Telkom Indonesia (Persero) Tbk PT (TLK) 2009 Q4 法說會逐字稿

Good day, everyone, and welcome to the full year 2009 results conference call. Today's call is being recorded. Please note, this call is a rescheduled call from the original call held on April 9, due to a bad line reception.

The session will begin with question and answer, which will be hosted by Mr. David Burke, EVP Strategic Investment & Corporate Planning. (Operator Instructions). We now have our first question in queue.

Thanks Anita, if you don't mind, I'll make a quick statement before we kick off.

Certainly. Please go ahead.

Thank you. All right. On behalf of PT Telekom, we'd like to welcome you all onto the call. We have to offer our sincere apologies to you that unfortunately the sound quality in the last call we had was not of the quality that was requested or was required by the investors who called in. And many of you did not hear the questions and/or the answers that were posed.

Subsequent to that, the Board of Directors decided to put it back together again and call this particular conference call, in order to give our investors overseas an opportunity to come in and ask those questions and also give some clarification on numbers, which they feel they would need further explanation on.

On this call today, we have Pa Rinaldi Firmansyah, our CEO & President Director, Pa Sudiro Asno, our CFO. We also have from Telkomsel, Pa Sarwoto, Pa Shin Loong and also (inaudible), CEO, CFO and also Commercial Director, myself and, of course, Pa Agus, who's the Investor Relations Vice President for Telkom.

So, please could we start? Thank you.

Thank you. Your line is open. Please go ahead, sir.

Hi. Thanks very much. It's Sachin Gupta from Nomura. Just a few questions. Firstly, I heard the question a few times but I didn't actually hear the answer last week. The increase in operations and maintenance cost, I just wanted to get some details behind that. I think I heard something about the BTS maintenance costs. Just wondering if you can elaborate on that, please, and how much of that is actually recurring cost base? That's number one.

Number two is, there's been some press today about the potential tower rearrangements. Just wondering, any further details on that? How is that likely to work? I guess the question I'm trying to get an answer to is, does Telkomsel transfer all their towers to the parent company? If that's the case, does the leasing cost go up or the rental cost go up in the second half and does the margin guidance take that into consideration? That's my second question.

My last question is, obviously, the December results, compared to Indosat XL COM they look relatively slow. Just wondering, what do you attribute that to? Is that largely a function of competition, or is there some more internal factors at play here? Thanks very much.

Sachin, thank you very much. Three questions on the O&M, we'll pass that onto Pa (inaudible). Two questions first. Okay, we can call in the second directly. Okay. Pa Sudiro on the O&M please.

Yes. Thank you, David. I think, if we compare one-time costs Q4 to Q3 it's seen a fairly significant increase, churn. I can explain it. Basically, there are two parts here.

One is, due to changing up our presentation, the financial statement (inaudible) in December, officially some certain costs related to the (inaudible), for example CPA in (inaudible) base reported in net basis until Q3 of 2009. And we changed into gross basis in Q4.

The amount was around [IDR515 billion]. So, Q2, they are sending up the presentation, we added [IDR515 billion] into [both sides], revenue and O&M. So, that's why the increase was around [IDR1.2 trillion].

And the second part is, basically, yes we increased because of one-time adjustment on recurring expense, due to the additional costs of spectrum fee IDR285 billion. And we had some additional power expense, due to the earthquake in Telkomsel side. And from the recurring expense, around IDR420 billion, due to the, basically, additional (inaudible) number of [58], both in [solo] BTS and flexi BTS. Thank you.

Thank you, Pa Sudiro. Well Sachin, I'll take on the question of the towers for you. There's not that much to report at the moment, but I think what I'd like to stress is that we are in discussions with the management team of Telkomsel. We're also in discussions with our partners in SingTel. We do not expect to execute a transaction that would have a material, huge impact of any sort on the bottom line of Telkomsel.

One thing that we can stress to you is that, overall, as a listed Company entity, that we expect the results of that to be better than they are today. Why? Because we should be offering a slightly reduced or marginally reduced fee on the rental agreement to Telkomsel. At the same time, we should be expecting that we can control our costs there on the OpEx side and really moving the CapEx over to the company that would be rolling out the towers. So, therefore, depreciation goes out of the window.

So, from this point in time, I think we're still in discussion with the management team, we're still in discussion with our partners at SingTel the best way to do this. And one thing that we are stressing at the moment is that there should be a minimum impact in Telkomsel's operations.

I'll now pass on to Pa Sarwoto to discuss the December results 2009. And they were a little bit slow in comparison to those of Indosat and XL and is there any story behind this that we should be looking into for December [2009]?

Shin Loong will take this question. Thank you, Shin Loong.

Hi. This is Shin Loong. I think, for the question, I will try to answer in two parts.

The first one, if you look at the full year '09, Telkomsel's results year-on-year growth is 12%; basically, a high base. I think my view is that 12% in high base is a reasonable achievement if not a significant achievement.

Specifically on the competition side, Q4, we see our competitors coming in with [free] inter-operator SMS. Telkomsel's decision at that point was to appeal to the regulators for the real point on this because, [I guess], according to the regulations, free SMS inter-operator is not allowed, right.

Unfortunately, we have not been able to carry it through and put a stop to that. So, in the subsequent months we have entered into the free inter-operator SMS war. We have some turnaround and hopefully next quarter we will have more results for you. Thanks.

Thank you, Pa Shin Loong. We'll move onto the next question, please.

(Operator Instructions). We will now take our next question. Please go ahead.

Hi. Yes. It's Kelvin from CIMB. Just one question on the change in the accounting to a gross level. Could you -- were there any other adjustments to the revenue as well as to your costs, apart from O&M, for the fourth quarter?

And secondly, could you also give us the restated numbers for the third quarter of '09, as well as FY '08 for the full year? Thanks.

Thanks, Kelvin. Pa Loong, [Sudiro]?

Yes. Thank you, David. As I said, basically, we added revenue in 2009 by around [IDR515 billion]. But at the same time, we also added on the O&M costs by the same number. That's the adjustment of the changing of the presentation.

And if you are asking us what the first quarter O&M -- Q2 O&M and Q3, I think basically you can see or read in website what we last night just uploaded. But I can repeat now. For the Q1 O&M, after they're normalized, IDR3.3 trillion; Q2 was IDR3.2 trillion; and Q3 IDR3.6 trillion; and Q4, of course, IDR4.3 trillion. Thank you.

Let me ask -- yes, I will stress what Sudiro just said. One is, because we are moving into more bundling of services, especially to the enterprise customers. In which, in the past, the amount of the [CPE] is not really significant, that was -- part of the transaction was not significant. While on the 2009, the amount is becoming more significant. So, that is why this now is considered as a -- on the accounting basis as part of the revenue and part of the costs. It was stopped there in 2008 because the number was insignificant.

And also, I think that is in line with the Telkom strategy going forward. And the accountant definitely is following the strategy on bookkeeping because more and more, the synergy between Telkom and its subsidiary, especially on the IP services and on other services, when we go into the bidding, basically, the amount of the bidding or the amount of revenue that we get includes certain products, which are not really our products. So, that is the -- also explanation of why. And it's not applied to any others, but mostly applies to those transactions

Hello?

Yes, hello, Kelvin?

Yes. Just quickly, were there any adjustments made to the Telkomsel numbers as well?

No.

Okay. Great. Thank you very much.

It's related to mostly Enterprise division which serve enterprise clients. And partners, to certain partnerships.

Thanks.

Thank you, Kelvin. We'll take the next question now.

Certainly. Thank you.

Hi, this is Paul Yong from DBS Vickers. I'd like to get a little bit more information on the IDR285 billion additional costs for flexi. According to your press release this morning, you mentioned that it is a lumpy item. Could you give us some color on why or how that comes about?

My second question is with regards to your guidance for improvement in the [EBITDA] margin. I believe this was mentioned in the previous conference call, but I just caught bits and pieces of it. Could you tell us whether that is inclusive of the lumpy items, or excluding both the (inaudible) items? And also, which cost area are you looking at reducing in this case?

My last question is with regards to turnaround in your FY '10 performance. There was a mention earlier about entering into SMS price war and things are looking [up]. Could you give us an indication as to what your first quarter numbers are looking like? Thank you.

Paul, could you please repeat the first question on flexi? Could we get that again, please?

Yes. According to your press release you said that's a one-off item, an additional fee. I'm just wondering where, or how that comes about?

Okay. Thank you.

Thanks, David. Yes. Basically, previously, based on our ministry [victory] of the spectrum fee, we had to pay [risk on] three carriers. Later on, after the government audit, the [communication] of POSTEL, that basically we should [pay] with the [nine carriers]. So, this [own debt], we have calculated [debt], basically, we have to add the [spectrum fee] by the best estimation at that time. We had to add by IDR285 billion, so because of the recurring of the (inaudible) calculation. Provisionally we calculated with the [three carriers], and finally we basically had to pay with the nine carriers. So, this is for the year of 2007 and 2008 and some additional for 2009.

And what's the second?

Guidance for EBITDA 2010.

So, guidance or EBITDA margin for 2010, basically it's relatively flat or slightly increase.

I understand that there are some cost management involved in there?

Yes. Now we are focusing on the basically competitiveness costs. By doing the one, it's renegotiate the [SLA optimum] payments costs.

Secondly, is basically, yes, we are slowing down in the addition of a number of PPS or flexi, so also we'll basically register gross (inaudible) yes. And also, we're renegotiating with the tower rent price and also electricity tariff. That's our -- basically any incentives will be done in 2010.

Okay. Sorry, on that, is that inclusive of the lumpy provision that we've seen in FY '09 like the IDR285 billion, IDR41 billion?

Yes. Yes, because -- that's inclusive, yes.

Okay.

Also maybe we can add, basically also, we can see from the bandwidth costs by basically implementing the AAG and the [HS] optic.

Okay.

Thank you [Sudiro]. [SMS]?

Thank you. Regarding the SMS free price war that after communicating issue bonds and regulation, we already had quick response in this but then, I can show you later on that the impact on our revenue and also (inaudible) is still good except from net adds that are already growing on [March].

Sorry, I missed the last part about net adds.

Sorry. There's a certain degree of our information, I think you -- that's about as much as we can talk about. Yes.

Okay. Thank you.

We will now move to our next question. Hi. Please go ahead. Your line is open.

Riaz Hyder here from Macquarie. Just a quick question on CapEx; can you give a detailed outline of how you plan to spend CapEx for this year and then also how that's likely to compare over the next two years?

Thanks Riaz. Hold on.

Yes, okay. Our guidance for CapEx for this year fits basically because ,even though we want to -- plan to register our CapEx ratio within four or five years going forward, but for [this year] because of Telkomsel also needs basically to continue the rollout, some infrastructure, and also the Telkomsel [sales] and also because we are basically transforming the infrastructure to become basically [IP-based]. For this year, our guidance is around $2 billion and 70% goes to Telkomsel, also to transforming their infrastructure and the rest is still in our fixed business.

And next two years, I think basically, as I said, in terms of CapEx ratio basically we want to register CapEx ratio from around 29% to become 20% within four or five years. So --

[Is that] 20% of total revenue you're saying?

Yes. Could be.

Okay. Thanks guys.

Thank you and we will now take our next question.

Okay, hi. (inaudible). Thanks for the call. I have two questions. Has there been a change in the reporting of your mobile revenues in PT Telkom? When I calculate the fourth quarter revenues they come out to be substantially lower than the second and third quarter.

And the second one would be, when can we expect to have the FY '09 info memo out? I could not find it on the website. Yes. That's it, thanks.

Okay.

(inaudible) speaking. In Telkom sales side there is no change in the (inaudible) of our (inaudible). Also, in the revenue, we didn't change our presentation.

Tell me about Telkom? In Telkom's income statement, the mobile revenue segment, if I calculate the fourth quarter revenue, which has a difference of -- I mean the full year was IDR27 trillion and three months '09 was IDR21 trillion, so the difference comes out to be around IDR6.1 trillion. That's substantially lower as compared to the third and the second quarter, so have some of the revenues been pushed in from the mobile side to data and Internet side?

We're trying to find out where the discrepancy is on this. Can we hold that for a minute and get back to you?

I think just for quick -- there is no change in the revenue recognition in Telkom, so while the change we are looking for, but there is no change at all on the revenue recognition.

Okay. And the second questions on the -- when we will publish the info memo. For the full year-end 2009, we will formally issue the info memo by next week, and then early in May, we will also issue the first quarter info memo.

Okay. Thank you.

We will now take our next question.

Hello?

Please go ahead ma'am.

Hello? Hello?

Yes hi. We can hear you.

Okay, thank you. Actually, I would like to know what is your outlook, if I'm looking at Telekom in the next, maybe not only this year, the competition landscape, but how you -- how you're entering in the national [investors] -- the Telkom, your position in terms of the competition from XL COM and also Indosat, if I want to have two to three years' horizon?

And we also, we also want to know that on the cost arrangement, because every year we were quite disappointed by your cost arrangements on [LC] unusual items, when we can really start to see that? That's my question.

Sorry, first of all, we didn't get your name or the company that you represent. Who are you sorry?

Sorry. Okay, this is (inaudible) from [Sumitomo].

Okay, from Sumitomo. Okay, and could you please repeat the second question? We got the first one on the competitive landscape for three years, which we'll be (inaudible) to get back to you on that one immediately, but at least the second question please?

The second question is, how can we, as an investor, be comfortable with your cost arrangement or management because in the past two years we always keep on seeing the one-off item that (inaudible) we felt in the fourth quarter, so -- and this year also it happened in 2009 as well. So going forward, how can we guarantee that we will see all your costs management are on track? Am I making my question clear?

Yes, you have. We're just going to discuss it with the Board and hold on just a moment. Thank you.

Thank you.

Okay. I think on the competitive landscape, we see, of course, that competitors can have [slightly kinks] in the past one year, especially with the number two and number three are changing their competitive positions.

Their latest move was on the off net as an [add], however, I think what we see going forward, we know how to react, how to respond. We have full information of what is -- the competitors are doing, so while we cannot disclose for now, we will basically do the more proactive pricing strategy going forward to be even growing our presence in the market. So we don't only look into number two and number three, but also the small operators who start to also come into the competition.

However, the message is that we remain optimistic on facing the competition. We know what we are doing. So I think we'll talk more in details later, yes.

Second, on the costs management, if you look -- don't look into the cost side only quarter-by-quarter, look into it on the annual basis. If you look, our costs, even with the IDR1 trillion of the early retirement tickets, we still only grow at around 9.4%. The quarter-by-quarter comparison will not give you a good guidance on what is our cost management.

However, there is one significant change. Unfortunately, it will only happen next year because there is one fixed cost element that we cannot (inaudible) until December 31, 2010 which is the cost of buying back the (inaudible). And that will last only until December 31, 2010 and will no longer be there on January 1, 2011. So that is when we really are able to show the proactive action by the management on the cost management.

Even now if you look, Pa Sudiro has mentioned that on the flexi in the past [excluded] the coordination on towers, on infrastructure, we strengthened the internal coordination on that so that we could save some operating costs and the investment costs.

So yes, and the third one, I think if you look -- one of the big components of the costs is on the early retirement. However, on the positive side, we can say that we are probably the most active management in doing the early retirement because we have done it since 2002 and actually the costs or the number has been reduced from around 37,000 to now around 21,800. So actually, we keep on doing proactively on that one in line with the business strategy and the -- basically management act. So I think that is what we can say for now. Thanks.

Thanks Pa Rinaldi.

Can I follow-up with one more question?

Yes. What is that?

I just would like to know, as an investor, how -- compared with all the other operators, or maybe our direct (inaudible), what do you see is our [niche] over [Excelcomindo], in terms of competition?

What's our competitive advantage against Excelcomindo?

Yes, in the longer term maybe. I need to (inaudible) but not only one to two quarters.

A specific question like this, I think we should do it offline. Why don't you call, because it affects our (inaudible). But in short, I'd like to say we have every competitiveness against our competitors, but we can talk offline in details.

Okay.

We have a strong balance sheet. We have strong coverage (inaudible). However, later, Shin Loong can explain on the other side, on the [soft] side, commercial and marketing. I prefer to do it offline, yes.

Yes, yes. Thank you. Thank you for your answer.

Thank you.

Thank you.

Next question please.

We will now take our next question.

Hello. Good afternoon. This is Rama from Macquarie. I have three questions. The first two are basically an extension of the O&M accounting change question that was asked before. Maybe if I could rephrase the first one like this. With regards to the O&M revenue as the last -- the cost portion changes, which division does it clearly impact? Is it the flexi or the fixed line or the Telkomsel portion?

The second one is with regards to your Form 20F, if you were to look on page 87, CP is listed as a separate line item. That doesn't seem to have moved that much. I'm just wondering, with regards to the cost recognition of the CP on a gross or net basis, what exactly is -- is that a different line item compared to what you're referring to?

And the final third question is, with regards to flexi and the outlook for its profitability, that seems to be decreasing over a period of time over the past three years, all the revenue, so the flexi, things are pretty stable. So if you could provide a little bit of color in terms of what the outlook for this business is or when the potential turnaround could be?

Thanks Rama. (inaudible)

Basically within this presentation, I think on the Fixed business, as Rinaldi also has mentioned, that one is in the flexi side because of the addition of a spectrum fee IDR285 billion and some additional expense of the electricity from Telkomsel, just a small portion, IDR40 billion, but the biggest impact is into basically the Fixed business. So Enterprise business, due to the CPA partnership fee, and spectrum fees, so only small part in Telkomsel.

And the second question?

The second question was about your Form 20F.

Let me put the second question, we will basically respond later on by email or phone separately.

Rama, can you send us an email? Rama, could you email directly to --- goes to the Investor Relations group and we'll respond to you yes?

Okay, sure.

Okay, the last one is the issue on the flexi profitability?

Yes. I think on flexi as -- no, the strategy has not changed since the past few years. You are right, the revenue base is pretty much stable, because I think more and more what happened is we are separating flexi now as a division as if it is a separate entity in the management report. So more and more actually the costs and revenue are more accurate. In the past, there are some costs that is borne together with the [tariff].

I think that is the explanation of what. However, our strategy on flexi is still not really aggressive. Basically, this is a strategy to really go in the market in which -- and also while we want to get the revenue, but we also want to affect the [cellular] side from the other competitors. As we mentioned repetitively, if we don't have the flexi, then somebody else will take it.

However, long-term, I think we are looking into the best way for flexi on how it would be positioned in the total 11 players in the market. So currently, we have five GSM and six CDFA so we are looking carefully on how do we position our flexi going forward. I think that is as much as we can tell for the time being.

Thank you. We'll take the next question please.

Hi, this is Foong from BNP. I've got four questions. Firstly on the transfer of the tower assets from Telkomsel to Telkom, I was just wondering whether, in the longer-term, is there a game plan to try and spin this off and become more asset light? And whether the recent government -- the information on the ban on foreign investment into this area, would it actually discourage going through that path?

And second question is with regards to the IDR1 trillion of savings per annum on the [PSO] costs. Can you break that down into OpEx and amortization?

And then the third question is with regard to network utilization rates. What is it during the peak hours and what is it on an average basis throughout the day?

And last question is on data. On a non-SMS and an ex-[RPT] basis, what is the data revenue that Telkomsel for 2009 and if you can, can you break that down into data that use on flash and data that use on handset? Thank you.

Yes. I'll take the first one for the power and the tower spin off. So we've got some echo on the line. Is that okay? Can you hear me?

I've adjusted the volume Mr. Burke. You may go ahead.

Okay. Thank you. On the tower, yes. We expect that should we be successful in creating or, shall we say, consolidating the tower company as a stand-alone business unit, under the tax regulation of Indonesia we would be forced to take that company to an IPO within three years, or at least three years after the company formation. We intend to follow that path.

It's worth bearing in mind that the current restriction on foreign ownership on tower companies is those that are in private hands. When the company becomes listed there is no exemption or no restriction for foreign owners in that particular company.

So I think to answer your question, yes, we will hope to be able to take that to the market within three years. And yes, once the company's at IPO we would be happy to invite foreign shareholders, if they wish, to invest in that company.

However, I must state that we have not decided at this moment in time the amount of the free float that would be issued to the public. So it's still very much -- it's something we will decide at a later stage

Okay, moving to the --

And the breakdown of the cash of course, as Pa Rinaldi has mentioned, that (inaudible) of basically depreciation and amortization of intangible assets are IDR1.1 trillion and interest expense around IDR80 billion. So the total before tax is around IDR1.2 trillion. So after tax around IDR1 trillion.

Okay. We'll cover the network utilization element. What's our network utilization of Telkomsel for the peak and what is it on average currently?

I have a number in average utilization. It's around 70% today and it's ready for [surfing] (inaudible) and for broadband

Broadband revenue.

Yes. I think last year our broadband equipment, comparing 2008 it stood at 349% revenue and Telkomsel flash execution showed increase 8% to 1.6 million subscribers in December 2009.

And the ARPU it also contributed 77% from small denomination in this case.

A few comments on the competitive landscape. Definitely we are all optimistic about the Indonesian economy and therefore our continued investment in Telkomsel.

As you all know there are 10, 11 players in the market. It's a little bit crowded. Unfortunately it is a CapEx game and the challenge to all operators will be to generate enough cash flow to pay for the next purchase of equipment.

And so from that angle we think that Telkomsel is well positioned. We have coverage across the whole country and our P&L and balance sheet is very healthy. We are generating enough money to pay for our CapEx.

So we will continue to invest in the country and make sure that every corner of Indonesia is covered, both in the urban and the rural areas. And given the [hits] that we have we would like to maintain our leadership position. Thank you.

Thank you. We'll move on to the next question, please. And we will make this the last question.

We will now take our last question for the session.

Hi, there. It's Colin McCallum here from Credit Suisse. Thanks very much for having the second call.

I think three questions from me if I may. I know it's the last question.

Firstly, could you just repeat, please, the broadband revenue for the full year and the broadband ARPU? I'm afraid I didn't quite catch that in the last question.

Secondly, can I just ask on dividend policy, what was the decision on 2009 dividends and what Pa Rinaldi are you thinking for longer term payout ratio? And would you look at special dividends or more buybacks as you have in the past?

And then the third question is just regarding the CapEx for 2010, the IDR2 billion, can you tell us some sort of breakdown of the amount that will be spent on the fixed line businesses? How much will be spent on flexi, how much on broadband, etc? Thank you.

Colin, I take it that you're referring to the broadband revenue and ARPU at Telkomsel, right?

I was talking about the broadband from Speedy rather than Flash.

Speedy. Okay. All right. Thank you.

That's fixed line.

Thanks, Colin. I think on broadband we have shown an increased revenue. In fact the ARPU, while it declined, it only slightly declined.

So if you look into our Speedy from the two broadband, Speedy actually the revenue is IDR2.6 trillion --

I didn't hear that again, someone moved the paper. Two point something?

IDR2.6 trillion.

Okay. Got that. Thank you.

Can you hear?

Yes, thank you.

Okay. IDR2.6 trillion and the ARPU is IDR256,000. While the ARPU on the wireless side is IDR58,000.

Meanwhile actually for the dividend, while waiting for the government [attention] and requests, I think our guidance still around 50% to 55% as happened.

So going forward we'll see the saving that we will get from the SO termination by year 2010. So I think for the time being it's still around that level. However let's see going forward.

On the CapEx I think one is both the group is modernizing the network into [IP base]. So if you look what happens to Telkomsel with the additional [WiMAX] 3G carriers, actually the network of Telkomsel have been upgraded and improved, especially on the big cities. And for that Telkom needs to supply with the fiber optics and other infrastructure.

So these two are linked together. The only difference is between the CapEx between the two companies is really on the BTS. But on the infrastructure, backbone etc., it's all linked because that's how it is.

And secondly, we do more and more converging network deployment with the access. When I say access it's BTS, copper cable access, Flexi, WiMAX etc. So that is the background of our CapEx.

So for 2010 we do expect actually from Telkomsel still around 70% of that IDR2 billion. That is the CapEx of Telkomsel. For Telkom it's around the rest; 30%.

And from that, flexi CapEx is still -- we expect this is around $180 million to $200 million. The rest is for the network infrastructure, for the broadband and for the optical fibers etc.

I think that is the [explanation] and those CapEx are to support the requirement for the data and a bigger bandwidth going forward.

So with that we are optimistic that Telkom and Telkomsel are able to be upfront in terms of the data and other triple play operations going forward. Thanks.

Thank you.

Sorry, I just -- for the flexi it's not $200 million or $180 million. It's basically we reduce and go small into the OpEx so the CapEx for flexi is $50 million.

Okay. That would be the last question of the day. We hand over back to Anita for closing. Thank you.

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