Telkom Indonesia

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

PT Telekomunikasi Indonesia Tbk, or Telkom, is the largest telecommunications and network provider in Indonesia, providing mobile, fixed-line, broadband, and various digital and IT services to consumers and businesses.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Telkom, the state-owned telecom giant of Indonesia, has a wide reach and enjoys significant market share. The company is transitioning toward a digital services leader, yet still manages various legacy telecommunication businesses.

Business Overview

  • Revenues: The company generates revenue through several business units, the primary ones being:
    • Mobile: Providing mobile network services, primarily under the “Telkomsel” brand, which includes voice, SMS, data, and VAS. This segment has historically been the largest revenue generator. The mobile segment faces intense competition from other mobile carriers, particularly in lower tier markets, resulting in declining revenues for legacy products.
    • Consumer: This segment provides retail-focused broadband internet, and voice services. It also includes digital lifestyle service, pay TV and gaming. The consumer segment experiences competition from smaller service providers, which affects margins.
    • Enterprise: Provides business-to-business connectivity, managed solutions, cloud-based infrastructure and IT services, data center, and cybersecurity services. This area is increasingly becoming the driver for revenue growth.
    • Wholesale and International Business: This segment encompasses international voice and data services, satellite communications, interconnection with other telcos, and cross-border network services.
  • Industry Trends:
  • The Indonesian telecommunications industry is dynamic, characterized by continuous growth and a shift towards digital services and data. * Mobile broadband has become the primary source of revenue growth, with increasing demand for data, video, and social media. * Traditional fixed-line revenues are in slow decline. * Digital solutions, including cloud computing, digital security, and the Internet of Things (IoT), have strong growth potential. * The competitive landscape remains intense.

  • Telkom is leveraging its infrastructure and market presence to capitalize on growing demand for mobile broadband, enterprise digital solutions, and other emerging technologies.

  • Margins: Telkom’s overall profitability is moderate, influenced by several factors:
  • High competition and government regulations puts a downward pressure on pricing in some segments.
  • The shift to new digital services requires significant investment.
  • Legacy businesses have lower margins than the newer and future facing businesses.
  • The push for new product lines creates some cost pressures.

  • Profitability has been impacted by some restructuring efforts.

  • Competitive Landscape:
  • The telecommunications industry in Indonesia is highly competitive, with a number of state-owned and private players, plus some new players. * Competition in mobile services is aggressive, leading to price wars.

  • Competitors in data and IT services are primarily multinational and tech firms. * The market is constantly evolving, so there is always the risk of other companies implementing new disruptive technologies. * The industry has seen consolidation and mergers to increase the scale of operations and profitability.

  • What Makes Telkom Different:
    • It is the largest telecommunication provider in Indonesia, with a vast nationwide infrastructure.
  • Has a strong brand image and a large customer base.
  • Strong government ties and support.
  • It has a diversified revenue mix.
  • A focus on digital transformation initiatives.

Financials

  • Revenues: Have seen modest increases over the last few years, but in 2022 growth was driven by mobile data traffic, fixed broadband revenues, and enterprise digital services, partially offset by decreased voice revenues. Total revenues for 2022 amounted to $10.6B USD
  • Profitability: The company is highly profitable.
  • Margins: Gross profit margins and net profit margins have recently seen a decline, due to increased costs, and strong competition.
  • Capital Allocation: The company is investing in infrastructure upgrades, data centers, and new digital services.

The focus is to improve returns on capital as well as ensure stable growth, even if at the expense of some lower margins.

  • Debt and Liquidity: The company has a considerable amount of debt, which needs to be continually addressed. Liquidity seems okay and they seem to have enough funds to meet their current obligations.

The company has several ongoing litigations and tax disputes with the Government, some of which could end up in losses and could affect the company. They also need to keep improving their network and digital capabilities. They face increased competition, especially in mobile services and new tech solutions, and should monitor industry trends.

Moat: 3/5

  • Brand Recognition and Scale: Telkom has a strong brand presence in Indonesia, and their vast infrastructure with a large customer base are huge advantages.
  • Government Backing: As a state-owned company, Telkom enjoys regulatory benefits.
  • Data Network: The company has made substantial investments in fiber optics, cellular networks, and the latest technology in order to keep them relevant and has a vast network footprint, particularly in Indonesia.

  • Switching Costs Some segments, such as the enterprise business, have moderately high switching costs since clients may incur costs or suffer disruption in changing vendors. The mobile business is less sticky due to less costs associated in switching providers.

  • However:
    • The moat is under attack in many ways by new and existing competitors, as well as technological changes.
    • The regulatory requirements in the telecoms space are also subject to potential changes.
    • The company faces increased risk from data breaches and security threats.
    • The core mobile business, is under stress and sees diminishing revenue returns and lower margins.
    • The company has made acquisitions that may or may not pan out as they have planned.

Understandability: 2/5

  • The company’s business model involves providing complex telecom and digital services.
  • Understanding their core infrastructure and network build-out as well as the legal and regulatory framework is rather tricky.
  • Their business segments are not mutually exclusive, and all have diverse ways of generating revenues, each with its own dynamics.
  • They often change strategies, which means investors must constantly monitor the company.
  • In their filings and earnings call, it is difficult to find the data that provides a solid analysis on the true sources of revenues and earnings.

Balance Sheet Health: 4/5

  • The company has a pretty large debt and will need to continue working with the current financial environment.
  • They have enough liquidity to meet short-term obligations.
  • Debt levels are moderate but should be watched carefully.
  • The government support provides a kind of safety-net for the company.

Although they may not have a spotless balance sheet, their position is fairly stable and they have shown resilience in times of crisis. They are not in danger of facing financial difficulty.

Recent Concerns, Controversies, and Problems

  • Competition: There has been a heightened competition in the Indonesian telecom market, which is affecting pricing and profits for the legacy operations.
  • Growth Challenges: There are questions about whether they can manage a smooth transition towards high growth digital businesses, and how it will affect the overall profitability.
  • Macroeconomic conditions The Indonesian economy is affected by high levels of inflation and interest rates, which may impact consumer spending and thereby profitability for the company.
    • They are also seeing some negative impacts from currency swings.

Management states that they are continuing to monitor the market dynamics and are working on strategies to overcome their shortcomings and gain from the opportunities present. They are also re-iterating their commitment to transforming Telkom to become a digital player, to meet the demands of a changing world, as well as reduce risk and improve long term prospects.

Final Remarks

While Telkom faces certain challenges, they also enjoy several benefits which should position them well for growth and success. However, it seems that the best course of action is to transition towards new digital services and away from traditional, legacy based operations. Their financial position seems mostly robust and should be able to handle future shocks, but it needs to be constantly monitored to ensure their financial health. Their business, is not simple to analyze and understand fully, and requires an investor to be more than just a generalist.