Telkom Indonesia (Persero) Tbk PT (TLK) 2011 Q1 法說會逐字稿

Good day, everyone, and welcome to the PT Telekom First Quarter 2011 Results Conference Call. Today's call is being recorded. At this time for the opening remarks, I would like to turn the conference over to your moderator today, Mr. Agus Murdiyatno, Vice President of Investor Relations. Please go ahead.

Thanks, Ellie. Ladies and gentlemen, thank you for participating in today's conference call to discuss PT Telekomunikasi first quarter of 2011 results.

On April 29, 2011, we released our financial results for the first quarter of 2011 ending March 31 of 2011. The press release and other materials are available at our website, www.telekom.co.id. Today's presentation is also available on the webcast, and an audio recording will be provided after the call for the next 30 days.

With me on the call is Mr. Rinaldi Firmansyah, Telekom's Chief Executive Officer, and the members of the Board of Directors and senior management of PT Telekom and PT Telekom shareholders. Our CEO will give you an overview of the results after my opening remarks.

Before beginning, let me remind you that today's call and the responses to questions may contain forward-looking statements within the meaning of Safe Harbor. Actual results could differ materially from projections, estimations or expectations voiced during today's call. These may involve risk and uncertainty, and may cause actual results and development to differ substantially from those expressed or implied in the statements. The Company does not guarantee to any actions which may have been taken in reliance of this statement.

Ladies and gentlemen, it is my pleasure to introduce Telekom's Board of Directors. Joining us today, Mr. Rinaldi Firmansyah as President Director and Chief Executive Officer; Mr. Sudiro Asno as Director of Finance and Chief Financial Officer; Mr. Ermady Dahlan as Director of Network and Solutions and Chief Operating Officer; Mr. I. Nyoman Gede Wiryanata as Director of Consumer; and Mr. Indra Utoyo as Director of Information Technology and Chief Information Officer.

Also present are the Board of Directors of Telekomunikasi who are joining us today; Mr. Sarwoto Atmosutarno, President Director; Ms. Triwahyusari, Director of Finance; Mr. Leong Shin Loong, Director of Commerce; Ms. Herfini Haryono, Director of Planning & Development.

And now I would like to turn the call over to Mr. Rinaldi Firmansyah for his remarks. Rinaldi, the time is yours.

Thank you, Agus. Ladies and gentlemen, good afternoon. On behalf of Telekom's management and employees, I would like to thank all our valued shareholders for your support and business to the Company. We sincerely appreciate your participation on this conference call.

Before presenting the first quarter of 2011 results, I would like to take this opportunity to give a brief overview of Telekom Indonesia. Telekom is the single largest integrated telecommunication company and network provider in Indonesia. Serving more than 126 million of cellular, fixed wireless and wireline subscribers nationwide, we provide a strong portfolio of information and communication services, including Fixed Wireline, Fixed Wireless, Mobile, Cellular, Data and Internet, Network and Interconnection services, directly or through our subsidiaries.

In response to demanding challenges in the domestic and global telecommunication industry, we have undertaken a fundamental and comprehensive transformation of our entire business, including our portfolio infrastructure and systems, organization and human resources and our culture.

This transformation, which was started in 2009, is part of our initiative to reduce our dependence on our legacy telecommunication portfolio of fixed line telephony and encompass a broader portfolio of time, telecommunication, IT services, media and entertainment.

On the regulatory front, new regulations in telco have been effective starting beginning of the year. Frequency fee for 2G that was previously charged based on BTS numbers and by the operators is now charged based on the bandwidth granted to the operator. This regulation change will give us more predictable O&M expenses.

Ladies and gentlemen, let me share some highlights of our first quarter results before getting to the detailed results.

During the first quarter of 2011, we have been able to grow our Cellular customer base by 21% compared to last year from 82 million subs to 99.4 million subscribers. As the Cellular subscribers grew, and as a result of our new pricing and ad campaign, the MOU has increased to 43 billion minutes, 53% growth year on year, or 16% growth Q on Q. Cellular revenue grew 4.8% to IDR11.3 trillion.

Our data, Internet and IP services revenue increased by 14% and contributed 33% of the total revenue. This in part is contributed by the 40% increase in customers of our fixed broadband service, Speedy, to almost 1.8 million subscribers.

Total revenue reached IDR16.7 trillion; increased 2% year on year. Meanwhile, income for the period was IDR2.8 trillion, an increase of 1% from last year. Our operating expense declined more than 4% Q on Q, driven mainly by the decrease of marketing, personnel and G&A.

Ladies and gentlemen, now I shall present the operational and financial performance results for the first quarter of 2011.

With over 99 million subscribers, we maintain our leadership in the cellular market with a 46% market share. Our Cellular BTS reached 37,800 units, a 17% growth compared to the same period last year.

Cellular revenues contributed IDR6.8 trillion; increased slightly compared to the same figure in the previous year. Our broadband subscribers showed excellent growth with total 1.8 million subscribers in fixed broadband, 4.3 million subscribers in the mobile broadband; up 40%, and more than 100% increase respectively.

Fixed broadband and mobile broadband revenues contributed of IDR964 billion and IDR347 billion, a 16% and 68% increase respectively compared to the same previous -- to the previous year.

We are able to slower the decrease of our Fixed Line revenue in the first quarter. Total number of Fixed Wireline in terms of subscribers only decreased by 0.6% to 8.3 million subscribers, an improvement from the same period last year that the decrease was 3.2%.

Meanwhile our Fixed Wireless business, Flexi subscribers, increased by 17% to [IDR18 million]. Total BTS reached 5,700 units. Due to promotional campaign in Cellular and a competitive market, our Flexi MOU decreased to 2.4 billion minutes.

In this period, however, that will maintain its [focus] as market leader in Fixed Wireless business. Fixed Wireline and Fixed Wireless revenues totaled IDR2.9 trillion.

Ladies and gentlemen, I shall now briefly present the financial results and try not to repeat all the information that you may have read in the info memo posted on our website.

Balance sheet, year-on-year basis; total assets is now IDR100.7 trillion, an increase of 4%. Total liabilities decreased by 6% to IDR40.5 trillion. Total equity increased to IDR60.2 trillion, an increase of 13%.

Income statement; operating revenue increased by 2% to IDR16.7 trillion. Total expenses increased by 4% to IDR11.5 trillion. EBITDA is IDR8.6 trillion, a decrease by 5%; while EBITDA margin decreased to 51.7%. Net income is IDR2.8 trillion, an increase by 2%.

Revenue contribution for this period was still dominated by Cellular, which contributed 40% to our total operating revenue. The second major revenue contributor was Data, Internet and IT; that contributed 33%; followed by Fixed Line with a 19% revenue contribution. Interconnection, Network and others totaled 8% contribution to total revenues.

Meanwhile, of our expenses, O&M was 30% of the total expenses. This O&M expense amount was in line with the additional number of PPS. Depreciation expenses were up [30%] of total expenses. Personnel expenses contribution reduced to 17%; Interconnection, D&A and marketing totaled 18% contribution to total expenses.

As of March 31, 2011, the total Telkom Group spending for CapEx reached IDR2.3 trillion. CapEx allocated for Telkom, Telkomsel and other subsidiaries amounted to IDR786 billion, IDR1.2 trillion, and IDR292 billion respectively.

As part of our cost optimization program, we conduct [tariffs] of initiatives focusing on reduction of routine cash expenses. Among others are power costs, IT costs, administration costs and network maintenance costs. Our capital expenditure is allocated mostly to enhance backbone infrastructure, broadband businesses, cellular, acquisition of network infrastructure, and improve IT systems.

Our strong financial position has enabled us to continue to pursue our program of total investment to find -- to enhance both the capacity and quality of our core network and infrastructure. We continue our (inaudible) backbone project that will also cater to ever increasing demand for greater value by supporting a reliable, high capacity network, capable of carrying a variety of services from west to east region.

Telkom 3 satellite will significantly enhance our broadcast capacity, as well as capacity, as profiling valuable support for enterprises and national broadcasting and defense systems.

Ladies and gentlemen, that ends our presentation on the first quarter of 2011. Let us continue onwards with the question and answer session, and it will be moderated by Agus Murdiyatno.

Thank you.

Thank you, Rinaldi. Now let's open for the Q&A session. When raising your questions, we would appreciate if you could speak clearly, and also state your name and your company. Ellie, may we have the first question please.

(Operator Instructions).

Just a couple; firstly, if you could confirm what your Data ARPU was for the first quarter, and what the ARPU was for flash subscribers.

And then I guess there's a second question there. What financial and operational measures would indicate to the management at the end of year that Telkomsel has actually had a successful 12 months? Are we still looking at, say, 50% of net add market share, or are there other metrics now in place which can give some guidance on how you're actually tracking relative to your expectations?

Thanks.

Yes, I think the first question could be answered by [the consultant].

Thank you. On Data ARPU, that is around 33,000 [per] users.

That's Data ARPU?

Yes, Data users. Our data usage is around 21.5 million users now, first quarter.

Yes, I think back to the ARPU, I think that has been informed by (inaudible).

On Telkomsel, I think while we are looking, that the marketing is entering 100% penetration, just like the experience in the other countries; it will still go beyond 100%. So still our objective is marker share, so that's why we still like to get around 50% of the new adds. 50% is still basically the target for us.

Thank you.

Are there any other targets in terms of, say, revenue, EBITDA, profitability; any other sort of metrics that you're I guess measuring yourselves against?

Again, are you asking for the guidance, or what are you asking at?

More in terms of, say, revenue market share or profitability levels. What would you consider to be a successful outcome for Telkomsel I guess is the question?

I think if we look into the market in the past three years, actually Telkomsel now in terms of pricing and tariff has been basically more or less at around the same position with the market. So that gives us a more flexible approach in building campaign, promotion and other things. So that is one.

Of course, in terms of the target, I think our market share in this still growing subscriber industry, we definitely -- that is our first objective. Yes?

In terms of the revenue, I think if you look into the revenue side, ForEx has been flat, so I think in the -- starting this year and going forward, we will concentrate more into the non-voice. That includes the Data, Internet and etc. And as we see that the industry is growing at around single digit, so I think we like to -- maximum to grow at around industry level.

Okay, thanks.

(Operator Instructions).

I have a couple of questions. First, we met you -- we met Telkomsel around November end, and management clearly disclosed that elasticity is not there in the market; and despite that you have continued with the lower pricing and acquisitions. And as a result, we have not seen very fantastic results in terms of earnings or EBITDA level.

So my question is, what is [of day] going forward. You told that you won't want to continue with the lower pricing earlier, but it has continued 'til now. So could you guide us; will it change from what we have seen in 1Q? That's my question number one.

And second question, we have seen lower amortization costs in the 1Q, and is this a sustainable trend? And which kind of intangible asset is that where we are seeing the lower amortization costs?

And my last question is, given that growth is single digit in the industry and your earnings are not growing in a fantastic manner, so what are you thinking about your dividend payout ratio, which stands around 55%? Is there some thinking around that if growth is not fantastic, then what else should Telekom do for its shareholders?

This is (inaudible) here. I think I'd like to put the pricing in the background, in -- against a background. The numbers that you see are blended numbers. So it's a mix of promotions that are lower price, and also against other packages that are more pricey, okay?

So I think you should take this into account. It's not a single price plan going forward. Right?

Now the other thing is the competition is still out there. The price pressures are still out there. We see a lot more what's being done at below the line. So I will not say that competition is gone. Again, as I say, it's there. It has taken on another form, and the competition is still very severe.

So against this background, we are monitoring the situation and we will optimize both the pricing and the usage.

Okay, and just a follow-up on this. You had 50% plus market share probably when there were two major players in the past, but now we clearly know there are three [main] players. So what is the rationale behind still having the 50% plus market share, given that it's not a two-player market now, it's probably a three-player market? Because if you stick to this target here, you'll probably end up being too aggressive.

I'm not sure how you've counted. We have always been the big three in the GSM market. And today, by my count, it's an 11-player market, okay?

Yes.

We take you point, but I would like to state that we rather stretch ourselves, and we still can make those numbers and still be profitable, and will likely achieve it.

Okay.

Yes, question about the [Wire], the cost -- [amortization cost base] now, [carried now]; yes, if you note that that since the end of last year that the (inaudible) of December, of December '10, we just basically finished the [tax] of '10; so we call it the tax '10. So obviously, we basically [booked] (inaudible) [plus] up to the (inaudible) program around (inaudible), so it seems this year, I think we're not longer to book amortization costs because of the costs in (inaudible). So these are the trends; amortization cost is now carried very low, lower than previous years, yes.

So if I can just -- I didn't get a name; which program was that? Was it for (inaudible)? Which program was --? I didn't get the name clearly.

[Cash all] means [twin scheme] operation. Basically, there were -- we had twin operations in (inaudible) Sumatra; there's Java.

Central Java.

Central Java and Eastern Java, so quite general. And as I said, since last year, we [finished] this on the contract with the investors.

Okay, so it will remain low going forward; the moderation costs should remain low?

Yes. due to the effects of [NOV] basically, we basically are not longer to book amortization plus from goodwill and intangible assets.

Okay, great. I just have one more question on the dividend payout ratio, if you can answer that, yes?

Yes. I think, just to add of what Sudiro said, if you recall since 1995, we have five regional which was operators by investors under (inaudible) scheme, and that was lasted for 15 years, finished by December 31, 2010. So amortization coming from intangible assets and goodwill are no longer there. So your question was would this be sustainable; the answer is, yes.

Okay, great.

Okay? Second, our dividend payout ratio; yes, you are right. We will hold the AGM next week on May 19, so one of the agendas is definitely the dividend payout ratio. And also, we are proposing, which we expect to get approval from the shareholders, to do the share buyback program. So these are currently the two programs that we are doing in order to utilize the capital more practically.

And the dividend payout ratio, we will still propose around 50% to 60% and later, the Government will decide on what is the [real percent] ratio.

So what you're saying is that -- I think your current payout ratio is around 55%, and you're just proposing a slight increase, not a major increase in the payout ratio. Is that what you are saying?

You should look from both sides. It's not only the payout ratio. We are also doing the shares buyback program.

Which is 2% to 3% here; with 2% to 3% off the market cap, right?

Yes, that is -- basically, we are proposing around 2% of the outstanding shares. Yes, so that is on top of the payout ratio.

Okay, great. Thank you.

I had three questions, actually. The first one was just getting a sense again on the mobile competitive environment. Obviously, if I look on your quarter-on-quarter mobile trends, they're slightly better than what the normal seasonality would be, and perhaps the margin is a little bit better than some of your competitors. But when you look at it within the quarter, would you say that there's been any material difference with, let's say, the early part of the quarter versus the latter part of the quarter? Because we have heard from a couple of other competitors of yours that things were a lot better towards the latter part, but presumably that would bode well going forward for the remainder of the year. So if you can throw any light on perhaps a bit of the state of the quarter itself, that would be very helpful.

Second, again, sticking with Telkomsel, the marketing and other costs are up quite sharply, and the margins for Telkomsel are down quite a bit. You pretty much tracked 57%/59% throughout the last several quarters, and then this quarter it's down to 55%. Are there any one-offs there? How should we look at margins for Telkomsel going forward again for the remainder of the year?

And then third, just a minor question; the Mobile Broadband subscriber base that you had reported; if you could provide a breakup between small screen and large screen, so customers around dongles and those around -- on handsets.

Thank you.

Okay, on the month to month within the first quarter, we are also seeing the same trend. The later part of the quarter is more reasonable, or more stronger than the first part of the quarter; of course, the Q1 data seasonality against Q4. But I think we tracked that and probably slightly above that.

Does this answer your question? Hello?

Hi, yes. I think we were disconnected.

Just in case we got [cut off], on the first question about within the quarter, we are also seeing the same trends. The later part of the quarter is better than the first part, and still within the seasonality, we are a little bit above the seasonality.

Okay, we've got the next question?

Okay. For marketing in this year, so Telkomsel doing the (inaudible) before depreciation costs, and so it reflects this for this quarter. It's higher, more higher than the last quarter.

In the second quarter, the total OpEx, because the previous quarter, in the last quarter of last year, so we booked in the (inaudible) impact of the reduction of (inaudible) [this year].

Two questions from me, please. Could you provide a status update on your proposed Cambodian acquisition? Where are you there? What's the timetable on this one?

Second one I had is with regard to the previous question on dividends. I'm wondering why the Company is very conservative on its capital management program. I understand that there'll not be any change with regard to the dividend on the parent level. At the same time, you do have a share buyback, but it's quite token at around 2%, with actual buy-up being quite low at the end of the day. I'm wondering what's holding the Company back in terms of paying out more money to shareholders.

I think on the Cambodian, I think we have not finalized. We still are looking on the project, and no decision yet. And we will let you know if any decision is going to be made and it's still in process. I think for now that we can't tell.

On payout ratio, I think you look into the shares buyback, the amount is [IDR3 trillion]. Although it's around 2% of the shares, but on the rupiah terms, it's IDR3 trillion. And actually, we are ready even to increase the amount for the shares buyback program.

So that basically would also give the increment into the earnings, and we do expect that we will benefit to our shareholders. So I think that is our answer for now.

Thanks.

If I could just add, what would it take for the Company to start [sweating] the balance sheet?

Sorry, again; can you repeat?

What would it take for the Company to actually started sweating the balance sheet, because it seems to be excessively healthy at this stage?

I think that is the -- as you understand, we are entering into the IT services media and entertainment. We just do an investment in the data center, although demand is around IDR300 [billion]. And that is the area that we are planning to do, yes.

And second part of this year, we will do another early retirement program. That will be around IDR500 billion, probably to IDR600 billion. So I think those are the areas that we can share of how do we basically use the capital for the time being.

Thank you.

HSBC, I just have three questions. The first one is actually on the fixed line effect on Flexi. When will the current zero tariff promotion start to provide a positive impact to the revenue base? I guess in the first quarter that actually partly resulted in a decline year on year and Q on Q for Fixed Line.

The second question is with regards to O&M expenses. Despite the change in the 2G frequency fees, it is still up about 9% year on year. Are there other components of O&M that went up margin double digit during the quarter?

And last question is again related to the capital management. Why the preference for a buyback where shares are not cancelled, instead of just paying out cash to shareholders via a more -- a better cash dividend?

Yes, (inaudible) on Flexi first.

Okay, thank you, Luis. Regarding of Fixed Line [access] (inaudible) zero program, as far Rinaldi has mentioned, we are facing quite some competitors in the in the market; no longer difference between CDMA and GSM. So that's why starting from February, offer what we call zero with not any condition.

The result until now we are happy. And on one, from February to March, we are growing around 8.5% in terms of (inaudible). And then we start to do in other cities. First, Jakarta, and second to east of Java, but not for local; this is for the (inaudible). And then the (inaudible) west of Java just on before the (inaudible) on that -- of Java, East or West Java area. We hope going forward our revenue will be increased. That's our objective.

Thank you.

Thank you. Despite on the more predictable frequency fee as the result of new regulation of 2G frequency fee, we not put that in our O&M SKU because mainly due to increase in, again, adjustment on frequency fee in the previous quarter, and also the increase of other supply costs.

In other operating expense, grew 44% year on year due to increase of cost of cards and devices in line with sales growth, and increase in data access fee due to the growth of Data business. It was mainly due to the increase [predictable RIM] or Blackberry services.

Does that answer your question?

Just a last on, I guess, on the capital management.

Why [I was] (inaudible) [stop] from the (inaudible) problem in [the financial year]. One is we still have time up until 2013 to decide whether [Artistock] will be canceled or will be sold. And second, I think this is also basically we need the discussion with the Government as major shareholder because the (inaudible) will be also in the Government. So I think -- and of course, this is also need AGM approval to decide if Artistock finally should be canceled.

Thanks.

Thanks. 2013 is the deadline, but I guess why not you can opt to decide to do it sooner?

Could you repeat that? We couldn't hear.

I understand that 2013 is the deadline for the decision, but I guess you can also decide on sooner rather than waiting for the deadline. What is stopping you from deciding sooner?

I think on the capital management, it is something very strategic. One, if we cancel, basically the process only requires the approval from the Government. But on other issues, let's say, tax issues, etc., that would probably require the approval from the parliament. So these two are two different issues, so while we do not have yet the permanent plan for the treasury stocks, I think we are still taking time before we decide. So bearing in mind that both involve the Government involvement.

Thanks.

Your line is open, please go ahead.

[Vashesh Gopari], JPMorgan. I just have just one question, a follow-up on the frequency period adjustment made in 4Q. Can you give us like-for-like amount so that we can better understand the sequential growth in the expense item?

The frequency adjustment in the last year is on [$350 million].

And that was all in 4Q 2010?

Yes

Okay, thank you.

I think on the frequency license fee again, basically, well, it is made based on the bandwidth by the Government, but I think what's important is that what we are going to pay is on the declining basis year on year until year five. So if you follow Q1, I think a little in the Q3/Q4, the amount that will be expensed will be slightly lower than what it is now that we are paying. And it will be gradually decline until end of year five, before -- if there is no regulatory changes it will be flat since year five.

Okay. Thank you.

I have two questions, first one's on your -- I'd like to understand your drivers, revenue drivers for 2011. I'd like to understand how Telkomsel plans to differentiate itself from the competition, to get -- essentially to get ahead of competition.

Second question is on guidance, if you can share with us the guidance in terms of revenue, the margins for both the Group, as well as for Telkomsel.

Thank you.

Okay. (Inaudible) from Telkomsel. Understand that after having 100 million subscribers, Telkomsel want to be distinct cellular company, and we are more focused on Broadband Services, and especially Data services. And also to differentiate with other operators, we will focus on more micro-segment below the line, and also to increase better quality and customer experience.

What do you mean by below the line on micro-segment?

Today in Telkomsel coverage, throughout Indonesia, we only have around 140 segments in (inaudible) area. But with our new system support, we can do it more micro-segment in the community (inaudible) [deliver], and be able to serve them more than 1,000 micro-segments with the different offering and different services and prices. This is the differentiation of Telkomsel to other (inaudible) operators. But Telkomsel guidance this year, 2000 --

Okay. The guidance EBITDA maybe I just as (inaudible) mentioned earlier, for the top-line growth, I think basically we want to basically [be close to] industry growth, so for Telkomsel, it's around 7%; and for the Group, between 5% to 6%. And for the margin, EBITDA margin, I think Telkomsel will turn around [2%] from last year, so to become around 56% more or less; and for the Group around 52% to 53%. And for the CapEx paid for the Group basically IDR1.5 billion, and this was IDR1 billion for Telkomsel and the rest for Telkomsel and other subsidiaries.

What are the reasons behind the lower margins for both Telkomsel and the Group?

Yes, it's not that industry, our [revenue quotes] basically bring on. You know last year, industry around [13%/15%] and I said, and (inaudible) said, basically no high single digit, around 7% to 8%, so we are going to [cap] at 7% for Telkomsel. And as you know, Telkomsel still contributes around 60% of our revenue. And that's on one side.

On the other side, I think cost side, last year we didn't have ERP, early retirement program, and this year, it's as (inaudible) said earlier also, we are doing another ERP around IDR500 billion to IDR600 billion. So that's why margin actually in Group lower than last year.

Yes, but fine, again, it's then the ERP affecting the Group margins, but what about Telkomsel's margin? That has come down by about 2 percentage points. And I can appreciate that revenue growth is slowing, but it's still growing, so I'm still trying to understand why the margins are under pressure. And then your competitors' margins are actually quite stable.

Especially in our marketing costs, marketing costs due to the tough competition, we need more promotions, because of the change of policy, the (inaudible) fee. And then the second one is, of course, due to the increase of our [TV ads]. We cannot decrease our energy costs in the terms of [effect]. There is some reason that are real pressure right now, or really (inaudible).

Right. Okay, thank you.

Okay, I think we've come to the end of the conference call. Thank you everyone for participating. If you have any [appetite] from these questions, [please be our guest]. If you have any further questions please feel free to contact us directly.

Before we end our conference call, I would like to ask the CEO for his closing remarks.

Thank you, ladies and gentlemen. We appreciate the questions that our participants have asked today. We would like to assure you that many of your concerns are indeed our concerns as well. We will make every effort to have (inaudible) along with the execution.

With strong base in both Cellular and Fixed Line subscribers, we are optimistic to be able to have (inaudible) position in the market. Our widest coverage of cellular network, combined with fixed line backbone, connecting from the West to the East of Indonesia are the factors in providing a reliable and high quality of fixed and mobile broadband for the whole country.

I would like to thank you all again for participating in this conference call, and look forward to meeting you again in the near future; and I wish you all good day.

Thank you very much from us today at this conference. Thank you all for your participation.