Executive Summary / Key Takeaways

• Strategic Transformation Driving Growth: PT Telekomunikasi Indonesia Tbk ($TLK) is undergoing a profound "5 Bold Move" transformation, successfully integrating its fixed and mobile businesses (FMC) and strategically developing its digital infrastructure, including data centers and a new InfraCo entity, to solidify its market leadership and capture future growth in Indonesia's resilient economy.
• FMC Synergies Exceeding Expectations: The Fixed Mobile Convergence (FMC) strategy, particularly the integration of IndiHome into Telkomsel, has delivered significant cost synergies, overachieving its IDR 1.9 trillion target for 2024 year-to-date Q3, and is poised to unlock further revenue uplift and operational efficiencies as integration completes by Q4 2024.
• Resilient Financial Performance Amidst Headwinds: Despite macroeconomic pressures, including deflationary trends and tightening consumer spending, Telkom Group reported 0.9% year-on-year revenue growth to RP 112.2 trillion for the first nine months of 2024, with normalized EBITDA at IDR 57.8 trillion, demonstrating underlying operational strength.
• Aggressive Digital Infrastructure Expansion: Telkom is aggressively expanding its data center capacity, targeting 400 megawatts by 2030, and has operationalized PT Telkom Infrastruktur Indonesia to optimize fiber assets, positioning the company as a dominant player in Indonesia's burgeoning digital economy.
• Balanced Growth and Profitability Outlook: Management maintains its 2024 guidance for low single-digit revenue growth and an EBITDA margin of 50-52%, supported by strategic CapEx deployment (22-24% of revenue) aimed at future growth, while also committing to a healthy dividend payout ratio.

A Century of Connectivity: Telkom's Strategic Pivot to Digital Leadership

Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk, or Telkom, founded in 1884, stands as a cornerstone of Indonesia's telecommunications landscape. The company has a long history of connecting the archipelago, but its recent trajectory is defined by an ambitious "5 Bold Move strategy" initiated in 2022. This comprehensive corporate transformation aims to future-proof Telkom's leadership by streamlining operations, eliminating redundancies, and pivoting towards a digital services powerhouse. The strategy is a direct response to evolving market dynamics, including a resilient Indonesian economy with stable inflation (1.8% year-on-year in September 2024) but also tightening consumer spending and intense competition.

Telkom's overarching strategy is to become a leading digital telecommunications company, serving both B2C and B2B segments. This involves leveraging its extensive infrastructure, fostering innovation, and optimizing its portfolio through strategic initiatives like Fixed Mobile Convergence (FMC), data center monetization, and the establishment of an infrastructure company (InfraCo). This strategic pivot is crucial for Telkom to maintain its dominance and capture new growth opportunities in an increasingly digital-first economy.

Technological Edge: Convergence and Infrastructure Innovation

Telkom's core technological differentiation lies in its integrated approach to connectivity and digital infrastructure, particularly through its Fixed Mobile Convergence (FMC) strategy and robust data center capabilities. The FMC initiative, which saw the IndiHome B2C business transferred to Telkomsel on July 1, 2023, is a prime example of this integration. This move aims to synergize mobile and fixed broadband offerings, providing customers with a seamless, multi-product experience. The tangible benefits are already evident: the convergence ratio under the FMC strategy reached 53% penetration by September 2024, a significant increase from 37% in July 2023. This multi-product holding is hypothesized to make customers "stickier and more loyal".

The FMC strategy has also yielded substantial operational efficiencies. Telkomsel has achieved a remarkable 30% reduction in CapEx per line and a 15% reduction in operation and maintenance costs per line for fixed broadband deployed in the last two years. These quantifiable benefits directly contribute to improved profitability and enable Telkomsel to serve a broader market segment more economically. The company expects the FMC integration to be fully completed by the fourth quarter of 2024, paving the way for the introduction of attractive convergent services under the Telkomsel One plan.

Beyond convergence, Telkom is aggressively building out its digital infrastructure. Its data center business, operating under the NeutraDC brand, is a key technological differentiator. The company currently operates 22 data center facilities, with an IT load capacity of 42 megawatts and an average utilization of 70%. Telkom is committed to expanding this capacity significantly, with plans to add 18 megawatts at the Cikarang Hyperscale Data Center by the end of 2024. The long-term vision is even more ambitious, targeting a total data center capacity of 400 megawatts by 2030 through both organic and inorganic efforts. This expansion caters to the burgeoning demand for cloud storage and processing, driven by artificial intelligence, ultra-high-definition content, and gaming.

Another critical technological and operational development is the establishment of PT Telkom Infrastruktur Indonesia (InfraCo). This entity officially commenced operations as Telkom's infrastructure-managed service provider on August 1, 2024, taking over the management of all Telkom fiber assets. The InfraCo is mandated to optimize asset utilization, enhance CapEx efficiency, and will begin commercializing its fiber assets by year-end 2024. This strategic move aims to unlock new potential and maximize the value of Telkom's extensive fiber network, providing wholesale services for B2B clients while adhering to anti-monopoly regulations.

Financial Performance and Operational Momentum

Telkom Group's financial performance in the first nine months of 2024 reflects both the resilience of its core businesses and the impact of its strategic transformations. The company delivered a positive revenue growth of 0.9% year-on-year, reaching RP 112.2 trillion. This growth was primarily fueled by sustained efforts in promoting data and Internet services, which are offsetting the natural decline in legacy businesses.

However, EBITDA for the same period saw a slight decrease of 4.1% year-on-year to RP 56.6 trillion. This slip was largely attributable to a strategic investment in talent rejuvenation through an early retirement program initiated in the second quarter, which caused personnel expenses to jump by 12.7% year-on-year. Excluding this one-off cost, normalized EBITDA stood at IDR 57.8 trillion, a more modest 2.1% year-on-year decline, with a normalized EBITDA margin of 51.5%. Operating net income, after adjustments for GoTo-related costs and asset unlocking, declined by 5.1% year-on-year to IDR 18.6 trillion.

Capital expenditure remains a significant focus for Telkom, with IDR 17.5 trillion spent in the first nine months of 2024, primarily on connectivity and digital platforms. The company aims to accelerate CapEx spending to 22-24% of revenue by year-end, laying the foundation for future growth. This strategic CapEx deployment is designed to enhance network quality and expand coverage, particularly for fixed broadband.

Segmental Deep Dive

This segment provides a detailed look into the performance of Telkom's various business units.

Mobile (Telkomsel): Telkomsel, the group's mobile arm, posted strong 16.4% year-on-year growth in its B2C business for the first nine months of 2024, driven by the IndiHome integration. Despite a slight 2.1% quarter-on-quarter revenue decline in Q3 2024 due to seasonality and weak purchasing power, its digital business recorded a healthy 2.5% year-on-year growth. Telkomsel's mobile customer base reached 158.4 million. The decline in ARPU is primarily due to the ongoing contraction of legacy services, which are falling at a rate of 20-30% year-on-year. Telkomsel's EBITDA margin for Q3 2024 was 44%, with a full-year outlook of 45-46%.

Fixed Broadband (IndiHome B2C): This segment demonstrated robust growth, with revenue increasing by 200.6% year-on-year due to its integration into Telkomsel. The company added 682,000 new customers, bringing the total to 9.4 million, with an ARPU of IDR 239,000. The strategy focuses on expanding into the mass market segment through initiatives like EZnet, which addresses affordability and aims to aggressively increase fixed broadband penetration.

Wholesale and International Business: This segment's revenue is expected to be backloaded in 2024, but it achieved 13.1% year-on-year growth in the first semester of 2024, driven by international wholesale voice and digital connectivity infrastructure. Mitratel, the tower business, contributed IDR 6.82 trillion in revenue for the first nine months of 2024, growing 8.7% year-on-year, with an improved EBITDA margin of 83.2%. Mitratel maintains its position as the largest tower provider in Southeast Asia, with over 38,600 towers and a tenancy rate of 1.52x.

Enterprise Segment: This segment grew by 3.8% in the first nine months of 2024 and is projected to achieve high single-digit growth for the full year. Growth is driven by digital connectivity and digital services like e-payment. The Indibiz brand, launched in Q3 2023, targets the SME market with tailored solutions.

Competitive Landscape and Strategic Positioning

Telkom operates in a highly competitive telecommunications market in Indonesia, facing rivals such as XL Axiata (EXCL), Indosat Ooredoo Hutchison (ISAT), Axiata Group (AXIATA), and Singtel (Z74). Telkom's market positioning is characterized by its extensive national network infrastructure and integrated service offerings, which provide a significant competitive moat. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, Telkomsel's position as a dominant market leader is reinforced by its product innovation and strategic pricing adjustments to retain market share in price-sensitive segments.

Telkom's strategy of refraining from price wars and focusing on increasing data consumption productivity differentiates it from competitors who may engage in aggressive pricing. The company's initiatives like Telkomsel Lite and by.U are designed to capture mass market and youth segments without cannibalizing its main products, by offering localized quotas and maintaining a premium price point compared to some rivals. This approach helps Telkom maintain profitability, as evidenced by Telkomsel's ARPU efforts remaining "above the peers".

In the fixed broadband market, Telkom's aggressive penetration strategy with IndiHome, now under Telkomsel, aims to capture the next 10 million customers in the mass market segment. This is a direct response to competition, leveraging the FMC synergy to scale network penetration efficiently. For its data center business, Telkom is actively seeking strategic partners to unlock value and gain expertise, positioning itself to compete with global players in a rapidly growing market. The establishment of InfraCo further strengthens Telkom's competitive stance by optimizing its fiber assets and potentially offering wholesale services, which must comply with anti-monopoly regulations but can leverage volume-based pricing.

Telkom's financial health, with a TTM Gross Profit Margin of 66.80% and an EBITDA Margin of 51.29%, indicates strong operational effectiveness. While direct quantitative comparisons with all private competitors are challenging to ascertain, Telkom's diversified revenue streams and focus on cost efficiencies, such as the 30% reduction in CapEx per fixed broadband line, enhance its operational resilience against agile rivals.

Outlook, Guidance, and Risks

Telkom Group maintains its 2024 guidance, anticipating low single-digit revenue growth, an EBITDA margin in the range of 50% to 52%, and a CapEx to revenue ratio of 22% to 24%. Telkomsel's EBITDA margin is expected to be around 45% to 46% by year-end 2024. The company projects CapEx to revenue to decline further to 17-19% by 2028, driven by network technology advancements and optimized asset utilization. Medium-term growth is expected to be in the mid-single digits.

Key assumptions underpinning this outlook include the stabilization of the competitive landscape, continued success of the FMC strategy, and the positive impact of government social welfare programs on purchasing power. The company expects to complete the FMC integration by Q4 2024 and aims to conclude strategic partnerships for its data center business by early 2025.

Despite this optimistic outlook, Telkom faces several risks. The "threat of deflation" and tightening consumer spending could continue to impact consumption patterns, particularly in the mass market. Intense competition and price pressure in the mobile environment remain a challenge, necessitating strategic pricing adjustments to retain market share. The ongoing contraction of legacy services, declining at 20-30% year-on-year, will continue to pressure ARPU. Furthermore, pending collections from enterprise and government segments, while deemed collectible, require provisions that impact G&A costs. Energy and food price volatility, alongside a strong U.S. dollar, also present macroeconomic risks.

Conclusion

Telkom Indonesia is in the midst of a transformative journey, strategically repositioning itself as a comprehensive digital services leader in Indonesia. The successful execution of its "5 Bold Move" strategy, particularly the Fixed Mobile Convergence (FMC) initiative, is unlocking substantial synergies and driving operational efficiencies, laying a robust foundation for future growth. The company's aggressive expansion in digital infrastructure, notably its data center business and the establishment of InfraCo, underscores its commitment to capitalizing on the burgeoning digital economy.

While facing macroeconomic headwinds and intense competition, Telkom's disciplined approach to pricing, focus on customer productivity, and continuous innovation in its product portfolio demonstrate its resilience. The company's clear guidance for 2024, coupled with its long-term vision for CapEx optimization and data center capacity expansion, signals a confident trajectory. For discerning investors, Telkom presents a compelling investment thesis rooted in its strategic transformation, technological leadership, and a commitment to sustainable value creation in one of Southeast Asia's most dynamic markets.