State-run PT Telkom, Indonesia's largest telecommunication company, recently released this year's first quarter results that suggest a continuing tough operating environment in the telecommunication sector.
Revenue was down 2.2 percent year-on-year, operating profit was down 19 percent year-on-year, and net profit of nearly Rp 2.5 trillion was down 23 percent from a year earlier. These figures are less than forecast.
Revenue contracted despite 41 percent growth to 72.1 million in the company's cellular subscriber base, implying severe dilution of its Average Revenue Per User (ARPU).
We estimate that the ARPU of Telkom's cellular unit PT Telkomsel fell by an estimated 27 percent from the previous year on the back of sharp decline in system usage as users migrated to cheaper products offered by competitors.
While we expect less aggressive moves by other industry players, we believe the Indonesian telecommunication market remains one of the most competitive in the world, given 11 operators under 9 companies, with 8 full mobility and 5 limited mobility licenses.
But we see limited room for Telkom and its competitors to drive up earnings growth via tariff increases.
On the cellular front, Telkom booked revenue of Rp 6.5 trillion in the first quarter, up some 9 percent year-on-year in the period, helped by a 59.9 percent jump in minutes of use (MOU). This translates to Rp 196 or less than 2 US cents in terms of Revenue Per Minute (RPM).
While 2 US cents is currently comparable to RPM in Thailand for example, when compared to Excelcomindo's RPM of just Rp 70 (i.e. 65 percent cheaper than Telkomsel's) in the first quarter, it is not surprising that Telkomsel's market share declined to around 47 percent, down from 50 percent a couple of years ago.
Going forward, we expect RPM to remain weak, given softness in rural incomes on the back of relatively low commodity prices.
With intense competition on the cellular front, decline in voice revenue continues to be a drag on Telkom earnings as traffic is diverted away from its fixed network to cheaper mobile networks.
Meanwhile, surging broadband revenue (part of the "new wave" business) is still insufficient to offset the decline in voice (part of the "legacy business"). Revenue from fixed lines declined 17 percent from a year earlier to Rp 2.1 trillion as phone users continue to prefer to make internet calls. In aggregate, Telkom's new wave business in the period rose 74 percent to Rp 562 billion, but still not enough to offset the legacy business' 6.2 percent drop, which amounted to Rp 892 billion.
On the cost front, Telkom's EBITDA fell 12 percent year-on-year and 4 percent quarter-to-quarter with the EBITDA margin having contracted some 600 bps.
Savings in personnel costs, which declined 15 percent year-on-year and 27 percent quarter-to-quarter , have somewhat cushioned margins. However, we are uncertain whether these cost savings would be sustainable in the subsequent quarters.
The first quarter revenue performance of Telkom as well as the recent MOU performance of other industry majors point towards weak subscriber quality in the industry.
Competitors continue to use greater numbers of free minutes to entice users, with consumers migrating to whichever phone provider has the cheapest tariff.
Thus, while there has been no indication to suggest the emergence of a second round of price wars to occur within the sector, we do not expect escalations in phone tariffs to occur anytime soon.
The writer is the senior vice president and head of research at Bahana Securities
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