Telkom Indonesia (Persero) Tbk PT (TLK) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Telkom full-year 2013 results conference call. (Operator Instructions). All materials for today's conference is available on our website at www.telkom.co.id. Please be advised that this conference is being recorded. I'll now hand the conference over to your moderator for today's call, Mr. Albert Tan. Please go ahead, sir.

Ladies and gentlemen, welcome to PT Telkom Indonesia's full year's results ended December 31, 2013 conference call. There will be an overview from our CEO, and after that, questions-and-answers session will be conducted for all participants on this call.

Today's presentation is available on webcast and an audio recording will be provided after the call for the next seven days. We released our financial results of the full year ending December 31 on March 6, 2014, and the report's available on our website, www.telkom.co/id.

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 to differ substantially from those discussed in today's call. Telkom Indonesia does not guarantee to any actions which may have been taken in reliance of the discussion held today.

Ladies and gentlemen, it is my pleasure to introduce you the Telkom Board of Directors who are joining with us today, Mr. Arief Yahya as President Director and Chief Executive Officer; Mr. Honesti Basyir as Director of Finance and Chief Financial Officer; Mr. Rizkan Chandra as Director of IT Network and Solution and Chief Technology Officer; Mr. Ririek Adriansyah as Director of Wholesale and International Service; Mr. Sukardi Silalahi as Director of Consumer Service; Mr. Indra Utoyo as Director of Innovation and Strategic Portfolio. Also present are the Board of Directors of Telkomsel; Mr. Heri Supriadi as Director of Finance; Mr. Edward Ying Siew Heng, Director of Planning and Transformation.

Before Pak Arief delivers his remark, I will take this opportunity to give you a brief overview of Telkom Indonesia.

Telkom is the single largest integrated telecommunication company and network provider in Indonesia, with over 148m telephony customers and more than 60m broadband users at the end of 2013. Telkom provides a strong portfolio of TIMES, representing telecommunications, information, media and edutainment, directly or through our subsidiaries. We also deliver services to multi-customer portfolio; retail, enterprise, wholesale and international.

As of December 31, 2013, the majority shareholders of our common stock was government of Indonesia with 53.1% ownership, and the remaining 46.9% was under public ownership.

I now hand over the call to our CEO Mr. Arief Yahya for his overview. Arief, the time is yours.

Thank you, Albert. Good afternoon, ladies and gentlemen. A very warm welcome to all of you to our conference call for full year results ending December 31, 2013. We sincerely appreciate your participation on this call.

In today's call, I will give you the overview of our achievement in 2013. Until the end of the year we could maintain an outstanding performance in operational and financial results. I'd also like to update you on the progress of our cellular and fixed-line business development, as well as other business portfolio.

Ladies and gentlemen, let me start the overview by sharing the highlights of our full year results.

Telkom consolidated revenue increased by 7.5% year on year, and net income grew double digit at 10.5% year on year. This is in line with Telkomsel's performance which recorded 10.1% year-on-year revenue increase.

Telkomsel gained 6.4m net additional customers during 2013, made total customer base to be 131.5m. Telkomsel continued to expanding its network coverage and capacity by adding close to 4,200 new BTS during the fourth quarter of 2013, with almost 85% of them 3G BTS.

Ladies and gentlemen, our fixed broadband users increased by 28.7% year on year to 3m, and the revenue increased to IDR4.6 trillion in the full year of 2013. Our mobile data users also increased. In the full year, it increased 10.8% from last year to 60.5m users. We booked IDR10.5 trillion revenue from mobile services and grew 35.6% increase year on year. Total mobile data services and fixed broadband revenues increased 25.6% year on year to IDR15 trillion.

During fourth quarter, Telkomsel recorded 3.6m net additional customers that made total customer base to be 131.5m. Until the end of 2013, Telkomsel owned 69,800 BTS and 27,000 of them are 3G BTS.

Ladies and gentlemen, consolidated revenue growth remained strong with 7.5% increase year on year and Telkomsel revenue growth maintained a double-digit 10.1% increase year on year. Revenue contribution for full year 2013 was still dominated by cellular voice revenue which made 38.7% to our total operating revenue. Data, internet and IT services came second, contributed 38.2%; followed by fixed-line voice, contributed by 11.7%. The remaining 11.4% is contributed by interconnection, network and others.

Cellular voice revenue, the biggest contributor, still increasing 4.6% year on year. Data, internet and IT services as the second contributor showed remained good increase at a level of 14.8% year on year.

In the meantime, on the expense side, O&M was the biggest contributor with 35.1% of total expenses. The second and the third contributor were depreciation and personnel expenses with 28.6% and 17% of total expenses, respectively. Interconnection, G&A, marketing expenses altogether contributed 8% to total expenses.

Total expenses increased by 7.1% year on year, mostly due to the increase of -- the increase in O&M in line with acceleration of network deployment in our cellular subsidiary. During 2013 we built more than 1,000 BTS per month.

Ladies and gentlemen, despite uncertainty in macroeconomic and market condition, in particular the weakening of Indonesian rupiah, for the year 2013, Telkomsel could maintain double-digit growth year on year for its revenue, EBITDA and net income. We call it triple double-digit growth. Telkomsel recorded IDR60 trillion in revenue, with a 10% growth year on year. Meanwhile, EBITDA and net income again were stable, amounting to 56% and 29%, respectively.

Telkomsel customer base increased by 5% to 131.5m customers, of which around 60m or 46% were data users. During the year, Telkomsel deployed more than 15,000 new BTS to increase the total BTS on air by 29% year on year to 69,800 BTS. Out of the number, total 3G BTS were 27,000, representing around 39% of total Telkomsel BTS. It is a 75% growth year on year.

Telkomsel legacy business that consists of voice, SMS and other services remained the largest revenue contributor, accounting for 80% of Telkomsel total revenue. Telkomsel's legacy revenue grew by 5% over the last year. Voice and SMS business remains robust and provides a strong foundation for sustainable profitability. To exploit Telkomsel legacy revenue, we focus on geographic clusters and customer segmentation, where we can provide more services and generate more revenue.

Broadband and digital business contributed close to 20% of total revenue in 2013, which was a significant increase over a year earlier. Revenue from broadband business grew by 35%, mainly from data broadband which grew 36%, and digital services which increased 70% from last year.

Over the coming year this business will continue to be Telkomsel main engine of growth. The potential to further increase the number of data users is still huge as current penetration of smartphone is still relatively low at around 20% of Telkomsel customers. We will encourage the adoption of smartphone as this is one of the keys to accelerating the data consumption.

On the fixed-line business, let me share our Indonesia Digital Network 2015. Progress for the full year of 2013, on the Id Access, Indonesia Digital Access, until end of December we have 8.2m broadband homes passed, blended of fiber-to-the-home, fiber-to-the-curb and ADSL. On top of that, we have installed 82,000 Wi-Fi access points in public areas. These Wi-Fi access points are accessible for Telkom and Telkomsel customers and expected to offload Telkomsel wireless broadband traffic.

Meanwhile, on the transport side, we call it Id-Ring, Indonesia Digital Ring, we have completed 69,000 kilometers of national and regional backbone network, out of targeted 75,000 kilometers in 2015.

For Flexi, currently we are preparing to consolidate our mobile business, which we expect to be finished within this year. In this proposal, we plan that remaining subscribers will be transferred to Telkomsel as an effort to maintain customer satisfaction. We expect that there will be benefit in this program and currently we are still calculating it.

As mentioned in previous conference call, we are looking at opportunities to do business overseas, targeting footholds in 10 countries until 2015. We are committed to have more international business exposure to broaden our market room, diversify our business risk, and improve the competencies of our human capital. After establishing representative office in Singapore, Hong Kong, Timor-Leste, Australia, Myanmar and Malaysia, we set up our international network operation in the USA since December 11, 2013.

On October 2013, we divested 80% of our shares in satellite-based pay TV subsidiary, Indonusa Telemedia, with a brand of TelkomVision, as we want to focus on internet-based pay TV business by establishing Metra TV, to be focused on maintaining our USeeTV cable and USeeTV.com services.

Ladies and gentlemen, let me now share the guidance for 2014 as a wrap-up. For 2014 we expect both consolidated and Telkomsel revenue w\could grow in line or better than market growth. Telkom consolidated revenue expected to grow between 6% to 7%. Meanwhile Telkomsel could maintain revenue growth above the industry growth.

For EBITDA margin, it will be stable or slightly decline for Telkom consolidated and Telkomsel. Consolidated CapEx spending for 2014 expected to be 20% to 25% of revenue. Allocation for Telkomsel purpose is around 60%; meanwhile, for broadband and other subsidiary, around 40%.

This is ending my remarks. Thank you very much.

Thank you, Pak Arief. We will now begin the question-and-answer session. When raising your questions, we would appreciate you speak clearly and state your name and your company.

Operator, may we have the first question please?

(Operator Instructions). Luis Hilado, HSBC.

Hi, good afternoon, and thanks for the call. I had two questions, broken up into the other income division as well as the OpEx side. Just wondering if you can give us a breakdown for the fourth quarter of the other income line. I understand that part of it is the sale of course of TelkomVision, but is there any other material part in that number?

The second question is to get more color on the OpEx increases. General and administrative expense, you've mentioned that provisions increased during the quarter. Is there any exceptional expense for G&A in the quarter?

Secondly, if you can give us the depreciation and amortization. There's an impairment charge that you've mentioned, if you can give us the amount.

And lastly, on personnel expense, is it fair for us to annualize the fourth quarter amount or is there some sort of seasonal bonus that is inside the fourth quarter number?

Okay. I will hand these questions to Pak Honesti, our CFO.

Thank you for all the questions. Before I directly answer your question, let me recall what the management guidance for 2013 performance. As we already informed also to the market analysts and investors, we give the guidance for the growth for revenue for 2013 is around 7%, and our achievement is more than that, 7.5%. And the EBITDA margin, at the time we informed that will be able or slightly decline, and the result is, based on the adjustment EBITDA, our EBITDA margin increased 0.4%. And also if you compare our performance with the other competitors in our country, certainly we are better than XL and also Indosat, meaning that Telkomsel gave the best performance for full year 2013.

So talking about the other income and other expenses, mostly the other income is came from the [get onto] our pay TV business, as mentioned by CEO in the speech, and (inaudible) other income from -- that we get from the satellite insurance fee.

Okay.

And about the provision of (inaudible) because of changing in our accounting standards. Before, in 2012, we did the individual assessment; and for 2013 that's on the new accounting standard, we do a collective provision. But I think this is only for one-off adjustment. Hopefully in 2014 we can improve this -- our collection and maybe our provision of that will be decreased than 2013.

Okay.

Sachin Gupta, Nomura.

Yes. Thank you very much. I had three questions. They're actually all on costs as well. Firstly, on the operational maintenance cost, they have increased quite a bit. This is despite you moving your -- some of your tower leases to financial leases. So I want to understand why such a big increase in O&M cost?

Secondly, just a bit of follow-on from Luis's question as well, this impairment you have taken, is it possible to quantify? Is it all at Telkom level, and does that relate to Flexi, and how much it is? And also there's been some provision for doubtful debt as well which has impacted G&A cost. Just want to understand how much is that and what that relates to.

And I guess last question is on your tower leases, you have been moving the tower lease expense from operating to financial lease. Just wondering how many towers does that relate to? And how do you actually determine which towers are part of operational and which towers are part of financial lease? Thank you.

Hi. I'll hand this over to, the first three questions, to our CFO, and the third question to Pak Indra.

Okay. Thank you. About the O&M cost increase, I think that's in line with our network acceleration especially in Telkomsel to support the business. That's why Telkomsel get the best performance in 2013.

And about the doubtful expenses, as I mentioned before, is because of the new changes of Indonesian accounting standards. So for example, in 2012 we booked for doubtful expenses around IDR200b-something, and for 2013, it's around IDR100b that's mostly non-cash expenses. That's because we put a proportion of that to expenses. And it is, say again, is one-off provision in our P&L.

Tower lease, that's also because the changing in our accounting standards, on the auditor, they suggest us to change the operating lease to be financial lease. That's why if you see, it also improved our O&M, but increased our depreciation and our interest expenses in our other expenses.

Pak Hones, I may add to your explanation here is, on the tower lease, at the moment we rent around 12,400 towers. It is consists of around 5,000 in operating lease, and the rest goes to finance lease. So during 2013 we already booked the depreciation of the tower lease around IDR588b to the depreciation cost.

So why this [big]? I think in line with our deployment, we had, as mentioned by our CEO, we had around 28% of our towers, our BTS, so the growth of the lease, also because of the growth of the network. Then that's already the [reverse] on result as previously mentioned. This is our explanation on -- in addition to that Pak Hones already explained.

Okay. Thank you.

Roshan Raj, Merrill Lynch.

Hi. Thanks for the opportunity. Three questions. First, just going back to the one-off items, sorry if I missed it, but could you just help us quantify what were the items and the associated amounts? For example, the amount you gained from sale of pay TV, the satellite insurance fee, as well as the provision, the amounts, if you could share, that would be good.

The second question is on the interconnect cost and revenue, it looks like you have a net interconnect outflow as revenue is less than cost. So are you actually revising the on-net and off-net [status]?

And the third question is on guidance, what is the underlying assumption for competition and pricing which gives you confidence that you will end up gaining market share once again in 2014? Thank you.

Interconnect will be -- okay.

I start from the last question, Pak Hones, from our side about the competition and how are we going to -- again provide good results. I'm here with Pak Edward, who'll explain about our expectation of the market growth.

Last year we experienced 7.1% industry growth, representing by the big three GSM. This year we expect the growth is about the same. We, since the beginning, we always want to be sustained in our position to be a leader in this industry. So that's why we said that our objective is to maintain the market share and so on.

Where is the growth will coming? Of course data will provide a lot of room to -- for our growing. And then also we still believe some from legacy, SMS and voice, still provides some room to be exploit to give us another chance to grow, because we have our network across of Indonesia, we have some position with [dominate] in some outside of Java. So we can do some pricing based on seasonality and also with -- on the traffic [interest] and on competition. So based on that, we expect we still can maintain our growth, at least the same like industry. And we expect also we can still beat the industry growth.

Pak Edward, you may --

Sure. Maybe I could add on -- this is Edward Ying. So maybe I could add on by saying that for the cellular business clearly in 2014, why we deem we can continue to perform is that we continue to invest, like what our CFO say, into coverages outside of Java. And we're rolling out more 3G base stations hopefully to connect more smartphone customers and they will buy data bundles from us. And on top of that we're going to also introduce new digital services and hopefully to engage them other than just web [card], web-related uses, whether they do just SMS communication or the standard OTT services. So those are the plans that we want to increase our revenue on.

Okay. I'll answer the other question about the other income. Yes, we get gains on [south] Indonesia. It's around IDR1.3 trillion. And also we also get other income. It's around IDR1.7 trillion from the contributed by [plan] of insurance fee for Telkom Satellite 3 that's already still in the orbit.

Thank you. The interconnect is -- if you look at the revenue and expenses re interconnect, the expenses seems to be higher. But please be reminded, the interconnect line is not only coming from the interconnect revenue but some of the expenses is because of the increasing of the traffic in the retail side. So this explained increase due to the higher rate of traffic going out of net and also going to the international. So it's the logical consequence of having a higher retail traffic going to outside of the network. Thank you.

Can we have the next question, please?

Anand Ramachandran, Barclays.

(technical difficulty) opportunity. I had three questions. Firstly, if I could just bother you again on the one-off costs. You do accounting changes that you spoke about, about IDR200b for 2012, IDR900b for 2013. Which cost head did this relate to? I could not catch that clearly. That's question one.

Question two. You talked about 8m households already for broadband and you have about 3m broadband subscribers as of December. Could you share with us what your broadband target would be maybe for 2014 or 2015?

Thirdly and lastly, if there's any update on what you plan to do with the tower business, particularly with regard to the initiatives you've talked about with regard to Mitratel. Thank you.

I will direct the three questions to three different individuals. The first one I would direct to Pak Honesti on the once-off cost. Number two, on the household broadband question, I would direct to Pak Rizkan. And number three, I will direct the tariff business to Pak Indra.

Okay. Let me explain again regarding the changes of accounting standard in -- about the provision on the (background noise) expenses. If you compare with 2012 and 2013, in 2012 we did the individual assessment for our enterprise segment. If we recall the number at the time, for individual [assessments], we booked IDR381b [PFS] cash expenses. And also the same thing in 2013. But when the accounting standard is changed, we also did the collective impairment for the provision expenses that we get from the enterprise segment. But with these non-cash expenses the impact is around IDR674b. So that's why the total number from 2012 up to 2013 is increased a little bit higher. Thank you.

Thank you, Pak Honesti. And which cost head is this is reflected in? Is this within the O&M expenses or within some other cost head?

This cost was on G&A.

On G&A. Thank you.

Yes. And these costs are in line with our deployment in BTS for Telkomsel.

Okay. Question two on the 8m households and broadband ramification, I'll hand over to Pak Rizkan. Pak Rizkan?

Okay. Thank you.

And for my question?

[Fixed] broadband subscribers has already grown by 28.7% and we expect next year will be -- and in 2015 will be 5m subscribers. Thank you.

Third question to Pak Indra on the tower business strategy.

Right. Okay. Thank you. Regarding the unlocking the tower business strategy, we have a -- the criteria to unlock the tower has been already mentioned maybe in the previous conference that we would like to have -- the first criteria is to optimum value from this unlocking. Second is to -- how to execute -- bid in terms of execution. Third is about certainty that this action will happen with a minimum risk. And the fourth is about securing the long-term interest on Telkomsel.

So by applying these criteria we apply -- currently there are five approach that we can do for unlocking tower business. First is by maybe selling the tower. Second is merging the Mitratel with other tower companies. The third is back door listing through the already public listed company -- a tower company. And then the fourth is IPO. But we also add one more option, what we call as doing nothing.

So we compare among these five. And I think by using those four criteria we come into two best options for next tower, getting in the best form to be unlocked. The first is back door listing. It means we go to the public offer to going public through a public company which already has been in the market. The second is IPO by ourselves.

So currently we do these options parallelly. And we do the evaluation very neatly, very thorough. Hopefully we will -- we can compare and make decision which one is the best option by beginning of third quarter. Then after that we will ask for approval. Then hopefully we will get the review about the process, about the legal and about the optimum value of the option that we choose. Then we expect if this then can happen, we predict that the unlocking implementation will be in the third quarter of 2015.

That's very clear. Thank you.

Next question.

Arthur Pineda, Citi.

Thanks for the opportunity. Three questions for me. Firstly, what percent of your subs base are now on smartphones and what percent actually regularly use data at this stage?

Second question I had is with regards to dividend. Any guidance with regard to the dividend payout ratios for FY13 and 2014?

And last question I had is again with OpEx. Sorry to belabor the point here. You seem to have booked these expenses for two years in a row and you've mentioned IDR674b in non-recurring expenses in 2013. Are we correct to assume that going through 2014 we should just simply strip out these costs altogether? If so, I'm just wondering why the EBITDA margin guidance is flat to declining. Thank you.

Can we have the first question to the Telkomsel folks from [Pak Heri], himself for smartphone and data, Edward.

Hi. This is Edward. On smartphone, at the moment Telkomsel has approximately [24m] subscriber base on our network. And on data user we are now close to just about 60m user on data -- data user on our networks.

Sorry, 60?

60m.

Thank you.

Thank you.

On the next question I'll now hand it over to Pak Honesti.

Yes. For dividend guidance, management proposes the same scheme with last year, [55%] consists of 55% as cash dividend, annual dividend and 10% as special dividend.

OpEx. Yes. I think as our guidance mentioned by CEO, we try to keep -- maintain the EBITDA margins flat or maybe slightly decline. But we also know that -- about Telkom continues to expand the network. And I think this has also increased cost a little bit. But despite that, we also continue the cost optimization strategy, just to control our cost and keep the profitability for us still flat or maybe slightly decline.

I'm just curious because you mentioned that IDR674b for 2013 is non-recurring. If we strip that out, should we not see an improvement in the margin?

I think margins as we maintain, yes. For 2013, adjusted margin is increased from 54.1% to be 54.5%. This is the adjusted margin. So if we compare that if revenues increase by [7.5%] and expense just only increase 6.4%, means that our revenues will increase the growth bigger than growth in expenses.

Okay. I may add. Heri speaking here. I may add some additional information for you. On the cellular side we see that 15% of our cost is in the US dollars. So if we compare to last year, it is supposed to be a bit higher in rupiah. And then we also come into the -- I think data that you know the margin is not really as big as the legacy services. That will give us some pressure on the margin. But as the guidance has been provided to you, we do some cost optimization in order to maintain our margin and also have a lot of initiatives for making efficient in design and also using our excess scale. At the end we try to maintain the EBITDA margin of slightly liquid compared to previous years.

Okay. Thank you very much.

Next question, please.

Choong Chen Foong, BNP Paribas.

Hi. Thanks for the call. Three questions from me. Firstly, could you give us more color on the new remuneration scheme at Telkom? What was the average increase in salary? And is there another hike scheduled for this year?

Secondly on the international operations in Malaysia, could you give us an update on the progress so far? And what are your plans and targets for this year?

And third question, with the shutdown in the Flexi networks, are we expecting any cost savings to come out of that?

About the new remuneration scheme, because -- this we did because we want to in line the increasing inflation of Indonesia. So every year we try to compensate the salary of our employees and refer to the increasing of inflation. And also we did this adjustment for last year. But for 2014 we predict increasing of the personnel cost is not more than 4%. But our inflation is predicted around 6%.

Well, in -- we did a study of the operation in Malaysia last November, I believe. And in Malaysia we'll be more focusing on the MVNO which we are targeted, especially for the Indonesian community in Malaysia, which in total we -- there are about 1.5m Indonesians officially, but unofficially can be as high as 4m. On top of that, then we are also targeting the traveler which coming back and forth between the two countries. Per year it's about 2m.

We use Telkomsel brand in Malaysia so we do hope that this can be more acceptable by the people in Malaysia. And this year we target that at least we can have about 100,000 subscribers.

Thank you, (inaudible). The next question goes to (inaudible).

Okay. Regarding the plan to [retrench] the CDMA business, yes, one of the activities to shut down, we first shut down the [rep] area, the area which giving negative contribution or negative income. In terms of [start], we set a criteria that we start with the tower or the BTS where the contract already expired. So we're not extending the contract.

Then the strategy to shut down, actually we have to also consider the continuity of the service. That's why we try to make these shutdown activities in the most efficient way. So the strategy is that we let our subsidiary, which is Mitratel that has the competence to run the tower business. So we [consult] or we transfer all the tower -- Flexi tower of corporation into Mitratel.

So we expect from that scheme there will be saving around 50%, we expect from the scheme, because from the remaining economic value of the tower, Mitratel can sell to other tower providers. Hopefully then Mitratel can leverage or create value-added revenue from selling to other tower providers from the remaining leasing time of Flexi. So hopefully we can save around 50% of the -- if we shut down just as it is to our current tower providers because the contract is quite strict. If we shut down we have to pay in the full leasing cost. So by migrating it to Mitratel we can save around 50%. Thank you.

Next question, please.

Pankaj Suri, Nomura.

Hi. Thanks for the opportunity. My questions are on cost again. Number one, how should we see some of the cost items going forward? Namely first one is the impairment of Flexi. Can we expect now the impairment this year?

Then for the (inaudible) cost, should we assume that whatever we find 4Q 2013, is that the way forward? And on O&M cost, how many more towers can be brought under financial lease over the next couple of years?

Then in terms of one-offs, my apologies, we're still not very clear. So can we request management to kindly send us a list of all the key one-offs to us along with their impact? That would be extremely helpful.

Then my last question is if you can tell us what's the strategy on international business and where exactly is Telkom trying to expand at this point of time? Yes. That's all from me.

Okay. On the first question, there are several parts to your first question, so I hope I've got everything. So I'll hand it over to Pak Honesti.

What is the second question?

The second question, can you repeat it again? It's -- I think it's on which areas geographically. But please, can you repeat your second question?

yes. Are you going to try -- because I was asking that for the international business, where -- which are the countries that Telkom are trying to expand.

Okay. So the second question, let me rephrase that. You're asking us which are the countries are we expanding and what is our international strategy. Okay. So the first question I'll hand over to Pak Honesti.

Okay. I will take the I guess about the impairment for Flexi. Based on our full-year 2013 results, impairment of Flexi amounting to IDR496b and it is one-off transaction. This is based on our best estimates on capital projection from (inaudible) industry in Malaysia, where we all know that CDMA feature in Indonesia is dying out. And also we -- the calculation of the impairment of Flexi also incorporates with the problem of Indonesian macroeconomic conditions and we set some assumptions and we predict about the growth of CDMA. And if we see that the business value of the Flexi is lower than the book value, we did the impairment. But we have also in the explanation, we have initiative to move CDMA business to Telkomsel and we see that maybe this year we can solve the case of Flexi, including the impairment of Flexi.

And the second question on how much the tower lease will come to the operating lease, and how much it will be versus the finance lease. It's around 60% approximately will go to the finance lease. The remaining goes to the operating lease.

In terms of numbers, will it be possible to quantify how many more towers can we expect that Telkomsel will be leasing this year? Any ballpark would be very helpful.

Heri?

Maybe around 6,000 about for operating lease.

Okay. Okay. Thanks for that.

And on the international side, we will fully expand to other countries with -- but it's reasonable that we will only expand where we can see clearly that there's a potential. One of the strategies is to fully expand to the country where the Indonesian people are living there. For instance, after this we will take a look on the Middle East. Probably we'll provide MVNO or MVNO-like business.

Middle East is a big potential-wise because there are so many, a couple million of Indonesians who live there. And every year about 2m people going for the Hajj and Umrah. And other than that, then we also take a look at the expansion to follow the traffic. And this is basically we want to leverage the potential of our [iBall]. We have a huge iBall and certainly we want to take the opportunity of doing that, successfully developing the network and include the CDMA business. Thank you.

Next question, please. Thank you.

Okay. Thanks.

Varun Ahuja, UBS.

Yes. Hi. Thanks for the opportunity. Again just emphasizing on the operating lease and finance lease, I suppose it was asked earlier also but I couldn't understand. So if you're increasingly converting your operating lease to finance lease, your O&M and telecom services expense should come down and there should be an increase in interest expense if you're treating the finance lease part of it as interest expense. But we don't see this happening so I just wanted to check where is the gap.

And also your depreciation and amortization expense for the last two quarters, it has been going up. I believe it's also a reflection of finance lease. But I think you had some impairment also by IDR26b. So should we assume normalized depreciation and amortization of IDR4.2 trillion for going -- per quarter going ahead? Thank you.

Heri, you can answer this one.

Yes. Okay. On the finance lease and operating risk, again, we already explained to you that actually around 5,400 of our towers goes to the operating lease and around 7,000 recorded as finance lease. How we classify this, because based on the rule, whenever we occupy most of the value of the towers will be becoming finance lease. So that is the rule.

Based on that one, we follow the rule. And the more we got the tower in category of us tower selling or co-lo, that will go to the finance lease. But if we continue to bring the tower to the new sites, I think the that will be operating lease. That's why going for what we believe the tower will -- most of the tower will go to the finance lease.

And then the question how -- what happened to the cost in Q4 in O&M or why that increase was significant. We have some cost that we recognize after all the administration is completed and so on by reconciliation. So because of that in the last quarter we have the reconciliation to normalize all the costs that we should record. And we have some growth in the network service centers, which basically is the cost for the tower. And also cost for the power, which is also increased because of the price of electricity increase. And some of repair and maintenance which regards the numbers of BTS growth.

So going forward, how it may happen. I think since the beginning we already said that we already actually predict the margin will be with the margin around 56% and net income margin will be around 29%. So it is a matter of how we recognize the completeness of documentation to recognize. But since the beginning we know that the cost will be that way.

Going forward, looking forward, I think Arief, our CEO, already explained, this is the trend we are looking forward. And we hope we can [extend] the trend for the full year.

Thank you. That's helpful. On depreciation and amortization, can you -- is it IDR4.2 trillion? Is this quarterly? Is it consolidated basis is the right way for future or is it going to increase substantially?

I think they are asking what depreciation in consolidated basis.

Yes. I think we follow the standard accounting for the depreciation. That's on the how many deployment that we did in the last year. For example, for tower, back to the tower. I think tower, why we -- our depreciation increased is because we changed our treatment from operating lease to financial lease, means that the tower lease is treat like asset. And for asset, we did the depreciation, based on the life of the asset itself.

Okay. This IDR526b impairment, is it in depreciation and amortization for the Flexi?

Yes. Impairment Flexi we put as asset depreciation.

Okay. I got you. I got you.

I think that was our last question and we have time for another one question. Yes. We have time for -- one more question, please. Operator, can we have one more last question, yes?

There are no further questions at this time. I will now hand the call back over to the speaker for any additional remarks.

Okay. Sure. Thank you.

So thank you, everyone, for participating on today's call. I apologize for those whose questions could not be addressed. Should you have any further questions, please do not hesitate to contact us directly. Thank you.

That does conclude our conference for today. Thank you for participating. You may all disconnect.