Telkom Indonesia (Persero) Tbk PT (TLK) 2016 Q3 法說會逐字稿

Thank you for standing by and welcome to Telkom's third quarter 2016 results conference call. (Operator Instructions). I must advise you that this conference is being recorded today, Tuesday, November 1, 2016.

I would now like to hand the conference over to your first speaker today, Mr. Andi Setiawan, Vice President of Investor Relations. Please go ahead, Mr. Setiawan.

Thank you. Ladies and gentlemen, welcome to PT Telkom Indonesia conference call for the nine-month 2016 results. We released our results on October 25, 2016 and the reports are available on our website www.telkom.co.id. This 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 response 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've 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 Board of Directors who are joining with us today. From Telkom., 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 and Acting Director of Enterprise Business Services; Mr. Dian Rachmawan as Director of Consumer Services; Mr. Indra Utoyo as Director of Innovation and Strategic Portfolio; and Mr. Herdy Rosadi Harman as Director of Human Capital Management.

Also present are the Board of Directors of Telkomsel. Mr. Ririek Adriansyah as President Director; Mr. Heri Supriadi as Director of Finance; and Mr. Alistair Johnston as Director of Marketing.

Ladies and gentlemen, I now hand over the call to our CEO, Mr. Alex Sinaga, for his overview.

Thank you, Andi. Good afternoon, ladies and gentlemen. Welcome to our conference call for nine months 2016 results ended September 30, 2016. We sincerely appreciate your participation in this call.

Ladies and gentlemen, in the nine months of 2016, we continued strong performance, both in terms of operational and financial. Telkom recorded triple double-digit growth, with revenue grew by 13.8%, while EBITDA and net income grew by 20% and 27.6% year on year, respectively.

Data, internet and IT service was the growth driver with 37.2% year on year. Its contribution to total revenue increased significantly from 31.3% last year to 37.7% this year. We also successfully maintained healthy level of profitability, with EBITDA margin of 51.5%, improved from 48.8% last year. And net income margin at 17.1%, increased from 15.2% last year.

In the meantime, our expense increased moderately by 8% year on year, lower than revenue growth, with manageable operation and maintenance expenses. Operating and maintenance expense, which accounted 42.2% of total expenses, grew by 10.3%, in line with continuous infrastructure deployment, both in cellular and fixed line businesses, as part of our effort to grow digital business.

Central to our strong nine-month result was the solid performance of our cellular business. Telkomsel once again delivered triple-digit growth in revenue, EBITDA and income, which grew by 14.4%, 18.9%, and 27.3% year on year, respectively. Ladies and gentlemen, Telkomsel gained more than 15 million net additional customers during this nine-months period, brought total customers to 163.7 million users.

Further, in order to maintain its network quality, Telkomsel added more than 20,000 new BTSs, and around 90% of those BTSs are 3G and 4G, reflecting our focus to accelerate the digital business growth. As of September, Telkomsel total BTS reached 124,000, with 59% 3G and 4G BTSs. As a result, digital business continued to be the growth engine and posted 40.8% growth, driven by data which increased by 40.8%, and digital services which increased by 40.4% year on year. Mobile data payload increased significantly, by 84.7%(corrected by company after the call).

Digital business accounted for 34.8% of total revenues, increased significantly from 28.3% a year ago.

In terms of its legacy product, for voice, Telkomsel booked 9.8% year-on-year increase in revenue and 9% increase in traffic as a result of innovative voice package and advanced pricing strategy.

For SMS, we started to see cannibalization from OTT services, with SMS traffic decreased 15.7% year on year. With SMS traffic declined 15.7%, we could maintain its revenue, only declined by 1.5% year on year to IDR9.99 trillion.

Ladies and gentlemen, on the fixed line side, our flagship broadband product IndiHome triple play recorded 1.524 million subscribers in less than two years of operation. To improve IndiHome ARPU level, starting quarter three 2016, we performed a comprehensive review and analysis of IndiHome customers as we would like to increase more profitable and more loyal customers. Based on the analysis, we managed to reduce the number of low-quality customers. Given this and the churned customers, the growth of IndiHome subscribers in Q3 2016 was small. However, the ARPU in quarter three 2016 improved to IDR313,000 from IDR300,000 in the previous quarter.

Ladies and gentlemen, let me now explain about our enterprise and wholesale businesses. Our enterprise businesses provide access, connectivity, as well as integrated ICT solution for more than 1,300 corporate customers, 190,000 small and medium enterprises, and 630 government institutions and regional government. In terms of broadband service, we estimated that Telkom control around 64% of traffic market share in Indonesia, with 2,349 gigabytes per second bandwidth in service, and part of which is the form of integrated ICT solution.

We also provide data center service to our enterprise clients, with 75,000 square meters of data center facility space in Indonesia. We estimate that we have around 32% share of total data center revenues in the country. In addition, we almost complete the construction of data center project in Jurong, Singapore, which has around 20,000 square meters of space. Expected to commence operation in November 2016, Jurong data center is designed to fulfill the needs of premium data center service for Singapore, regional and also global markets.

Further, Telkom supports smart government initiatives conducted by regional governments across Indonesia as part of their effort to modernize city management by implementing IT and application-based public services system. Telkom provides broadband infrastructure and cloud-based solution to help the government to improve their service to public. Telkom has already implemented smart city system in 211 cities in Indonesia.

While in the wholesale business segment, Telkom serves other licensed operators in Indonesia. The services vary from leased channel, data communication, connectivity, traffic transit, satellite, to managed service.

Ladies and gentlemen, all the service mentioned above are supported by our superior nationwide network. We continuously expand our terrestrial and submarine backbone to support both our mobile and fixed-line businesses. During nine-month period of this year, we have deployed almost 2,000 kilometers fiber-based backbone that made the total length of our backbone become 83,878 kilometers. And in addition, we are expanding another 48,000 km fiber-based backbone until 2018.

Our major submarine cable system project, SEA-ME-WE 5, or Southeast Asia, Middle East and Western Europe 5, and SEA-US, Southeast Asia-United States, are progressing well. SEA-ME-WE 5, which span 17,800 kilometers from Dumai, Indonesia to Marseille, France is expected to be in operation by fourth quarter of 2016. Whilst SEA-US, which stretch 14,400 kilometers, from Manado, Indonesia to California, reached around 65%(corrected by company after the call) completion progress and is scheduled to commence operation in the third quarter of 2017. Both projects are carried out by consortiums of Telkom and several other telco companies.

To connect those two submarine cable lines and also to connect them with our domestic network, we are now deploying IGG, Indonesia Global Gateway, stretching from Dumai to Manado. This is our strategy to become a regional hub of data connectivity.

Ladies and gentlemen, as I mentioned in my first quarter earning call speech, we are in the process to launch satellite Telkom-3S and Telkom 4. We expect Telkom-3S to be launched in the first quarter of 2017. It will carry in total 42 active transponders, consist of 24 standard C-band, 8 extended C-band, and 10 Ku-band transponders. As of September 2016, the progress of this project was around 80%.

While Telkom-4, which will replace Telkom-1, is planned to be launched in the third quarter of 2018. It will carry 48 standard C-band transponders and 12 extended C-band transponders. As of September 2016, the progress of this project was around 38%.

Ladies and gentlemen, let me now share with you other recent events that happened in the third quarter of 2016. On September 9, 2016, Director of Enterprise and Business Service, Mr. Muhammad Awaluddin, was appointed as the President Director of PT Angkasa Pura II, a state-owned airport services company operating in the western part of Indonesia. Subsequently, Mr. Honesti Basyir was assigned as the Acting Director of Enterprise and Business Service, in addition to his current position as Director of Wholesale and International Service.

Secondly, in September 2016, Telkom entered into agreement to acquire 49% stake in MelOn Indonesia from SK Planet. MelOn Indonesia, a digital music company, previously was 51% owned by a Telkom subsidiary, Metra, and 49% owned by SK Planet. As MelOn has more than 5 million digital song catalog, its presence is essential to enrich digital content both for our mobile and IndiHome services.

Lastly, Telin Myanmar, our business arm in Myanmar, attained application service license last month. As such, Telin Myanmar is eligible to provide internet service, private line voice and data, as well as related value-added services. With more than 50 million population and the country is still in its early stage of national development, we reckon Myanmar as an attractive market. Telin Myanmar had also been granted the IP transit service license in 2013 and currently serves Myanmar post and telecommunication.

Now let me reiterate guidance for the result year of 2016. With strong set of results in nine months 2016, we expect both Telkom and Telkomsel's revenue to grow better than market rate. We estimated that industry will grow at around 10% to 11% in 2016.

EBITDA and net income margin is expected to slightly decline in line with continuous infrastructure development and revenue shift from legacy to digital business.

Capital expenditure for the Group is expected around 25% of revenue, with investment focused on mobile and fixed broadband infrastructure.

This is 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.

Roshan Raj, Bank of America.

Hi. Thanks for the opportunity. Two questions from me. First, if you look at the three quarters this year, there has been a continued increase in subscriber net additions over the three quarters. What in your view are the key internal and external factors which led to this up-trend?

Second question, if we look at the regulatory changes that's being discussed in the industry, most of them are kind of looking at diminishing your market position. So, looking further out over the medium term, what are the variables or what are the options that you're looking to explore to manage the impact of regulatory changes to both your fixed and mobile businesses? Thank you.

I can take the first part. I think the increase in net adds, I think it's really indicative of the competitive situation in the market. I think that the cellular market here is I think more competitive than it has been for some time, and I think on three dimensions.

One is competition on voice packages, which hasn't been seen much of late, but both Indosat and XL have been targeting sort of low-cost voice pricing. I think number two, the investment in 4G. All the operators are investing heavily in 4G and therefore trying to drive customers onto the 4G network. I think that's driving competition. And thirdly, I think with combo packages, so these are packages which include voice, data and SMS combined, we've seen our competitors push quite aggressively on those. So I think it's really reflective of a more competitive market dynamic.

Okay. Thank you for the second question regarding the regulatory. Let me update you regarding the progress of changes in the regulation. We think that the new regulation, especially for interconnection and network sharing will be released soon, maybe someday this week or next week. We will decide our position after we get the clear result from the regulation of the government.

But to anticipate this regulation, I think that what we've already done previous in Telkom and Telkomsel, I mean the synergy, this is the key thing to us, to anticipate the regulatory changes. So the synergy between us in the Group and also to keep the deployment of network and to keep our capacity dominant and also to improve our quality service, I think the key thing to anticipate any changes in regulation.

Thanks for those responses. I was a bit unclear with the first one. My question was the net adds for Telkomsel, it's gone from around 1 million in 1Q 2016 to around 6 million in 3Q 2016. So, has Telkomsel been more active in terms of the variety of prices and products that has been launched in the market or it's been more a tactical marketing or something else which you have done better to gain progressively more subscriber additions over the quarters? That was my first question.

Second question was not specific to, say, interconnect. It was more a general question. The general sense we get is Telkomsel and Telkom are seen as a dominant player, and so the regulatory changes are possibly aimed at kind of bringing down its dominance. So, do you at a big picture level have a clear view as to how you are going to manage all the regulatory changes, which will be in different forms, and then playing out over a few quarters? What are the counterpoints or counter-arguments you have to defend status quo or manage the downside risks?

Yes. So, to clarify the first question, I mean the reason we're doing more net adds is because there's a higher turnover of customers in the market. In the prepaid market, if there's higher turnover, you end up having more customer base but actually a smaller what we call revenue-generating base. So it's really, if you think about the dynamic, the more activity in the market, then the more each of the operators will have customers who are -- haven't yet turned off, but we have acquired new customers.

But you're quite right to point out that we're winning in the market. I would say that the reason for that is not one individual factor. I think it's the continued platform that we've had for the last couple of years which is superior network and superior execution. So I think that's continued, so, nothing really different in our approach to the market. But like I say, when there's more activity, then you'll notice that all the operators will show net adds, which at a later date will probably churn off at some point.

Thank you very much.

Colin McCallum, Credit Suisse.

Yes. Thanks for the opportunity. Two questions from me. One, on the broadband side. Could you just talk us through a little bit of what you ended up doing on the pricing for your fixed-line broadband? I note the ARPU, as you said, it increased a bit. But if you could talk us through what your most common packages now for the fiber offering and what your targets might be for customer numbers and ARPU level. It was an increase, as I said, but I think it was actually quite a small increase. So if you can talk a little bit about what your studies have suggested you need that ARPU level to be and therefore what the target would be for the next year or two, that would be helpful.

And then the second question is more for Alistair, on the Telkomsel side. Noted that Telkomsel is still doing very well on monetizing. The combo packages that the peers have launched don't -- well, it's a bit more mixed in terms of results for your competitors. Do you expect the competitors to at some point have to increase the price points on those combo packages? And is that something you think is imminent or you think it's going to be a while before they get ready to trying to do that. Just your own view in terms of the way the market dynamics are going to shape up over the next year or so. Thank you.

I can take the first question. For IndiHome, we have what we call the deluxe package, with a speed minimum of 10 megabytes per second. It consists of 95 TV channels and home phone connection. This costs around IDR405,000 per month. And of course, this is only the beginning or the cheapest deluxe package. We do have packages which are more expensive than this. However, in competitive areas and in areas where the affordability is the issue, we enter the area with more competitive packages, which cost around 30% or 40% lower than the deluxe package. So, in the range of IDR200,000 to IDR275,000 per month.

We would like to see and we expect to have slightly better ARPU by end of this year. But I think it would only -- it would be in the range of IDR300,000 range.

So on the second question, I think -- do I think the competitors will raise prices and monetize on the combo packages? It's difficult to predict what they'll do. I suspect probably not. I think the opportunity that they see is to convert more of their customers into being firstly data users then heavy-duty users and on 4G. We know from our own base that if you convert a customer from 3G to 4G, their ARPU increases by 20% to 30%. So I think that's probably -- everyone's probably on a path to try and grow the size of their data users.

Obviously, Indosat, I haven't seen their results. XL, not great on revenue but very strong actually on data users and smartphone users, which I'm sure they're happy about.

In terms of our own strategy, we also compete in the combo arena, but we hope to do that in a slightly smarter way. And our differentiation really comes from two things. Number one, continued superiority on network. Number two, increasingly bundling our packages with premium content, so, music and video, and we are trying to differentiate that way.

Got it, very clear. Thanks a lot.

Wei-Shi Wu, BNP Paribas.

Hello. Thank you very much. Two questions from me. Firstly, I would like to ask about the Telkomsel's voice [use], in terms of revenue per minute. That seems to be up quite strongly during the quarter. So I just wanted to find out what exactly the company has done during the quarter to drive the big uptick in the revenue per minute.

Then secondly, just over in terms of competitive dynamics. One of your competitors obviously lost quite a lot of share. Do you anticipate a return to intense competition like the one we saw a number of years ago? If so, how would Telkomsel respond to the competition? Thank you.

I think on the first question,, actually the pattern we've seen on voice for the last year, year-and-a-half has been steady or declining RPM, combined with growth in volume, and that's been driven by a strategy of putting the price up on out-of-bundle voice and encouraging customers to buy packages, so, using more. I mean that strategy continues, but in this quarter, quarter three, it's distorted by seasonal price increases during Lebaran. Actually, some of those price increases we kept after the Lebaran holiday on the basis that we felt that'd be sustainable. So the strategy is pretty much the same but I think it's just -- seasonal changes.

In terms of competitive dynamics, I think I would characterize the market as pretty competitive at the moment, anyway. I don't think it's quite similar to how it was a few years ago, I think the markets a bit different but I do think it remains very competitive particularly around data pricing and particularly on the 4G data pricing where I think, our competitors probably see an opportunity with 4G trying to compete with us.

Maybe I have some additional explanation on this one. I think data pricing right now is not in the way that we expect, very healthy, I think it is supposed to be in the short run, our competitor also considering after try to encourage the use, they are starting to thinking about how to monetize the market. Right now, there are -- the pattern that we expect they also come to the same direction, so based on this one, I believe that what happened in the few years ago won't happen right now, because we already see right now the result is not really positive for our competitors right now.

Although, they are, I think, increasing the mobile load and also the user. That is our view and our expectation on this.

Obviously, we try to -- always try to find some mitigation in terms of managing the costs ,investment and so on in order to still providing the quality along with having good margin on this one.

Thank you very much.

Hussaini Saifee, Citi.

Yes, hi. Thanks for the call. Two questions from me. First is on the competition. Now you said that the competition remains very intense but still we are seeing the industry growth of high single digit which is, again, one of the best in the region. So what is your sense of like, from here, what do you think that the competition will further intensify or how should we see the growth for the industry in the next year? That is question number one.

The second question is on the guidance, your guidance on the EBITDA margin. You still expect margins to slightly decline versus last year but as of nine month, your margin seems pretty healthy so any color on that will be helpful. Thank you.

Okay, I'm Heri from Telkomsel to answer your questions. First in the competition and then industry still grow by single digit growth, first, I think from the growth mostly coming from the broadband, data and digital services. If we see from the payload actually compared to our peers in the region, our consumption is still quite low, this provides us room for growth.

Second also, the smartphone penetration is also I think quite low compared to our peers. That also provide us with room for growth and from the data, although the competition increase and in fact, actually we find that the room for growing for data even for all the players. In terms of the -- I think my colleagues will be adding some explanation on that one, but I jump to the second question.

In terms of the EBITDA margin, from the data, actually, as we mentioned earlier, actually data is not that lucrative as legacy in terms of providing the margin, we continue to grow on that one and also our competition offering increased, encouraged the usage by providing a lot of quota. This brings, actually the smaller margin on that one.

Of course, as management, we try to have a better revenue than what we expect and also what our target that are coming from the continuous effort on the design and then our bargaining position and also continuous doing some improvement on the efficiency. That brings the result that -- although we said it is supposed to normally decline, but we continue to put, I think, maximum effort in order to maintain the margin.

Hussaini, just to reinforce your point on the first question about competitive intensity, I think the fact that the volume of daily growth is so high -- on our networks and our competitor's networks, data traffic is roughly doubling each year but data revenue is growing in our case by about 40%. So there is a lot of competition which is leading to price erosion on data and in particular, larger and larger data packs available to customers but you are quite right in pointing out that we are still growing and the industry is still growing and that's really fueled by frankly, huge customer demand which is driven by more and more smartphones, more and more network, more and more application usage.

And looking ahead, can that continue? I think demand for data will continue but obviously, our concern will be around voice and SMS and how long they can be sustained.

Just to add briefly on EBITDA margin point, what was mentioned by our CEO just now, actually because we are moving gradually towards more and more digital businesses, so then we expect in combination, total from mobile as well as fixed business, the EBITDA margin will slightly decline in the near future.

Okay, thanks. Just maybe a couple of follow ups. So how do you see the growth going in the next year on the mobile side and also on the CapEx? So is the data growth -- the data demand is very high, how should we see the CapEx or is your network ready to handle such a steep growth in data demand.

And a small housekeeping question on the impairment of receivables, it is also high for the nine months 2016, so were there any one-offs related to that? Thank you.

I think on the next year figure, we are still looking on that one in our yearly budget on that one. But basically what we try to achieve, continue to grow something above the industry because we have all the resources needed and as long as there's opportunity there we try to have our best efforts so the results exceeding the market.

Is our data network ready to handle -- yes, I mean, we've had a strategy for the last couple of years to -- what we call leading supply so effectively to build our network ahead of demand. Having said that, when your network traffic is doubling each year, then you have to continue to spend ahead of the curve. And I think particularly on 4G, I think we will see a big focus on 4G investments. So I don't expect the sort of CapEx burden to decline any time soon.

On your second question, you were correct, there was a one-off item in the third quarter which was from the write-off of bad debt amounted to IDR741 billion. This is as part of our continuous effort to improve the quality of our account receivables.

Understood. Thank you very much.

Gopa Kumar, Nomura.

Thanks for the opportunity and congrats on a good set of numbers. I have three questions. Firstly on Telkomsel, sorry to go back on the revenue trajectory, and given data is certainly picking up, when do you expect it will impact the legacy revenues and do you see some cannibalization? What sort of data contribution do you expect the legacy revenues to decline? So will that mean that the current double digit revenue growth could slow down to maybe mid to high single-digit growth? I'm just trying to understand at what sort of data contribution would you expect that to happen?

The second question is on the IndiHome broadband, sorry, just to check, management had previously highlighted some issues on the rollout side in terms of getting permits to households getting access and in terms of talent availability, is that all sorted out or have you see an improvement there.

Also, a bit longer data question, in case of some issues persisting, would you be looking to acquire any of the smaller players on the broadband side, to gain scale faster, given that your balance sheet is quite strong? Thank you.

I think on the first question, about the -- I guess the balance between legacy and data growth. What we are seeing clearly SMS is in decline, I think terminal decline, our volume has declined by 15% year on year for obvious reasons and revenue sustained by price increases but that is debatable how long that could continue. Voice has been in great health both in terms of traffic and revenue; however, I mean, technology will eventually lead to cannibalization by OTTs, almost half of our base now have smartphones, so that is only a matter of time. As to the phasing of that difficult to predict and I wouldn't want to make any big predictions.

In terms of our data business, like I mentioned before, the traffic is growing by about 100% roughly doubling every year. At first, we don't see that declining, our usage per customer per data user is now 1 gig a month, compare that to the 4G customer where the average usage is about 2.4 gig a month. So , that is significant uplift and where we now have about 17 million 4G handsets on our network growing by about 1 million additional handsets or 1.5 million per month. So I see very healthy demand for data. I think pricing will continue to be an issue and that is largely dependent on market conditions as to how much of that we can monetize.

Yes, on the IndiHome question, we still face from time to time on-the-ground challenges, if you will, probably not so much of getting permit to the household but it's mostly related to the home cabling readiness in most cities in Indonesia.

And also, if you are aware that most Indonesian still live in landed houses, so we literally have to go connect the cable from one house to another as opposed in the developed market whereby people -- most people live in apartment buildings. So once you connect one apartment building, and then you can get back maybe 20 or 30 homes. So that is not the case in Indonesia.

But to be fair, if you see the development of the subscribers number that we have managed to get in less than two years, I think it's quite an encouraging achievement.

Again, I was wondering if some of the issues persist and if you think that rolling out fiber and the logistical challenges exist would you be willing to acquire any of the smaller players to gain scale faster given your cash balance sheet strength?

So we are always open for any interesting acquisition opportunity, but I think we can tell you at the moment that we are not intensively looking at such opportunity that you mentioned.

Thank you.

Miang Chuen Koh, Goldman Sachs.

Hello, three questions from me. Firstly on the mobile side, in terms of the ARPU, we saw further increase both YOY and QOQ basis, so the reasons attributed is cluster-based pricing, market segmentation and of course, the data increase -- data usage increase as well. I'm just wondering, in terms of those cluster-based pricing benefits, how much more is there actually to go? It seems that it happens every quarter, you continue to be able to kind of monetize that or increase it.

The second question is on IndiHome, so subscribers were pretty flattish because you are rationalizing the quality of the customer base. I'm just wondering any guidance over the next 12 months, what kind of subscriber base are you looking for and in terms of the EBITDA margin for this business currently, can you give a sense of that?

And then the final question is on tax, I think, previously, you mentioned in previous quarter was about IDR750 billion of one- off tax expenses, did any of that show up in 3Q and if not, then it is all going to be lumped in 4Q then? Thank you.

So on ARPU, yes, increasing. I'd say the major reason for that would be, well, growth in voice volume because we are encouraging customers to take packages, and I think, growth in data volume, albeit the unit price has been in decline, I think that is really the underpinning reason. How long can that continue? I don't know, it is difficult to say. I think inevitably, voice will be under pressure from OTT. I think data volume will continue to increase as it is today but I think -- your question is how effective pricing will be and that is really a market question.

In terms of cluster-based pricing, it continues to be a very, very useful tool for us and we are actually getting more and more, what's the word, smaller scale in terms of our pricing areas. What that means for us is we need to optimize and maximize revenue, without causing major competitive shifts in the market. So it's a very useful tool for us.

Okay, for IndiHome, next year, we are targeting to have in the range of 1.5 to 1.8 million new subscribers and unfortunately, until now, we still don't disclose the EBITDA margin for this particular business.

And then your last question on the tax, so we paid IDR750 billion tax related to asset revaluation program in the last quarter of last year. Until June this year, that still sits at prepaid tax and we expensed some portion of the figure in the third quarter of this year which is around IDR200 billion in the third quarter.

Got it. So the remainder of the expense will be taken in the fourth quarter or you will be spreading them further out?

It would be spread out, some could be in the fourth quarter, and some others could be next year, sometime next year.

Okay, sorry, just to clarify, in the IndiHome guidance, 1.5 million to 1.8 million total subscribers next year or new incremental subscribers next year.

New customers, new subscribers, new additional customers.

Okay, so kind of doubling, I guess. Okay. Thank you.

Yes.

Cheng Li, Bernstein.

Hi, apologies for the noisy surrounding, just two quick questions. One on the just to clean up numbers, I thought SMS revenue growth for the nine months has been only -- has been about 20% to 30%, but internet and data growth is only less than 10%. I just want to clarify whether that is the actual numbers or whether a misstatement and if it is the exact number, what is causing that very different to expected dynamics?

The second question is about the potential for market entry from the stronger operator from overseas, so we have seen in a few markets this year across the region, including the latest in the Philippines there's talk about introducing stronger backers, particularly from China. Given the stiff competition in Indonesia, what is the probability of that happening, do you think? Thank you.

SMS, the first question is about SMS.

Okay, on the first question why data usage growth is smaller than data payload actually in Telkomsel side, we put the -- SMS for the non-P2P coming into the digital services. And then in the consolidated it is not in data category so this kind of difference on the way we reconcile the book on that one.

But I think overall if you see from the payload and how is payload coming to the revenue, as mentioned by Alistair that the payload grew by 85% that's bring up to the growth of revenue about 41% that is -- which is the real number.

So in terms of market entry from probably overseas operators, so I think there are obviously two ways that can happen, it can be a new business startup or it could be by an existing operator. I think for the first one, the new business startup, I think, the prospect of that is pretty much zero in that there is really no spectrum available and indeed, I think the government's agenda is to -- for consolidation rather than further fragmentation.

Obviously, there is always the opportunity for an overseas operator to buy an existing player, and I guess we have no real view on that. I guess it could happen but no rumors at present.

Okay. Thanks.

Choong Chen Foong, CIMB Research.

Hi, thanks for the call. Two questions from me. The first question for Telkomsel, if I look at the smartphone penetration for Telkomsel, that is lagging behind XL going into the third quarter implying that, Telkomsel is getting a proportionately lower share of the smartphone users in the market. Is that a concern? You said that your network is superior so I suppose that -- could that be then that your data use, which are double of that of XL could be the factor of driving that difference?

And my second question related to the regulatory side, can you give us an update on the IC rate cut proposed by the regulators? Where are we right now and is there a certain timeline for BRTI to make a decision on the IC rate cut? Thank you.

So I can take the first one on smartphone penetration. I think that the profile of our base has always been different to XL and Indosat and I think there are two main reasons. I think one, their bases are really focused on Java island whereas we have a base right across the country. Secondly, their customers have tended to be slightly younger than ours. Both of those factors mitigate towards higher penetration of smartphones.

And, it's a good thing and a bad thing. It's a good thing in a sense that we have half of our base are voice and SMS users, very, very solid revenue, very, very loyal. Obviously we are looking to grow the smartphone penetration. I also think the percentage growth is a little bit misleading as well because in absolute terms, we are growing at a faster rate in terms of absolute numbers. But I think, really, it is something which we have known for quite some time.

For the regulation update especially for interconnection regulation, we expected that the new revision will be released by the government someday this week or next week. We are still waiting the information from the government when exactly, the dates, they will release the new revision. But based on our communication with several parties, we think that's maybe someday this week or next week.

Okay, and just to follow up on the two questions and answers, back to the question on the smartphone penetration, you mentioned that you don't think that your competitors would be inclined to lower the pricing for the combo packages and overall data use, so does that mean that you might have to bring yours closer to the competitors over time? That is my first follow up.

And the second follow up for the regulatory side, if the BRTI were to come back and say that, they want to set the IC rate for Telkom and Telkomsel, what can Telkom and Telkomsel do? Thank you.

So, I guess on the first question, to be honest, I think the premiums that we have in the market are pretty well set, we are obviously the most expensive and that is driven really by superior quality. I would expect that to continue.

Ultimately if the market is driven down any further in terms of prices, that will have an impact on us. We are sitting out looking to drive the market down and whatever opportunity we have to monetize further, we will do. I can't even predict what my competitors will do and if they do decide to ease off a bit on pricing, I think that is good for everyone, but I just don't want to predicate future prospects based on what they will do.

On the interconnection rates, I think as mentioned several times from the call that actually the revenue from the interconnection -only account for, what, 5% of the gross revenue and then it's only accounting about 1% on the net-wise, it is quite small. And the second, also the pattern of the traffic itself, 90% is actually is on net, but I think that some part as long as the price is not that aggressive, I think we can still maintain that one. The third again, I think very similar explanation.

On the trend of the payload,, growth is a lot higher compared to the legacy business so we focus on that one and I think on that one, we don't have any interconnection issue so that is from the business-wise that we see that one. So we continue to increase our quality in addressing the kind of regulatory trend.

Okay, thank you so much, everyone.

Navin Killa, UBS.

Yes, I just have one question on the interconnect rates. So, in their really recent conference call, XL management had indicated the possibility of having differentiated interconnect rates among different operators. What is your thought on that scenario and what it could mean in terms of a multi-tiered pricing structure? Is that something you would be comfortable with, is that a scenario you would like to avoid? Any big picture thoughts there? Thank you.

We already expressed that our position on the interconnection was supposed to be not kind of symmetric right now that we apply. The best practice is supposed to be asymmetric by considering to stimulate that all operators are going to build across Indonesia on this one. So that the -- if you base on our view on what is the best practice and also based on the recommendation of ITU on this one. The second, I think on this issue also -- we would like to see also a clear cost figure from them so everybody needs to clear putting the cost so the asymmetric I think scheme is supposed to be a really asymmetric rate.

Any last question? Okay.

There are no further questions in the queue at this time.

Thank you, everyone for participating in today's call, we 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, everyone.

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