Telkom Indonesia (Persero) Tbk PT (TLK) 2006 Q3 法說會逐字稿

Good day everyone, and welcome to the 2006 Third Quarter Result Conference Call. [OPERATOR INSTRUCTIONS]. At this time for opening remarks I would like to turn the call over to your moderator for today, Mr. Harsya Denny Suryo, VP Investor Relation and Corporate Secretary. Please go ahead Sir.

Thank you operator. Good afternoon Ladies and Gentlemen and all participants. Welcome to the Conference Call of P.T. Telkom Indonesia. Today we will discuss the Third Quarter Results for the year 2006, and we'd like to mention that the Info Memo for the Company results has already been released today, [inaudible] on November 3, 2006. And it's also available for your interest on our website www.telkom-indonesia.com.

I would like to announce you today that the speaker on the Conference Call will be the President and Director and CEO of Telkom, Mr. Arwin Rasyid, and accompanying him are the members of the Board of Directors and most of the senior leaders.

Ladies and Gentlemen our time for this call is one hour. And this also includes a question and answer session at the end of the presentation. A tape recording of this conference call will be available one hour from now for the next 24 hours.

I'm delighted to host Mr. Arwin Rasyid, our President Director and Chief Executive Officer. And Mr. Garuda Sugardo, our Vice President Director who is off location from now but he's on the conference call. Mr. Rinaldi Firmansyah, our Director of Finance, our CFO. Mr. John Welly as Director of Human Resources. Mr. Guntar Siregar as Director of Consumer. Mr. Abdul Haris, Director or Network and Solutions. Mr. Arief Yahya, Director of Enterprise and Wholesale. And I believe we have also Mr. [Yusu Curia] as our -- one of the Directors of P.T. Telkomsel. And among us we also have our Executive Vice President Mr. David Burke as EVP for Strategic Investment and Corporate Planning. We also have among us Mr. [inaudible] as EVP for Risk Management, Legal and Compliance. And I believe, Mr. [Adin Ahmad] also here with us, he is the EVP for IT and Supply. And he I believe, is also joining us in the conference call in Bandung.

So without further ado, Ladies and Gentlemen, I would like to make it clear that some statements made during this conference call may be forward-looking in nature. I am reminded to point out our disclaimer that actual results could differ materially from projections, exclamations or expectations voiced during today's call. These may involve risk and uncertainty and may cause actual results and developments to differ substantially from those described or implied in these statements. The Company does not guarantee that any action which might have been taken in reliance on those statements will bring about specific results as expected. So those are what are statements are during this conference call. So it is now my pleasure to turn over our call today to Mr. Arwin Rasyid for his remarks. Arwin the time is yours.

Thank you Denny. Ladies and Gentlemen, first of all thank you for attending this call and we really appreciate everyone for taking this time to be with us. Today we are pleased to announce that for the third quarter of 2006 the Company has recorded an increase of 62.5% in net income consolidated to IDR9.2 trillion.

Now I will like to update you on the progress of our main businesses as follows. Let's start on the fixed line. As at September 30, 2006 the Company has recorded a total 8.7m fixed wireline services. This excludes fixed wireless and this a [great] growth as compared to the same period of last year.

For the fixed wireless [inaudible], TelkomFlexi has reached 3.7m subscribers. Also we would say, almost no increase competitive same period of 2005. TelkomFlexi is now available in 236 cities across the country supported by a network of 1,505 base tower stations. However, I would like to mention that the voice traffic for TelkomFlexi has increased by 44.5% to reach 3.7b minutes from 2.6b minutes compared to the previous year.

In August of 2006 Telkom has introduced a new feature in TelkomFlexi known as FlexiCOMBO. This allows our customers to use their Flexi phone in other cities. Basically FlexiCOMBO is a call forwarding feature within their main Flexi number to a temporary Flexi number. TelkomFlexi has kept its leading position as the market leader in a fixed wireless market, with approximately 70% market share.

Our blended ARPU for TelkomFlexi has increased 6.4% in third quarter 2006 to be IDR56,000, as compared to only IDR23,000 a year ago. But do bear in mind that this is on a nine month average. If we look at the month of September '06 only compared to September '05 previous year the ARPU for TelkomFlexi has increased by 24%.

Now with regard to the international calls 007. In the international direct dialing business, for the third quarter results international calls has generated net revenues for the total amount of IDR579b. Not to mention that Telkom in relation to the IDD business has recorded a total of 537m minutes for incoming, and 109.3m minutes for outgoing international traffic. This translates to a 17% increase for incoming calls, and a 14% increase in outgoing calls compared to the same period in 2005.

Let's look at Telkomsel. For Telkomsel during the first nine months of 2006 with competition in the [inaudible] mobile cellular industry has been tremendous. Nevertheless Telkomsel still was able to maintain its leading position in the market by taking a major part of its new edition in third quarter '06 of 8.2m new subscribers, making that a total of 42.47m subscribers. This is total increase of 38% compared to the previous year.

Telkomsel [flexible] usage record a total of 12.7b minutes or a growth of 26.4% compared to third quarter 2005. As a result we are pleased to note that this puts Telkomsel the leader for full mobility wireless with more than 50% market share. As of September 30, 2006 the total number of [DPS] grew by 58% to reach 14,249 units as compared to last year.

Mr. Denny Suryo, sorry for the interruption, this is the conference operator, we're getting some feedback.

Okay, I understand. Thank you very much.

Okay. Let me continue. Telkomsel's blended ARPU [inaudible] decreased year on year by just 1.2% from IDR86,000 a year ago to IDR85,000. While the ARPU of the fixed subscribers, such as [inaudible] has only increased slightly. But [inaudible] has managed to increase by 27% compared to the previous year.

Let's look at Broadband. We're still concentrating our efforts on expanding our TelkomSpeedy Broadband services into many cities around the country. We think this is a great potential for [connecting] people and for the reason we have intensified our [cable] efforts, as well as increasing our cooperation with other parties. As of September 30, 2006 TelkomSpeedy, which is already available in 35 cities, had recorded a total number of 64,800 plus subscribers, which is a significant increase compared to the year before where the subscriber base was still low.

And for our Telkom Internet Services, known as Telkomnet Instan as of September 30, 2006 we have recorded 650,500 plus fixed [telco] subscribers who have access to Telkomnet Instan totally 2.7m minutes of usage. Compare this to last year this translates to a growth of 20%.

And last but not least, with regard to [inaudible] '07 on October 19, 2006 Telkom and P.T. Bukaka SingTel International have entered into an agreement on [inaudible] agreement. As a result of the amended and restated agreement Telkom obtained the legal right to control financial and operating decisions of regional division seven. In return Telkom will pay to BSI a fixed monthly payment of IDR58.4b dated October 2006 and June 2007. And IDR44.45b beginning July 2007 until December 2010. The source of payment is coming from the revenues of KSO VII.

The transaction will not have a material impact on Telkom's financial position or operating results. [inaudible] agreement shall allow Telkom to move forward in a rapidly expanding network infrastructure.

Ladies and gentlemen I would like to continue now to highlight you with some of the third quarter financial results. I'd like to mention that the third quarter results of 2006 has been positive again for the Telkom Group.

The performances were mostly essentially reachable to the following points. First EBIDTA consolidated has shown growth in activities at IDR24.5 trillion, an increase of 33% compared to the same period of last year. The consolidated EBITDA margin improved significantly from only 61% one year ago and now at 66%. Secondly, operating revenues consolidated also grew by 23% to reach IDR37 trillion, again showing a double digit growth. And thirdly, net income per share at IDR458 grew by 63% compared to the same period in 2005.

The three biggest revenue growth contributors of our third quarter results were mainly from cellular, data and internet and interconnection, where each had grown by 50%, 31% and 11% respectively. Meanwhile in the area of OpEx, total consolidated operating expenses have increased by 14.1%. The main factors were mostly contributed to growth resulted in a 28.7% increase in depreciation, 18.6% increase in operation maintenance and Telkom communication services, and 8.1% increase in general and administrative expenses. On the other hand, personnel expenses decreased slightly mainly due to the fact that for this year there was no early retirement program.

So that concludes the core developments of the third quarter, which we have described to you. We are showing positive results in almost all of our business segments, and we hope to be sustainable in the long run. At this juncture, allow me to conclude my presentation before we continue on with Q&A. Thank you.

Thank you Arwin. Now let's open the Q&A session. Before raising your questions, of course we would like to know your name and your company. And operator may we open up the lines. May I have or may we have the first question please.

Certainly. [OPERATOR INSTRUCTIONS]. We will now take our first question I will open the line.

Thank you for that. Good afternoon everyone. First of all congratulations for very good results. Sorry, by the way my name is [Raymond Totavi] from Deutsche Bank. I have four questions. Number one is on the personnel costs. I understand that you will resume the early retirement programs next year. Probably, if I'm not mistaken, the additional cost will be IDR1.5 trillion. My question is, is there any reason [inaudible] to stop you to increase the early retirement program from IDR1.5 to IDR3 trillion. Because in my view the risks of rising personnel costs is actually greater if Telkom postponing it.

Number two with regard to the study from [inaudible], I remember during the second quarter conference call Telkom has highlighted that you have [inaudible] and study should be completed I think September or October. I just want to get an update on that.

Number three with regard to CapEx for the fixed line. [My understanding] is already 1.2 trillion. I understand that you are forecasting $500m for this year. Can you give some color on that?

And the last question is cost for migration of the Flexi, how much has been expense up to nine months how much more that will be expensed in the fourth quarter. Thank you.

Okay, thank you very much Raymond Totavi. I think for that I would like perhaps to open up to the Board Directors to answer any questions that were posed already. Okay first on the personnel costs, perhaps maybe [inaudible], we also have the Director of HR here to explain this. But Rinaldi.

Thank you [Denny]. Mr. Raymond Totavi, I think basically you raised a good point. On the early termination, yes we are basically in the process of finalizing the early termination figures for year 2007. This is the things that we are considering heavily due to several reasons. One is the impact of it on the P&L. It's not the amount but basically on when it is going to be booked. That is still basically underway with our auditors, it could be booked in 2007, or even this year.

On the, basically on the question on why not accelerating the amount of the [termination], I think let us consider -- rethink or think about that idea. So far we have not really thinking of increasing but we'll see what we can do there. I think that is one.

Second let me answer on the CapEx on the fixed line. You are right that the CapEx on the fixed line actually 1.2t is the one that has been billed and already billed. However, we are basically -- out of the [500], we are basically going to contract out around IDR4 trillion, IDR4 trillion divided by [inaudible]. Around IDR4 trillion up to a year end. That is not the cash out that is basically what we are going to bill. Cash out is a combination of what we've contracted [inaudible]. So that is one.

Basically the CapEx is slower than [technical difficulty] we save around IDR1 trillion, or IDR1 trillion let's say $110m on the fixed [wireless] site. And we save also on a few things.

The second is also, to be fair, is also because of due to the process there was a delay in the procurement of the CapEx. We are expecting them year 2007. We will become more [inaudible].

The third question on the cost of migration of Flexi. We have paid -- actually there are two things. On 2005 actually already have accelerated the depreciation of Flexi equipment in Jakarta and [West Java]. Close to IDR700m and year 2006 we also do the same of around IDR460m. If you include the wireless [local look] that's coming to IDR550 and year 2007 is going to be around IDR250m. That is excluding the new CapEx to build Flexi in region two and three in [West Java].

Okay that is hopefully a good answer your question on three points. I think on the study on [inaudible].

For the [inaudible] I would like to ask [David Burke] our VP for Strategic Investment and Corporate Planning to explain a bit more on the question for Mr. Raymond Totavi.

Hi Raymond. Raymond a very good question. Just before I go into it in more detail maybe what I'd like to do is take a couple of minutes to explain the background of it. Other people [inaudible] who may have the same question later on so they don't have to ask it again. Just a couple of minutes.

If we step back and look at what the objectives of the portfolio strategy were in the first [technical difficulty] the future business and product roadmap for Telkom the Group. Give all the necessary inputs for the top management to be able to understand what their business is and what their portfolio was required to achieve, in order for us to reach our end objective of IDR30b [technical difficulty] by 2010.

Then from that created operational guidance, and implementation of the strategic initiatives from there, and then [technical difficulty] implementation.

I'm sorry for the interruption, but your voice is breaking up a little bit.

Okay. Thank you.

Okay, I think there's interference. A little bit louder, okay. We have completed the 14 week program with AT Kearney and the first presentation to the Board of Directors happened two weeks ago. However we have from there we are now in a process of splitting out the key strategies that have been realized from the strategic road map, and we are having internal workshops with our directors. So each of the directorates in the Company will be having an internal workshop on each area, for us to further develop and ascertain what we should be addressing.

In synopsis what we've come out of the portfolio workshop are three areas, unlock, empower and transform. We're seeing that out of unlocking our portfolio value, we're looking at how to maximize the cash generators, invest in potential growth engines and also to optimize our legacy business. In a nutshell if we were to look in the building blocks of our business, we've got very clear strategies defined now. And we have eight recommended actions which are currently under review by all the directorates and we should be hoping to finalize this prior to the end of November by having internal workshops first. So even though the strategic roadmap is out we still have to produce internal workshops to counterbalance to ensure that we're doing the right thing, and work out the implementation strategy. Is that enough Raymond?

Okay. Yes.

Okay. Thank you very much. And thank you gentlemen for the explanation. May we have the next question please? I know we have a lot of callers on the line and we have very limited time, but anyhow please open up operator for the next available question. Thank you.

Certainly. [OPERATOR INSTRUCTIONS]. We will now move to the next question.

Hi. This is Karen Ang from Citigroup in Thailand. I have three questions. Pretty much follow up, the first is on personnel expenses. What is your guidance for the fourth quarter of this year? You mentioned earlier that you expect single digit year-on-year personnel expense growth, but it's actually down year-on-year, so are you still sticking to that target?

The second question is a follow up on CapEx. What will be the cash out for the fixed line business as well as Telkomsel given that you are well under your full year targets for both businesses?

And the third question is also on CapEx, if you are able to give us your 2007 fixed line and wireless CapEx budget. Thank you.

Thank you very much Karen Ang from Citicorp. I think, well I'm still looking at three gentlemen here again at the right and left of me. First of all, again to Rinaldi our CFO and I would like to also ask John Welly also to add on.

Okay. Thank you Karen. Let me answer on the cash out. On the fixed line we are expecting on the cash out of around IDR1.9 trillion. [Technical difficulty]. Hello?

It's okay, go ahead.

Okay.

Please go ahead Sir.

Okay. So it's around IDR1.9t for the fixed line. For the cellular part it's going to be around IDR9 to IDR10 trillion.

[1.45].

No cash out.

Yes.

1.4, this is billion U.S.

U.S.

Okay. So that is for the guidance. For year 2007, I think that since there are basically on the real CapEx and the new CapEx for the fixed line will be slightly less. However due to the carryover of what was not done in year 2006, so you would see that will be a slightly increase of the CapEx guidance of the fixed line for year 2007. So we will basically -- probably it's close to around IDR6.7 trillion for the time being. [Inaudible] for cellular.

[Inaudible] cash or?

When we talk about CapEx [inaudible], means that basically we contract it out.

Yes, okay Karen. I think those three areas have been pretty much covered by Rinaldi. Is there anything else?

Personnel expenses for fourth quarter 2006.

Okay. One point yes. We are still looking at those numbers.

Yes, we are still looking on the number quarter four 2006. We would like to maintain probably -0.5% compared to 2005. But we will go back to you when we get the numbers.

Let me give you a little color on the personnel expense. You know the fourth quarter is where we pay additional benefit of the [inaudible] what you call [inaudible]. So you would see that there will be an increase Q on Q [inaudible] in the fourth quarter. So yes I think we will not move far away from the guidance that we gave before, maybe even slightly lower.

Does that answer your question?

Yes one other question that wasn't answered was the CapEx guidance for Telkomsel in '07.

Telkomsel '07 I think the same [inaudible] with '06. So depending [inaudible] our target may be for '07 is [inaudible] to '06.

Thank you.

Okay. Thank you very much.

And we now move to the next question.

Thanks very for the call, it's Colin McCallum here from Credit Suisse. Just a couple of questions, again following up. The IDR550b that Rinaldi mentioned that would be written off in 2006, I presume that that has not been written off yet and that that will come in the fourth quarter. That's the first question.

Secondly, just on the early retirement, the IDR1.5 trillion, how many employees is that earmarked for? Is that for 1,500 in accordance with your original plans. And if so, is that not quite a big increase, because I think the previous year's program was something like IDR512b for a similar number of employees? And if you could just explain what's leading to the increase there. Is it a different category of staff or perhaps some color on that issue?

And thirdly, just on interconnection. Have you any further color -- further quarter forward on what interconnect is likely to mean in terms of margins and overall revenues for the fixed line division next year, when we move to cost base interconnect in January. Those are my three questions. Thank you.

Okay, thank you Colin McCallum. I think there was three questions right. Okay, you said two. Okay I just wanted to make sure on that. [inaudible] on personnel costs.

Let me answer you on the Flexi cost. It's not written off Colin. So what happened is we do [accumulative] depreciation and that part of it has been accrued in the depreciation expense up to the third quarter.

So the IDR550b has already been accrued during this year?

Yes, that's correct. So due to the Flexi migration we have to -- the economic [inaudible] of our equipment should be accelerated to the year so that's what we did, so the depreciation was being accelerated already.

Okay. I just want to clear up, we have already looked at our figures with John Welly on the personnel on the costs on personnel. Indeed what has mentioned before compared to last year there is a decrease [inaudible] 0.5% just so we can note that. Okay. Operator for the next question.

[inaudible] question about how we would like to distribute the retirement for 2007. We are still trying to develop or exercise the range of numbers of personnel between 1,800 to 2,600. That would be the participations of early retirements. That will be the same formula which is applied in 2005, no difference in formula. However, a slightly different, we would like to accommodate inflation for example, inflation rates. That will be the only minor changes to the formula. And we are currently exercising whether we can absorb 1,800 to the range 2,300 employees that participate in the early retirement program.

That's very clear, thank you. Can you just give us the range of cost spend -- what would it be for 1,800 and what would it be for 2,300? If you just give us a rough approximate range.

The range will be 1.5 to 1.7 trillion. The only things now we have to distribute -- as you may know that we have grade -- lower grade -- at a lower grade. If we could apply to the lowest grade, of course we can have more employees to participate in the early retirement programs. Similar budget we can apply more lowest grade employee. If they participate, it means that we will get -- we will have more early retirement participation.

Got it. Thank you very much.

Okay, thank you very much [inaudible].

Okay, thank you for the interconnections. Since the cost of interconnections will be implemented on January 1 2007, so the [inaudible] 2006, it still remains like now in quarter three. And in the 2007 it will be decreased around 2 to 3% from the total interconnection revenues. The impact of the cost of interconnections will be impacting [inaudible] on our revenues for 2 and 3%. Thank you.

We will now move to the next question. I've got [inaudible] right now.

Yes. Thanks a lot for the call. This is Suresh Mahadevan from UBS. Can you -- I hope you can hear me well. I have three quick questions. First question is one your cost side. Obviously your personnel expenses have come off 20% quarter on quarter and when I look back I think it's quite -- come off quite dramatically even. And I think you have given a full-year guidance but I just want to know why it has fallen? And also the other cost lines seem to be moving quite -- quite dramatically I would say, especially your operating and maintenance plus other telecom services. That is up 47% quarter on quarter. So I wanted to hear what has caused that. That is question number one.

Question number two is the EBITDA margins for third quarter are already healthy, close to 67.6%. I just wanted to hear your thoughts in terms of what is the EBITDA margin on a consolidated basis you're targeting for this year, that is [inaudible]. And how sustainable is it in the coming year?

And the third question is, you talked a little bit about your employees and early retirement programs. You currently have close to 28,000 employees. I was just wondering what you think is the right employee size for Telkom given the current businesses? I'm sure a lot of the [inaudible] in the non-mobile business so I wanted to hear your thoughts on that. Thank you.

Yes, thank you very much Suresh Mahadevan. I think there are three questions. One on margin, EBITDA and then something on the employee -- right employee number for a telco company. Okay. [Inaudible].

Okay. I think on the personnel costs, I think if you look at basically -- we look into the personnel costs on an annual basis because if you look at Q-on-Q I think it's going to be difficult to really follow. Because --

Okay, no, that's fine.

Yes. Because every quarter, like second quarter, we do have after the AGM we do have the [inaudible] etc. Yes. So that is. So on the personnel costs I think there are few, as you can -- one is in year 2006 in this personnel cost there is no termination costs. So that's why there is a decline in the personnel costs. That is why.

Secondly, yes, there is also a decline in the pension retirement benefits for this year. However, there is an increase on the real basically incentive, both consolidated, the fixed line and the cellular. And there is also an increase on the health cost. So that is basically to give you a real color on what is the personnel costs. So I hope that answers your question on the personnel costs.

On the EBITDA margin, well I think there are -- we, as we mentioned earlier, basically in the fourth quarter we will do a one-time additional personnel costs on the [inaudible]. Plus there are a few operating costs. So we do expect that the EBITDA margin should go lower than the current. So we are thinking or we are estimating that the EBITDA margin for end of year is around 63%.

That was in the fourth quarter or the full year?

The full year.

Full year.

Full year. However, bearing in mind that that is not including the early termination that we discussed earlier.

Okay. So this year there have [really] been no early terminations?

Yes, yes. This is assuming that we do not include the early terminations in the last quarter of year 2006.

Okay. Because you're already at close to [inaudible] for the first nine months.

Yes.

[Inaudible] is very [inaudible] I think, full year.

Well we do have our marketing costs normally that we do quite both in the cellular and on the fixed line to prepare for year 2007. We do have the increase in the personnel costs and other costs.

Okay, thank you.

Okay, what is the right size of the employees?

Yes, the right size of the employees. I think that third question we'll ask John Welly to maybe answer on.

What is the right size of the employees, taking into consideration the current nature of Telkom business? First of all, for the time being we would like to follow the -- our long-term business plan which stated that we will consistently put minus 6% growth on the numbers of employees until 2010, which indicates that if we success via that plan, the numbers of employees will be 21,000 at the year 2010.

However, by reviewing the current business portfolio of course we would like to again to recalculate what will be the numbers I believe for our legacy business [inaudible]. What will be the appropriate numbers for the wireless [CDMA], which is in nature similar to Telkomsel and what will be the ideal numbers for our multimedia employment? I think we will review all those to get to the new ideal numbers which is based upon the business portfolio for the future.

So for the time being we will stick into minus 6% growth until 2010, which means that we will maintain a number of 21,000 employees maximum at 2010. However it could change once we finalize the [inaudible] the future.

I see a signal already from Arwin Rasyid for a microphone.

Thank you. I wish to add what my colleague John Welly has mentioned. I'd just like to add from the financial perspective. As you know, first of all Telkom is a [inaudible] enterprise. So as much as we like we want to have our employees as well as possible, but we are not that flexible to do that. Because I don't think it is conducive for Telkom as a [inaudible] enterprise to undergo huge lay-offs. We are not going to do any lay-offs at all. Our strategy is just to pursue voluntary retirement programs. However, as a reference you can look at our personnel cost to revenue as a reference. If you look at telcos in the region, the employee cost to revenue we see is anywhere hovering between 9-12%. Telkom, as at September, is 13% but this is not really for the whole year. So basically if you want to ask us, we want to reduce our size but more importantly to achieve an employee cost to revenue in the [inaudible] that Mr. John Welly has mentioned. Thank you.

Thank you.

Yes, I think I would add on your question also on the other costs. If you see the operation and G&A costs I think it has been increased in line with the revenue side. Because those operating maintenance are basically due to the increased number of the [inaudible] ads and then payment for the frequency license etc. On the G&A it's also in line and we know as a [inaudible] enterprise we should have reserved 1% and 0.5% for community development. And that is basically what was spent on the second quarter. So we do not really see any [inaudible] on the operating costs.

Okay. Thanks a lot.

We will now take our next question. I will open the line now.

Hi, good afternoon. This is [inaudible] from JP Morgan. Congratulations on your results and thanks for the call. I have three questions. Just a follow-up on Telkomsel's CapEx for 2007. Just wondering how you intend to finance it, whether you'd have to lever up the balance sheet a bit?

Second is also Telkomsel, I was wondering if similar to last year there would be an interim dividend payout coming from the company some time early next year?

And the last question is with regards to the end year results. This will be the first year you're going to fully comply with Sarbanes-Oxley in New York. I'm just wondering if you anticipate any accounting rule changes or any adjustments you'll have to make for that?

[Inaudible] are you on the line, are we --?

Our guidance for 2007 CapEx is about $1.5b. Yes?

How much of that would you need to raise to fund it?

Mostly from the operating cash flow. Because, you see on the figures, we have the -- the cash flow is not [inaudible] to cover it. But that is the same on the dividend policy.

Yes I think on the second question, on the dividend interim, we have not discussed about that. So it will depend on the needs and requirements of the parent companies, both Telkom and SingTel. So we don't have any guidance yet for the dividend interim of Telkomsel.

And regarding your third question on the Sarbanes-Oxley, I think so far we have done the audit or already started on the internal controls. Actually the auditor is Price Waterhouse Coopers. So we -- for the time being we do not see major impact on the account treatment because basically on the Sarbanes-Oxley is least two different things. The accounting treatment still basically follows the Indo and U.S. GAAP. While the Sarbanes-Oxley really focus on the internal control issue which are now being conducted or being audited by Price Waterhouse. We have done the first stage of our [bit]. Of course this is our first experience. There are basically -- actually some exciting process that we are experiencing. Hopefully it will be no accounting impact.

Thank you for that.

Mr. Denny, can we take the next question.

Yes please.

Okay, I will open the lines up shortly.

Hi this is [inaudible] from Goldman Sachs. A couple of questions from me. Firstly, if you look at the fixed line revenues in the third quarter it seems like you ship out Flexi. The fixed line had a very good quarter, revenue up 3% quarter-on-quarter. I just wanted to know what's driving growth there?

Second is there any guidance for Flexi subscriber targets for the end of this year?

And also I would like to know what's the status of FlexiCOMBO? It seems like there's some press articles saying that the regular has stopped this service pending a review.

And my last question is on Telkomsel's very strong subscriber growth in the third quarter. I just wanted to know what is the trend in the fourth quarter? Thank you.

On the -- do you want to do it in sequence or can we just give that one to Siregar or Abdul Harris? [Inaudible] Siregar?

Thank you. So for the Flexi, up to 3% compared with the last year is because the business Flexi in third quarter has been rebound from its performance in second quarter. The growth of sales in second quarter to third quarter around 28% and growth of production is around 25%. About the Flexi target, end of year 2006, we expect it around 4.2m subscribers. And for the status of FlexiCOMBO, I think my colleague Mr. Harris.

Thank you. Regarding the Flexi Combo I can inform you that actually the government, the [RPI], already make decision that FlexiCOMBO can be operated essentially at the area, that Telkom already fulfils the requirement of the [RPI]. Up to now there are 60% -- there are 60% of area already fulfill and there is no problem in this area. But for the 40% of areas Telkom will be completed at last November 8, and for that the government of the [RPI] still accommodate for [inaudible] reason. So it's meant that there is no problem actually for the FlexiCOMBO. And [inaudible] we will continue. Thank you.

Thank you Denny. I wish to add what my colleague Mr. Guntur Siregar has mentioned about Flexi. You know that there is [inaudible] we have not recorded Flexi as a business. As you can see that the Flexi revenues are all spread out among the different [inaudible] in the income statements. But when we look at Flexi as a business we have some nice stories to share with you. In the first nine months of 2006 the total Flexi revenue is IDR1.8 trillion. This compares with a voice, long-distance interconnection, SMS. Compare this to the same nine months of 2005 our Flexi revenue was IDR1.25 trillion. So as you can see, if you compare the two periods, '06 nine months with '05 nine months of Flexi revenue as a total, Flexi revenue has increased by 49%. So as you can see, this speaks positively for Flexi continuing to be our positive revenue growth generator.

Thank you Arwin. I think there was one question regarding the trend for fourth quarter for Telkomsel. Perhaps if [inaudible] -- can you answer that?

Yes, hi. This is Moon Yuen from Telkomsel.

Oh yes, hi Kuan Moon.

Hi. Just to give an indication, we have traditionally Telkomsel does very well in Q2 and Q3. That's why you see very strong Q3 numbers [inaudible]. But as in usual subscriber numbers fluctuate a lot month-on-month, quarter-on-quarter. But we are still on target based on the full-year guidance in terms of total numbers of subscribers and it will be about 50, more than 50% of what the market has to offer.

Could I ask just one follow-up question on FlexiCOMBO? I'm not entirely clear what requirements you have fulfilled with regard to the 60% area where you can offer this service. Can you be a bit more specific on that please?

So the question is what is the requirement for 60%?

Yes, correct.

Yes the 60% is half the total customer of Flexi. As you know, there are 2.9 customers already served for the FlexiCOMBO in line with the requirement of the government, of the [RPI]. So the rest is from or about 1.4 subscribers will be -- will be complete at last, at November 8 this year.

Yes. Let me add, elaborate on what my colleague Mr. Abdul Harris has mentioned. Just to give you a quick overview, as you know, the problem that we have with the regulator is that with regard to FlexiCOMBO, [they] are complaining that we are already entering into the area of full mobility or roaming. And we argue that is not the case. And so when this was discussed that boundary with the regulators it seems that it has to do with our features so we need to fix it.

So in very plain language, the feature is as follows. You see when we introduced FlexiCOMBO the nice thing about it is that when the user goes to town -- another town he gets a temporary number. And when he goes back to his original town the number still goes with him for a couple of days. Now the regulator says that that is not in compliance. So what they want us to do is basically to be very sure when the user goes back to his original town then the temporary number is no longer active.

And another feature is that when the user goes back to his original town and when he gets a call from the new town it cannot be forwarded to his temporary number. So basically in effect what we're saying is that the regulator wants us to be very certain that once a user goes back to his original town the flexibility of roaming is no longer in existence with the temporary number -- sorry the flexibility of forwarding. The roaming is there, that's why it's called FlexiCOMBO. Don't forget that please. Thank you.

[Inaudible]. Yes that's very clear, thanks a lot.

Okay, thank you very much.

We will now move to the next question.

Ladies and gentlemen, that will be the last question. We only have one more and one minute. So, I hope it's not about FlexiCOMBO again. Okay, please go ahead.

Hello. Hi, it's Henry Cobbe from Thames River Capital. Hi there. Just a question to summarize the employee costs I think you mentioned earlier, the fourth quarter what the adjustment could be. And then next year what the per annum employee reduction costs are and what savings you expect from it?

And the only other -- and let's also again just repeat the total Group CapEx number for '06 and '07?

Okay, so I believe that's two questions. Is that correct?

Yes. Yes. I've got a third one if you like.

Okay, that's fine. Total CapEx and then fourth quarter adjustment for savings -- personnel savings.

Yes I think on the total Group CapEx you have heard that on the cellular side we are basically -- we still estimate of around [USD1.5b], but for the fixed line with the carry-over of what we have not spent in year 2006 should be around [7 trillion] or 750m. So that is basically on the CapEx assumption. We have not finalized. We will finalize it soon but that is initial guidance for the time being.

Okay Arwin. I think that really ends the conference call. But before we end I'd like to ask the CEO for his closing remarks, Arwin. Thank you so much for all of your participation. I know we had a lot of people on the call so thank you so much for joining us.

Okay, thank you Denny. Well, ladies and gentlemen, as you can see during our three conference calls already for this year I guess, at 2006 we can look forward to a good year but I don't want to mislead you by saying it's going to be rosy all the years ahead. There are still many challenges facing Telkom and Telkom Group. Competition is intensifying, customers are getting more sophisticated and we see that we still have a lot of challenges that we'll need to face. But nevertheless, having said that, we've already completed our strategy study that was explained to you in some detail by David Burke. So when we meet at our next conference call I hope we can share with you more of our strategy study, how we will approach the years going forward. However, at this juncture I'd just like to say thank you for being with us and for supporting Telkom. Have a nice day.

Thank you. And that concludes today's conference call. Thank you everyone for your participation.