not true. I think overall the data user -- actually, year on year, about 64 million users are data. In fact, the payload usage increased by close to about 14%, let's say, 15%.

But why there's a slight -- you do not such a tremendous growth this quarter is because this quarter we have two days short because of the February month. In general, at least you ask me, there is still momentum of growth. So, I hope I answered your question.

Edward, I'm looking at the terabytes. And if you look at the terabytes, they grew 2% quarter on quarter, so it's by far the slowest kind of growth you've seen for a long time. And, coincidentally, or maybe not, you saw wireless realizations also start to do a welcome u-turn. I'm just wondering is this just coincidence, or is there something to do between the two?

From my record -- we can speak separately to you, but from my record, actually, our terabyte has gone up by 13.5%, actually, more usage, and more of our customers actually moved from [Signal] to Flash. So, that's probably you do not see the increase.

But we're also short of two working days, that revenue; that's probably you do not see the jump that you wanted to see, perhaps.

Understood, sir. Thank you.

And then, the next question, you asked whether our costs were going forward. Actually, this is only the first Q. As you know, we're still working through the next nine months. There is a one-off that we take on the ERP, we call the release of people, and that cost us some money. Overall, we see that, going forward, our EBITDA, at best, will decline by 1% at Telkomsel level.

Okay. How much was the ERP in Telkomsel in the first quarter, sir, if I might impose?

IDR160 billion.

Thank you so much. Thank you so much for answering all the questions.

Colin McCallum, Credit Suisse.

Thanks very much for the opportunity. Can you just tell us, again, just on the CapEx figure, I couldn't hear very clearly? Are you saying 35%, or are you saying 25%? If you just clarify that, that would be great.

Secondly, just on the fixed line rollout for IndiHome, could you tell us, as at the end of March, what is the fiber homes passed that have been achieved, and the number of fiber customers in place at the end of March? If you could also give us those figures as targets for end of 2015 that would be great. Thank you.

For the CapEx, as our CEO mentioned, is 25%. We are spending -- around 60% to 65% of the CapEx will be allocated for the mobile-related business; around 20% to 25% for the fixed broadband-related business; and the remaining will be for other businesses.

So, yes, but is the overall figure 25%, or 35%, please?

Say it again, please.

Is the total figure 25%, or 35%? I'm sorry, you're not coming across very clearly on that point. 25% or 35%.

25%.

Got it. Thank you. Very clear, thank you.

Arthur Pineda, Citigroup.

Thanks for the call. Just three questions for me. Firstly, with regard to your payout level, of course, this has been reduced recently, what's the rationale for this reduction? And what do you plan to do with all the cash, given that you're actually neutrally geared?

Second question I had is with regard to your investments. You mentioned 80/20 split on legacy versus digital. What are the considerations for expansion into this space? And can this actually be loss-making?

A third question I had is more on housekeeping. On MRT charges, can you remind us for the plans on both Telkomsel and Telkom this year? Will there be more booked in the subsequent quarters? Thank you.

Arthur, I try to answer your question. You're asking for the ERP, the release of staff, that whether we have any more in this year. Is it correct?

Yes, for both Telkom and Telkomsel.

For Telkomsel, we have no intention to do any more for now. This is our first quarter, and we just did it, so we need to evaluate and see how things go, and we'll come back to you. So now, there's no intention.

Did you ask one more question about the digital? I did not understand the question on the digital one. Digital business?

Yes. It was mentioned a while ago that there's this long-time 80/20 split between legacy versus digital. I'm just wondering what the considerations are in terms of expanding into this space? And could you actually see this as being dilutive, given that we've seen that happen for other names in the region? What business lines would you be looking to get into?

Okay, regarding the internal expansion, yes, I think that mostly the asset that we are looking for is in the digital -- mostly in the digital business. 80% is focusing on the digital business asset, yes.

And can that be potentially loss-making?

I think that's the nature of the -- this is kind of a long-term investment. This is more of future business that we are investing, that is something that we have commit for long term. And we see this the future, that's why we start to impact from now for our future, and we focus on the digital; on investment on the digital asset.

Thank you. Could I just get clarification on the payout, and if I could just revert on the Telkom ERP, if there's any as well? Thank you.

The rough number is around -- on the budget, around IDR500 billion. It consists around 1,000 employees. Is that clear?

Very clear, thank you. So just maybe on the clarification on the payout levels being reduced, and what you do with all the cash.

Yes, well, the cash is actually -- we reduce our bank loan. So we hedged our bank loan to give more money for the expansions.

And for the CapEx.

Understood. Okay, thank you.

(Operator Instructions). Jimmy Chen, Bernstein.

Just one clarifying question; it was asked before, but I didn't catch the full answer. On the tower deal, Mitratel and Tower Bersama, can you just clarify what is the situation, whether it's happening or not? There are news reports that it may not be going ahead. Thank you.

Yes, as maybe you are -- we are aware there are many media publication that -- rumors also happening in the media. But again, we have to follow the proper and transparent process, and also comply with the audit, the required procedures and [governance]. And I think that, at a certain point, we are either coming to asking for (inaudible).

Okay. As a follow up, what's the management's general thinking and strategy to do with the towers held first within Mitratel, and also within either Telkomsel, or the Telkom Group?

I think this still is just for Mitratel. We haven't incorporate or include the Telkomsel towers.

(multiple speakers) ]And no plans to sell the Telkomsel towers]?

Yes, it's not including the Telkomsel towers. It's separate.

Thank you.

There are no further questions at this time. Mr. Setiawan, please continue.

I think if we have all the questions then we can end the conference call.

One question about the numbers of home [passes] of fiber we have, until end of quarter 1, we have already 13.6 million home pass. And out of that, there are 7.3 million are fiber and already connected to the houses. As we mentioned in the report, 245 million -- sorry, 255,000 houses triple play services; and out of that, 25% are fiber.

Thank you.

Natalie, can we close the conference call? No more questions?

Jonathan Koh, UOB.

I just want to double-check two numbers that you mentioned when you answered the question. The first number is the accelerated depreciation for fixed wireless, is that IDR872 billion?

And then, the second number is the one-off expense for ERP. Is that IDR160 billion? Can I just double-check the two numbers? Thanks.

Okay, it's correct, IDR872 billion for the accelerated depreciation for the Flexi.

And the ERP is -- there is [process of] two from the Telkomsel, is it correct -- it is correct? That's IDR160 billion. And for the Telkom around IDR500 billion are -- for 2015.

For the first quarter 2015?

For the whole 2015 for Telkom.

Okay, I understand. That's the budget.

Yes, the budget.

Okay. Thank you.

Princy Singh, JPMorgan.

I have two questions. The first one is on your voice and SMS pricing strategy. I believe there have been some price hikes over the last few quarters and how should we think about this, going forward? Will you continue to take these price hikes, or you think most of these prices hikes are done?

My second question is on the 4G rollout. And where is the -- what is the status of the 1,800 megahertz network, we have some reforming to happen? And when can we expect that to be concluded? And when -- should we then expect the network around 4G starting to get rolled out from a timing perspective?

Mr. Singh, let me -- I didn't get your second question. But, anyway, let me try to answer one at a time, and then we'll see what are the gaps that I have to respond to you.

Firstly, I think your question is can we continue to have an increase in voice revenue and voice usage, going forward --

Yes, my question was on pricing, more on voice pricing.

Yes, pricing. So far, let me talk about overall business. The first Q result, our voice revenue has gone up by close to 8%, so has the usage for voice. For SMS, actually, our usage -- our revenue gone up about 5%, but usage actually came down.

So, actually, (inaudible) we redefined our pricing with cluster base. We look at how to target the users, and how to get the best value of both sides, the user as well as the operator.

Will we continue that way? Yes. We are looking forward to see where else we can actually improve; not so much just increase pricing, but look at how to engage the non-active customers to make them more active in voice, and also more active in SMS, when we can do that. And that's how we got our revenue a little bit of an increase in the first Q, our results.

But truly, in voice too, that continues usage as we roll out more and more of our network, and also taking some share from the competition. So that's on voice.

Pricing, I would like to say that we will continue to adjust accordingly. And the next quarter with Lebaron, we will do the same thing as well. Sorry, in this quarter, coming up in June, the (inaudible) and then Lebaron.

So, I hope I answered your question on SMS pricing and voice pricing.

I think I caught your third question, is that about the reforming of the 1,800. Actually, 1,800, as you probably read and heard so many times that the government had decided that 1,800 will be [quite] neutral. That means you can now use it for 4G.

And they have a series of plans. To cut a long story short, they must end by end of the year, so the whole country should be able to use 1,800 LTE by end of the year.

Now, you asked whether we started the progress. The progress has started about last week, and in Papua, in two areas, Papa Maluco. And where we actually have done a few 100 base stations on our site, we started to (inaudible) again, start to migrate the 1,800, where all the operator, three of four months, can now actually [call that] neutral. However, we need a certificate from the BRTI, which is the regulator, to pass our ULO testing.

Understood. Can I just --?

I hope I answered your questions?

Yes. No, that's very clear. Thank you very much sir. Just one last question, if I have your permission, just in terms of your wireless network build going forward.

Understandably, you have the best footprint across Indonesia. But as you roll out a more data-centric network, are you concentrating more on densification or adding capacity in select locations where you think monetization prospects are better? Or is it still going to be your strategy where you just keep densifying across the entire footprint?

If I put in plainly, we start on what we have today. We have over 90,000 base stations. Our nearest competitor has about 50,000, 52,000, so they are far away from us.

Then, what's our strategy? Our strategy has continued to be innovation and leadership in network coverage, so that will continue to run. When we say innovation, we are looking with 4G. For example, we're the first to launch in Indonesia 4G.

So now, with the 1,800 moving forward, we are also looking at how we will deploy in the area that we think is important to us, where there are a lot of 4G customers. So, we are doing that for 4G.

Other than that, we are improving our 3G coverage, because we believe mobile broadband will be the next drive. Today, we cover about 300 cities. But, having said all this, we only have 55% of the 90,000 base stations in Indonesia that is 3G-enabled, so there are more rooms to move for us. But our intention is to provide mobile broadband across Indonesia.

Understood. That's very clear. That's all from me, sir. Thank you very much.

There are no further questions (inaudible).

Thank you everyone for participating in today's call. We apologize for those whose questions could not be addressed here. Should you have any further questions, please do not hesitate to contact us directly. Thank you.

That does conclude our conference for today. Thank you for participating. You may all disconnect.