Telkom Indonesia (Persero) Tbk PT (TLK) 2016 Q2 法說會逐字稿

Thank you for standing by and welcome to the Telkom first-half 2016 results conference call. (Operator Instructions). I must advise you that the conference is being recorded today, Tuesday August 2, 2016. I would now like to hand the conference over to your speaker today, Mr. Andi Setiawan. Please go ahead.

Ladies and gentlemen, thank you for standing by. Welcome to PT Telkom Indonesia first half ended June 30, 2016, conference call.

We released our results on July 27, 2016, and the reports are available on our website www.telkom.co.id. Today's presentation, is available on the webcast and an audio recording will be provided after the call for the next seven days.

There will be an overview from our CEO, and after that all participants are given the opportunity to participate in the Q&A session.

Before we start, let me remind you that today's call and the responses to the 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 risks and uncertainties and may cause actual results to differ substantially from what we have 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's my pleasure to introduce the Telkom's board of directors who are joining with us today. Mr. Alex J. Sinaga as President Director and Chief Executive Officer; Mr. Harry M. Zen as Director of Finance and Chief Financial Officer; Mr. Abdus Somad Arief as Director of IT Network and Solution and Chief Technology Officer; Mr. Honesti Basyir as Director of Wholesale and International Services; Mr. Indra Utoyo as Director of Innovation and Strategic Portfolio; and Mr. Muhammad Awaluddin as Director of Enterprise Business Services.

Also present are the Board of Directors of Telkomsel, Mr. Ririek Adriansyah as President Director; Mr. Heri Supriadi as Director of Finance.

Before Pak Alex delivers his remarks, I will take this opportunity to give a brief overview of Telkom Indonesia.

Telkom is the single largest integrated telecommunication company and network provider in Indonesia. Telkom provides a strong business portfolio of TIMES; Telecommunication, Information, Media and Edutainment. We also deliver services to multi-customer portfolio in retail, enterprise and wholesale.

As of June 30, the majority shareholder of ours was Government of Indonesia, with 52.1% ownership, and the remaining 47.9% was under public ownership.

I now hand over the call to our CEO, Mr. Alex Sinaga, for his overview. Pak Alex, the time is yours.

Thank you, Andi. Good afternoon, ladies and gentlemen. Welcome to our conference call for first-half 2016 result ended June 30, 2016. And we extremely appreciate your participation in this call.

Ladies and gentlemen, in the first half of 2016 we continued strong performance both in terms of operational and financial. Telkom successfully achieved triple double-digit growth for the first half of 2016. Our revenue grew 15.6% year on year, while EBITDA and net income grew 22.8% and 33.3% year on year, respectively.

We also successfully maintained healthy level of profitability, with EBITDA margin of 51%, improved from 48% in the first half last year. Net income margin was recorded at 17.6%, increased from 15.2% last year. Data, Internet and IT services grew sharply by 50.7% year on year. As a result, its contribution to total revenue also increased significantly to 40.1% from 30.8% last year. In the meantime, our expense increased by 8.5% year on year, lower than revenue growth, partly driven by operation and maintenance and marketing expenses.

Operation and maintenance expense, which accounted 44.2% of the total expenses, grew by 14.6%, in line with the continuous infrastructure development both in cellular and fixed line businesses, in an effort to grow digital business growth. Marketing expense increased by 22.3% year on year due to active promotion in 4G LTE and aggressive marketing and sales activities on the occasion of festive Ramadan season.

Our strong results in first half of 2016 were in line with solid performance of our cellular business. Telkomsel gained almost 5 million net additional customers during first half 2016, brought total customer base to 157.4 million, amidst relatively high SIM card penetration and heating up competition.

Telkomsel continued expanding its network and infrastructure aggressively by adding more than 15,000 new BTSes during the period, with around 90% 3G/4G BTSes, reflecting our focus on growing the digital business. As a result, mobile data payload increased significantly by 82.7%, with strong smartphone adoption, which increased 45.7% year on year to 70.1 million users.

Ladies and gentlemen, Telkomsel continued its strong performance during first half 2016 and again delivered another triple double-digit growth in revenue, EBITDA and net income, which grew by 16.1%, 23.9% and 32.7% year on year respectively.

Revenue increased to IDR41.1 trillion, with digital businesses continued to be the growth engine with [46.7%] year-on-year growth. Digital business contribution to total revenue substantially increased to 34.6% from 27.4% last year.

In legacy business we are still able to sustain healthy growth in voice, which grew by 8.5% year on year, mainly attributable to higher usage, which increased by 14.7% year on year. It's mainly due to improvement in network quality, successful voice package products, as well as growth in our customer base. While revenue from SMS grew by only 1.7% year on year, driven by the decline in SMS traffic of -16.1%. We have cautioned that popularity of instant messaging application is inevitable and predict further deceleration in SMS growth.

Ladies and gentlemen, on the fixed broadband side, our flagship product IndiHome triple-play recorded total subscribers of 1.5 million. We keep enriching our content of IndiHome so that our customers now can enjoy 95 TV channels for basic package. Besides linear content, we also provide video streaming service such as iflix, CatchPlay and Viu to enhance customer stickiness and attract potential subscribers.

To accelerate IndiHome expansion throughout Indonesia, we continue to enhance our human resources, both in terms of capabilities and quantity. In June 2016 we had 4,400 fiber technicians for IndiHome installation.

Ladies and gentlemen, on June 29, 2016, we successfully placed out 864 million of our treasury shares, with net proceeds of IDR3.25 trillion. These proceeds mainly will be utilized to support our capital expenditure and recapitalization of our subsidiaries. The transaction was the biggest treasury share placement in Indonesia by far.

Ladies and gentlemen, now we'd like to share with you on the asset-leveraging initiative that we started this year. Telkom has an available asset in the form of unutilized land bank as we have around 1,200 hectares, and we plan to develop these assets into assorted investment property projects. In the first stage, the development will be focused on enhancing operational efficiency by providing office space for the Group.

In 2015 we spent almost IDR1.1 trillion for office space rental in various place. And we intend to significantly reduce this rental expense over time by developing office building on our land bank.

Now let me reiterate guidance for the full year 2016. With strong set of results in the first half 2016, we expect both Telkom and Telkomsel's revenue to grow better than market rate by continued effort to increase digital businesses revenues. We estimate that the industry will grow by around 10% in 2016. EBITDA margin is expected to slightly decline in line with continued infrastructure development and revenue shift from legacy to digital business.

Capital expenditure for the Group is expected at around 20% (sic - see slide 17 "25%") of revenue, with investment focus on mobile and fixed broadband infrastructure.

That's the ending of my remarks. Thank you.

Thank you, Pak Alex. We will now begin the Q&A session. When raising your questions, please speak clearly and state your name and your company. Operator, may we have the first question, please?

(Operator Instructions). We will now take our first question from Miang Chuen Koh from Goldman Sachs. Please go ahead. Your line is open.

Hello. Three questions from me. First is on mobile. The first-half postpaid ARPU declined year over year. Can you talk about why that is the case?

Second question is on fixed broadband and on IndiHome specifically. The ARPU was about 300,000 at the end of first half of this year. This is lower than in the first quarter. This is a bit odd as we see that your price plans are generally fairly stable. So can you explain why it declined? What are the expectations ahead?

Last question is also on the IndiHome, just a question on the subscribers. So you reached about 1.5 million in first half of this year, so it's about 400,000 additional subs since the end of last year. So this is a bit behind your run rate of last year. So perhaps you can give a guidance of subs target by end of the year. Thank you.

Okay. Thank you for the question. Heri Supriadi speaking here from Telkomsel.

On the postpaid decline of ARPU, this is mainly coming from because we increased the number of M2M subscribers with the lower ARPU for our line. The second, we're also addressing our high-value prepaid customers, so bring them to becoming postpaid subscribers. It is lower ARPU compared to the, I think, most of the regular postpaid that we have already. So that brings altogether to end up rate becoming a bit declined, but in total still increased.

So for second and third questions, this is Abdus, CTO of Telkom Group.

So first, about the ARPU of IndiHome, it has slightly declined from first half -- first quarter 2016. It is because of we are introducing a new package that is targeted for competitive areas that are already grabbed by our competitor. It is to grab the demand that's there. And this package, a little bit slightly below the existing price, but we have a basic price and add-on as an option for the customer. So it will impact this quarter and the target of our ARPU, then around 300 right now, until the full year.

Second, about the subs, it is 1.5 million. It is -- the demand is still there. We are sure that it is still strong demand. We prepare already the plan that we plan from the beginning of the year about the people, the technicians, about the IT tools and also the infrastructure. It is well-prepared and now it is ready in the market.

We still have some problem in customer site and also in the field. For example, the wiring in house of the customer. It is a transformation of knowledge of the people and also the contractors. So the speed of the contractor still a problem for us, therefore it is a little bit behind. But we are now changing the standard of the in-house wiring. We use an alternative, not using fiber optic, we also will use [UTP] cable.

So by this approach, we do hope that the speed of the sales can be improved, and expected will be around 2 million until the full year. Thank you.

Thank you for that. Maybe if I could follow up just quickly on a couple of things. Can you describe a little bit on the mobile side? You talk about the M2M subscribers. What kind of M2M subs are you talking about?

Then secondly, again on the IndiHome, I didn't quite catch what you mentioned earlier. You said that instead of using fiber optics, now what are you using now again to wire the housing?

Hi, this is Edward Ying speaking. The M2M, there are many services we offer into the market. One of them, predominantly they are actually now serving the EDCs, which means now we can measure whether the EDCs, those are the machines when you pay your Visa Card, your MasterCard, you swipe. Now we can measure the uptime, we know how many transactions they do. So I like to use the word most of the banks in Indonesia are working with us.

I think for numbers, I don't want to disclose. But I would like to say that we are close to 200,000. Okay?

And yes, not in such a major scale will be our T-bike and our OBU that measure past performance and management. These are some of the new services that we put on the market and trying to get traction on it and scale. So this is predominantly what we do, there are new services coming onboard shortly.

I hope I answered your question. Thank you.

Regarding the indoor cable, yes, it is an option to use again copper, but it is UTP cable. Since the bandwidth that require for triple-play is below 100 megs, the spec of UTP cable still reach that speed. So it is an option. And the contractor is more ready for this kind of installation. Therefore we choose this option instead of also still installing the fiber. Thank you.

Got it. Thank you.

Our next question comes from Colin McCallum from Credit Suisse. Please go ahead. Your line is open.

Yes. Thanks for the opportunity. Just three questions from me. First of all, just on the IndiHome ARPU question, could you split for us the ARPU level that you're getting from fiber customers that are IndiHome versus the ARPU level from non-fiber IndiHome customers? If you could give us those two numbers, that'd be helpful.

Second question is just on CapEx. I think in your introduction you talked about CapEx-to-sales ratio of about 20%. I think previously you'd talked about CapEx to sales of maybe 20% to 25%. Were you just abbreviating what you were saying in the intro there or is it actually a reduction to 20% from previously 20% to 25%? Just want to get your meaning there.

And then the third question is just on one-off items. I know there's a couple in the second quarter. Can we expect further one-off items, for example, early retirement program charges in the second half of this year? Any color on that would be helpful. Thank you.

Okay. For first question regarding split between ARPU, fiber and non-fiber. So the fiber ARPU is around IDR350,000 per month. And then non-fiber is around IDR250,000. So in blended we get IDR300,000 per month.

Okay. Thank you.

Hi. It's Harry here, CFO of Telkom. On the second and third questions, our CEO did mention it was 25% of sales. So that's -- not 20%. So that's the guidance towards the end of the year, 25%, in terms of CapEx, of sales.

So for the ERP, towards the end of this year we have budgeted totally around IDR400 billion for ERP that would be hopefully completed within the third quarter of this year.

Also in Telkomsel IDR150 billion additional.

Thanks, Pak. So, just to check, so I think those IDR200 billion was accrued in second quarter. So does that mean an additional IDR400 billion will come in the second half or just an additional IDR200 billion?

Total would be more or less IDR400 billion. So additional IDR200 billion will be coming in in the third quarter.

Okay. That's very clear. Thank you.

Plus another IDR150 billion on Telkomsel side, also for ERP. That will be coming in third quarter as well. Yes.

Okay. Thank you.

Our next question comes from Choong Chen Foong from CIMB. Please go ahead. Your line is open.

Hi. Thanks for the call. Three questions from me.

Firstly on the Telkomsel margins, that was very strong for the first half of the year. Do you think that's sustainable going into the second half or do you see any sort of cost pressure coming through that might actually cause your margins to ease half on half?

And then second question, on the IndiHome side, right, can you tell us a bit about the content cost? At IDR300,000 ARPU, is it profitable given the fact that you said you have 95 channels and all that? Is the content cost a big cost element there?

And third question is on the -- you mentioned about the development of some of your land bank and you could potentially save about IDR1.1 trillion in rental cost. Can I understand when that might be realized because I realize -- I'm aware that you have a building that's being constructed next to your headquarters. So is it about to be completed very soon and therefore you start to get the savings on the rental?

Okay. On the margin side on Telkomsel, if you see -- because actually this year we have one day more in February. It was 29 days as compared to last year 28 days, so we record about IDR229 billion additional revenue from that day. And then the second, last year we did record some one-time expenses in early retirement program, which was about IDR161 billion. And also the settlement of USO case in which we need to record as expenses about IDR102 billion, which not happened this year. That's altogether bring us to better ARPU, better margin compared to last year.

So how the figures until the end of the year, as we always mentioned to you, actually we're growing our business finally coming from the data, which gives us less margin compared to the legacy. So our guidance still, we say that by going to the -- more to digital and data, the margin supposed to be decline a bit. But we try to do our best to maintain our margin at least similar to last year.

So regarding the second question, the content cost. Content cost in IndiHome, it is -- there are two, I guess, two basic package. First, cost for the content is around IDR30,000. And then the higher package costs around IDR60,000. So it is still in the corridor of the pricing. And then EBITDA margin is around 20% until 25%, yes? 25% to 30%. So it is profitable.

Yes, for the third question, one building has been completed, which is the new office of Telkomsel. So Telkomsel, their previous head office used to be an external building. So they just moved to the new head office about two months ago. And another building, which is going to be the new head office of Telkom Group, is also in the final stage of construction. We are hoping that this will be completed in the next two to three months.

And then we are in the process of preparing construction of smaller offices in a few different cities in Indonesia, both for Telkomsel and for Telkom.

So the cost savings will come through in -- starting to come through next year?

Yes. We believe that we would realize some cost savings starting next year. It's just that in terms of amount, we still cannot figure out by how much. Some of our subsidiaries that are currently still occupying external buildings are going to move into our new head office towards the end of this year. So we'll have less rental expense by next year.

Okay. And one last bookkeeping question. What is your ARPU for non-IndiHome broadband subs, i.e. your former Speedy subscribers?

So the old ones, Speedy, from IDR100,000 until IDR150,000, so below the IndiHome.

Okay. But do we have an exact number for the second quarter?

Second half or second quarter?

Second quarter, yes.

Okay, it is around IDR135,000.

Okay. All right. Thank you so much.

Okay.

Our next question comes from Jimmy Chen from Bernstein. Please go ahead. Your line is open.

Hi. Thanks for the opportunity. First question on the stock placement. Just want to understand why the placement -- I understand you said it's to fund CapEx, but I remember a few years back there was a plan to increase dividend payout, correct me if I'm wrong. So why the need for extra capital when there was originally a plan to return capital?

And the second, in terms of the pricing for the stock placement. How did you decide the current price at which you placed it at?

Third question on the land bank, the investment properties. I heard at the beginning that this is the first phase. It sounded like there are further phases. Just want to clarify whether you're only developing properties for your own needs or are you also entering into the property investment business?

And lastly, also clarify on the ERP. I heard it's ending Q3 this year. Is that the end of the ERP program altogether or will there be further terminations or early retirements in the next few years? Thank you.

Yes, thanks for the questions. For the treasury stock sale, as a state-owned enterprise, it is very complicated for us to get approval to, let's say, do anything else besides selling. So let's say if we want to cancel it, it's very complicated for us to get the approval. So the proceed that we get, we are going to use it to, partially, to support our CapEx, and as well as to recapitalize some of our subsidiaries.

In terms of the pricing, there is one clear local regulation issued by OJK, the capital markets supervisory body, that the price -- the sale price has to be not lower than the average of the buying price and has to be not lower than the closing price of the -- on the day -- on the previous trading day. So hence the price that we executed the treasury stocks at was IDR3,820, which is on par with the closing price of the previous trading day. Okay.

Sorry, just to interject there. On the pricing, was there any kind of valuation for the Company that was done in order to determine what the appropriate purchase or sales price of -- would be for the stock?

Say that again, please?

Was there any kind of valuation done to price the Company's own stocks and decide what the current price is appropriate for selling?

No. We simply have to follow the OJK regulation.

Okay.

Okay. On the asset leverage program, we do have some plan to enter selectively and carefully commercial property projects. We are currently talking to some potential partners, including some reputable retailers' names. But we expect that these commercial property projects will be starting in next year. So this year will just be a preparation stage. Yes.

And on that, two more questions. One, will you be only providing the funding and the planners will be doing the construction, etc.? And also how much capital -- how much CapEx are you planning for this? Thanks.

We are still in the process of preparing the budget as well as the capital. With regards to funding, there's always an option whereby we would co-invest together with some potential partners.

And on your last question, on ERP. We do expect to continue ERP at least, as the current plan, up to year 2020. Obviously we need to consider the Company's condition before we execute -- before we execute the plan every year going ahead until 2020.

Understood. Thank you.

Our next question comes from Arthur Pineda from Citigroup. Please go ahead. Your line is open.

Hi. Thanks for the opportunity. Three questions from me. Sorry if this has been asked before, but IndiHome take-up seems to have decelerated in the second quarter. What's driving this? Is the demand softening or are there bottlenecks in some areas?

The second question I had is with regard to IndiHome pricing. If I recall correctly, this was being discounted quite heavily in the market initially when you are rolling out. Are we seeing any changes with regard to the pricing strategy for IndiHome?

Third question is with regard to the regulations. Any update on the interconnection rate cut and the proposal to cap off-net versus on-net rates? Thank you.

So regarding the demand, yes, -- we are still optimistic about the demand. So our third and fourth quarter will be -- we expect that the sales will be higher than the first and second quarter. Therefore, we are optimistic take-up rate at least 2 million in the end of this year. So by accelerating not only the infrastructure we have, but also all the stakeholders that are involved in this sales activity, including, as I mentioned previously, the contractor of house wiring, installation that has now become a little bit of a problem for us because the speed and the numbers of the contractors not sufficient for today, and we collaborate already with the association of the contractors. We do hope that that would be accelerating the speed of the sales.

And the second about pricing, yes, we introduced discount for entry level, but not more than 20%. And we introduced also add-on of the new packages. And we haven't calculated yet the ARPU for this add-on packaging, such as new channels and also some initiative in digital services. So we will check up the ARPU next quarter. Thank you.

Hi. Honesti here. Regarding the interconnection new regulation, still in progress, not finalized yet, but we predict that maybe the fastest time is around September. All the operators still discuss with the government how to get the best solution for interconnection regulation. Thank you.

So I have one follow-up question with regard to your capital. You have obviously cancelled the Teleguam deal, plus in addition you've raised capital with your share sale and you've got more in your books. What should we expect to see with regards to the freed-up capital? Do you expect to just reinvest that into the business or is there room for you to actually raise payouts?

Yes. That will be used for our CapEx and obviously it will be additional war chest for potential M&A in the future.

Very clear. Thank you very much.

Gopa Kumar, Nomura.

Thank you for the opportunity and congratulations on a good set of numbers. Sorry, I missed the early part of the call so sorry if you've already discussed this. I have three things that I'd like to understand.

Firstly, can you talk a bit on the medium-term growth outlook for Telkomsel? What's your plan to address any potential impact of data cannibalization risk in the longer term?

Secondly, can you help me on the [sale] of IndiHome. Do you disclose the split between fiber versus non-fiber customers? And going forward, would you -- what's the plan? Would you plan to add or plan to focus more on fiber subscriber additions, and what does that mean, or is it on the non-fiber and what does that mean to ARPUs?

And thirdly, a bit of housekeeping. In terms of your 2Q results, was there any benefit from hari raya shifting forward by a few days? And if that's the case, consequently how would the growth in the 3Q -- would there be an impact on 3Q growth rates from this? Thank you.

Hi. This is Edward. I will try to address the question about the medium-term growth of Telkomsel. I think Telkomsel will continue to grow in a mix, in the term, whether it's 6 months, 12 years. I think there is still demand on the wireless business. There's still huge demand on broadband business. But surely one thing, we see pressure in SMS, we see voice continue to grow but SMS continue to face pressure, meaning less usage. But our next wave of growth we are looking at introducing, like we said earlier, we got M2M customers, and we look at the new growth in financial FinTech strategy using TCASH, and other management and M2M and IoT that we hope will grow in the next -- maybe longer term in the [future].

So in the short term and to summarize, I think we'll continue with voice, data, that would be our key driver in the next 12 months. Notwithstanding the competition, I think there is still demand, and especially in data in the business, so we believe we were able to continue the growth as we earlier stated. We continue to believe that in the next -- we will finish the financial year closing at double digit.

I hope that answers your question.

So for the second question --

Okay. You say the double-digit -- I'm sorry. Go ahead.

Okay. Thank you for the question. So regarding fiber versus copper, so we are focusing on adding of course new subscriber from fiber. For time being, the new sales come from fiber on average between 70% to 90% per day. So most of the new subs are fiberized.

And then -- about the ARPU, of course from the fiber, we expect more ARPU in the future. And we are preparing the aggressive promotion for additional [STB], means the second or third TV at home, and then also the content from our subsidiary from MelOn, for example and then we already have Karaoke features there and so on. So by this fiber infrastructure, we can deliver more services, then we will be adding a new revenue, a new ARPU for us. Thank you.

Thank you. If I may just have a follow-up question. Can you -- is it possible to disclose the current split of fiber versus non-fiber subscribers on IndiHome?

So from the IndiHome subscriber, there are 68% from fiber. The rest are still in copper.

Thank you.

Our next question comes from Roshan Raj from Bank of America. Please go ahead. Your line is open.

Hi. Thanks for the opportunity. Three questions. First on IndiHome, could you share some medium-term targets for two to three years out, what sort of homes connection are you looking at?

Second is on depreciation and amortization at the Group level for Telkom. It dropped quarter on quarter, so what was the reason for that? And then what sort of trend should we expect for the full year?

And third bit is on network-sharing regulatory update. Has there been any information from the ministry and what aspect is this regulation likely to address? Thank you.

First on the number three, on the network sharing side, so far the regulation -- the new regulation on network sharing is not finalized yet. But the main principle that we anticipate on this is actually it will be based on B2B. It's not going to be a mandatory sharing. So I think that's okay for Telkomsel and it will not have any big impact on us.

So the question regarding the medium term of IndiHome, so we are planning to build 10 million more homepasses, with expectation around 60% will be connected houses, means our subscriber, within two -- up to three years from now. And then it is more efficient because the infrastructure will be used not only for IndiHome; it is also used for Telkomsel and other licensed operator and also for corporate customers. Thank you.

For your questions regarding depreciation and amortization, we expect that this expense will grow by low single digit for full year 2016 from what we have in 2015.

Okay. Thank you for your response. Just on IndiHome, I wanted to reconfirm, I heard it is EBITDA-positive, but is it positive at earnings level, net profit level? Some sort of color there will be helpful.

Until now we still do not disclose down to the net income level for IndiHome.

All right. Thank you, Pak.

The next question comes from Prem Jearajasingam from Macquarie. Please go ahead. Your line is open.

Good afternoon and thank you for the opportunity. Two questions from me. First of all, could you remind me the asset revaluation exercise that took place last year, I believe there were some tax implications. Could you help us understand what the tax rates are likely to look like for the full year? That's one.

And secondly, on the spectrum auctions, do we have any further updates on that? And how do you -- if you only won one block in each of the 2100 and 2300 blocks, would that be sufficient for Telkomsel or do you think that you need more spectrum? Thank you.

Okay. On the first question, in Q4 last year we paid IDR750 billion as part of the asset revaluation for tax purposes.

We hope or we plan to book the revaluation outcome by Q3 this year. The government would charge either 3% or 6% of capital gain as a result of this exercise.

So the tax charge was IDR750 billion that was paid?

Yes.

On the spectrum auction, so far we have already several meeting with the regulatory. But the schedule -- the detailed schedule and the rules is not finalized yet.

On the additional spectrum, yes, if you take a look at Telkomsel, it's probable we have the most dense spectrum use compared to the others because we have the biggest customer base and our spectrum is quite similar with the other operator. So the answer is yes, we will submit or we will get -- try to get additional spectrum. The most likely case is that on the 2100, there will be two 5-megahertz blocks and we do hope that we can get one of -- at least one block. Thank you.

As a follow-up, if I may, do you think that the spectrum auction could be the impetus for greater competition, especially if someone like Hutch were to secure further spectrum in both the 2100 and 2300 bands?

Well, there are -- this is what we -- the information from the ICT minister is that only the operator, the existing operator will be invited to the auctions. And if you take a look at the whole picture, then the need of spectrum is not at the same level. For some, like us, it's sort of very, very -- we have probably the biggest need of spectrum, additional spectrum. And then also there are other operators who need more spectrum because of the density of the subs base.

But if you take a look on the nationwide, it's probably Telkomsel, the most that need spectrum. Some operators has very dense in certain area, but their spectrum is not really fully utilized on other areas.

Does that answer your question?

Yes. Thank you.

Our next question comes from Sachin Mittal from DBS. Please go ahead. Your line is open.

Yes. Thank you. I have three questions. Firstly on the top line. We have seen that SMS and voice recently declined in (inaudible) -- the decline is seen in countries like Thailand, and everywhere, but Indonesia, it is still growing. So wondering what kind of smartphone penetration do you expect that to happen -- the legacy revenue starts to decline. And where are we right now in terms of smartphone penetration for Telkomsel customers? That's question number one.

Question number two is on the cost side. What is your current 4G penetration levels? I guess it was around 15% last quarter, so where are you now and what's the target for the full year? And does it mean that your tower leasing has to accelerate or no? Do you think we -- there is still progress at an even rate, what we have seen so far?

Lastly, in terms of competition, have you made some changes to data pricing over the last two to three months, and if you can share some of those changes to us? Thank you.

So this is Edward. Let me try to answer the first question. I think you are right. I think basically, around the region, you see people under pressure for voice. And actually in other regions, but clearly in Indonesia, some of the operators, they are actually losing voice and SMS revenue already.

So we are probably another operator that still have increase in voice revenue year on year. There is still a huge voice usage, the usage actually gone up on voice. But obviously the pricing is depressed, but overall we still grow about 9% of revenue year on year on voice.

On SMS, we marginally grow our revenue year on year. But actually you see the usage has really started to decline. So the point you make is true; it's coming, and this will actually happen in a big way. So I don't have a crystal ball. I can't tell you. But at this point in time, the smartphone penetration is about 4.5 million, 45% of our base. And we have about 1.5 million on the monthly basis, new smartphone onto the network.

So we anticipate SMS will slowly but surely will come to decline. But voice, we still believe there is some way to run, some runway to go. We count now on when they convert to smartphone, we want to see that increased data usage. At the same time we are rolling out, as you know, 4G and now we have our 65% of our base stations are 3G. And so actually we want to capture that and the digital experience on the broadband bundle, we have video services and of FinTech and our M2M, this is the new play -- the additional play that we want to move into.

On 4G, I think today we are approximately 5,000 base stations, close to 6 million subscribers. So how far can we run? I think 4G is picking up, but probably not as fast as 3G is. So we will still observe. But nevertheless, I will assure you that Telkomsel would be the leader in 4G to continue the momentum that we are leading today.

Okay. And lastly --

3G pricing -- sorry, pricing?

Any update on pricing?

Data or overall pricing?

If you can segregate into data pricing and voice pricing, because I think your voice pricing, ARPU has also gone up quite a lot in this quarter. So trying to understand the dynamics on the voice pricing and data pricing.

So basically, I mentioned to you actually voice revenue grew 9%, but usage has actually gone up by 16%. So technically you can see it doesn't balance, so which means actually our price, on average, the usage has gone up but price actually come down. So that's what it is. SMS, price has gone up but usage declined as well.

As data is concerned, I think it's still very new. So today it's highly competitive if you look at the Indonesia market, both XL and Indosat offer tremendous discount bundle on the 4G network. We do likewise, but not as aggressive as they are. We anticipate 4G huge run rate. We need to build the usage and experience so we will compete aggressively if need be with our competitor on that to build the business and experience.

So I will see in a longer term. If you look at the way we currently manage our RPMB, I think it would decline in the near term. Okay. Thank you.

Yes. Thank you.

Our next question comes from Hussaini Saifee from Citigroup. Please go ahead. Your line is open.

Hi. Thanks for the call. Just two questions from me. First is on the wireless side. So I believe Telkomsel had increased data tariff by around 13% in June this year. So how do you see the subscriber reaction in terms of usage? Are you seeing an impact on usage level because of the tariff increase? That's question one.

The second question is on the Mitratel so I believe that you are consistently adding towers. So what is the strategy out there and what is the tenancy or co-location on the Mitratel towers right now? Thank you.

Okay. On the tariff increase, what is the impact on the subscriber? First on the voice, if you see the voice increase. We did increase the price during the festive of Lebaran. So basically we know that there is demand and also strong demand for the [repeat]. So basically the traffic is still growing along that with the season .

On the -- similar to the data, we actually -- if you see Rupiah per megabyte slightly decreased because we tried to convert the subscriber from the pay as you use becoming package user, subscribe the package. So we don't decrease the price; instead we try to stabilize the price by offering the package. And then we do the same -- we did the same during the Lebaranfestive, increase with regard to traffic and demand.

So basically, the way we manage is different on the competition, different on the market dynamism and also the readiness of our network. We try to minimize the impact on the pay load growth and so on. So basically you see from year on year up tonow the traffic of the data still increase about more than 80%. I hope that answers your question.

So basically there is no impact on the growth in terms of data usage because of data use increase. Is my understanding correct?

Yes. Yes. I think if you see the -- I think not as fast as the previous year, the growth of the data pay load, more related to the growth of the smartphone itself. So if we can increase the smartphone adoption, we believe that the data payload also will increase as we experience every time people replace their 2G handset to becoming 3G or smartphone, this would add 30% increase in the pay load.

Okay. Yes.

About the tower business, yes, Mitratel still continues to expand the tower business, especially to support Telkomsel international business. We believe that the demand for the towers will depend on how aggressive the operator expand their business. But up to the first semester this year, we see there is no other operator out there that are aggressively to build the tower except for Telkomsel. But also with the roll out of 4G network, we believe that the demand for tower still continues to increase.

Now the tenancy ratio of Mitratel is around 1.13. Thank you.

Our next question comes from Paula Ruth from Trimegah Securities. Please go ahead. Your line is open.

Hello. Thank you and also congratulations for your strong results this first half. I would like to ask a question regarding the tax revaluation. I think previously, in the call, mentioning about the revaluation, outcome will be booked in the third quarter if I'm not mistaken. I just want to clarify what does it mean with the revaluation outcome is it mean, because I understand that you booked prepaid tax last year. Does it mean that you are going to book the exact amount of IDR750 billion as tax expense in the third quarter?

Then my second question, if you don't mind, could you elaborate more about the accounting treatment for this additional tax expense from the revaluation? I think because of two alternatives that I've been thinking about is whether the tax expense is going to book as an other expense before you count the tax, or is it going to be booked as an additional tax expense, part of the normal tax rate for the Company?

That is all. Thank you very much.

Yes. So the IDR750 billion that we paid last year has not been accrued so we would be accruing it by the third quarter this year.

And then with regards to the type of tax expense, it will be additional tax expense for this year.

Okay. Very clear. Thank you very much.

Sure.

We will now take our final question from Lucky Ariesandi from Yuanta Securities, Indonesia. Please go ahead. Your line is open.

Hi. Thank you for the call. I have two questions basically. First is the follow-up from previous analyst's question about the depreciation. I noticed you mentioned that you expect that depreciation will grow by low single digit this year. Does that mean that the second-half depreciation expense will increase by a lot from the first-half number?

And also will there be further exercise on accelerated depreciation on Telkomsel's equipment because I noticed that in fourth quarter last year you accelerated the deprecation on some of Telkomsel's equipment. And using your guidance of a low single-digit growth and depreciation expense, my back-of-the-envelope calculation is for around IDR2 trillion of additional depreciation compared to first-half numbers.

And the second one is on the tax benefit from the previous year's asset revaluation. Do I understand correctly that -- I got the figure from -- that the total benefit will be around IDR2 trillion for Telkom Group, from the revaluation practice. Thank you.

I think the biggest CapEx spending effort in Telkomsel, first I would like confirm to you, there is no accounting statement changed in our Group so the policy is about the same.

The second, the amount of CapEx we are about to invest is about the same compared to last year. So we do expect -- that's why the number of the depreciation amount is about the same or slightly increased compared to last year.

Second, regarding the accelerated depreciation, we already plan about IDR500 billion of accelerated depreciation. It is about the same level that we booked last year. It is for the modernization of our network and so on. In the end, the amount is about the same or slightly increased from last year. I hope that answers your question thoroughly.

How about the tax? Can I confirm the IDR2 trillion total benefit from the revaluation practice you did last year?

The IDR2 trillion number is actually the NPV of the exercise as opposed to the amount that we paid last year IDR750 billion]. So IDR2 trillion would be the NPV.

Okay. Thank you.

There are no further questions at this time. Mr. Setiawan, please continue.

Thank you, everyone, for participating in today's call. We apologize for those whose questions could not be addressed yet. Should you have any further questions, please don't hesitate to contact us directly. Thank you, everyone.

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.