Thank you for standing by, and welcome to the Telkom's Nine Months of 2015 Results Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, the 10th of November 2015. 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. Andi..

telecommunication, information, media and edutainment, directly or through its subsidiaries. We also deliver services to multi-customer portfolio in retail, enterprise, wholesale and international.

As of September 30, the majority shareholders of Telkom was the Government of Indonesia, with 52.6% ownership, and the remaining 47.4% was under public ownership. I now hand over the call to our CEO, Mr. Alex J. Sinaga, for his overview. Alex, the time is yours..

Jakarta, Bali, Bandung, Surabaya, Medan, Makassar, Lombok, as well as Manado, that was launched in October 2015. As the spectrum we're forming in 1,800 megahertz will be completed in November. We expect to roll out 4G as the end service in more cities in the near future.

Ladies and gentlemen, in the home triple play, our flagship product in fixed-line businesses saw an encouraging progress with 678,000 subscribers only 9 months after the product was launched in early this year.

We believe that demand for IndiHome is huge, given the fact that Indonesia has more than 60 million household with growing middle-class segment and very low fixed broadband penetration of only around 6%. However, we have to be frank that we faced some challenges in the field to absorb the strong demand.

We are now working very hard to strengthen our capacity and capability in terms of human resources, especially Indonesia as well as business process to accelerate the deployment of last mile fiber network to the premises of the customer.

Hence, we are confident to achieve at least 1 million in the home subscribers by end of this year, and we expect further acceleration in the coming years. Ladies and gentlemen, we continue to do development of Fiber Backbone to provide high quality broadband infrastructure nationwide.

Last month, we officially connected Merauke and Papua through a submarine broadband highway, we call it SMPCS, that drastically elevates connectivity in eastern part of Indonesia. Now let me say share with you about Mitratel deal.

The plan to submit Mitratel's sell with Tower Bersama has been canceled off since the terms and conditions of product change agreement could not be fulfilled. We are now evaluating a number of option to unlock value of our Tower asset.

We believe that we can come up with a scheme that will bring the best value for the company as well as for the shareholders. Ladies and gentlemen, in terms of guidance, if we look at our 9 months result, we're optimistic that our revenue will grow better than market rate in full year 2015 by continued effort to grow digital businesses.

EBITDA and the income margin were slightly decline, in line with continued broadband infrastructure development, both in mobile and fixed line businesses. That concludes my remarks. Thank you..

Thank you, Alex. And we'll now begin the Q&A session.

[Operator Instructions] Operator, may we have the first question, please?.

[Operator Instructions] The first question comes from the line of Luis Hilado from HSBC..

I had a few questions. And the first 2 on your results. The first one is regarding the G&A expenses. As you mentioned, it's up quite substantially in the quarter and both year-on-year and it seems to be at the parent company side, PT Telekom side rather than Telkom side.

Just wondering if you can give us some guidance on what that looks like going forward and what caused it. Second question is SMS pricing up quite substantially also Q-on-Q and year-on-year? Did you increase effective pricing across the country or just specific areas? And the third question is regarding Project Loon.

Could you give us some insights on, for example, what the shareholding is between yourselves and Indosat and Excel? And anything you can highlight from Project Loon?.

So regarding your first questions, so expenses increased substantially compared to last year. The increase mainly due to the significant increase of positions for impairment of receivable around IDR 945 billion in 9 months. So after we look in deep -- we look at detail, I think into Q4, there's no more allowance.

And then the rest are now more manageable. If you look at our accounts receivable margin 12 months, it's around IDR 500 billion. So more manageable numbers..

Yes.

The IDR 945 billion is for both paid for fixed-line or broadband?.

No. This is for accounts receivable of part of the -- our operation site across this businesses in the Telkom Group. We are talking at Telkom Group of performance now. So the next question is regarding SMS price, I think that Heri Supriadi can help us..

Luis, Heri speaking here. With SMS price, actually we -- first, we noted SMS already quite mature, a lot of substitution here. And also, electricity of the product already, I think, almost no electricity. Our focus of adjusting the price is to try to get the value from this business. So for this part that I think there was like a big drop by about 18%.

We have also increased revenue by 5.2% because we increased that price. We applied this pricing national-wide on the SMS..

Project Loon....

Let me answer the question on the Google Loon. We are -- the 3 offers was signing the -- it's kind of a MoU or drive agreement. There's some technical part agreement. There is no commissary interject. So -- and we do position Google Loon as the extension of our outlook.

We -- the intention is to in the raw hand [ph] to use the Loon to which the very remote area that are very hard to reach with the current network. That's what we see on the Loon..

Your next question comes from the line of Anand Ramachandran from Barclays..

I had 2 questions. Firstly, to follow up on the costs, I wanted to specifically check if there were any specific one-offs in the third quarter with regard to fixed asset amount impairments or anything else. And if not, we specifically saw cost increasing at a higher pace than revenues in this quarter.

Is this something that you would expect to continue or moderate going ahead for the group? My second question would be to request an update on where you stand on interconnect.

What do you expect the scope of changes to be? And could you again remind us of specific impacts you expect at the Telkomsel level and at the group level for 2016?.

So Anand, from [indiscernible]. I'm Heri. Regarding our cost again in third quarter, there is allowance around USD 945 billion -- sorry, IDR 945 billion. Sorry, billion rupiah. And then, as you are talking about in the near future what's going on with this -- our cost, I think IDR 940 billion is allowance, but we have to do it this year.

And now, in our books, the -- of course, built more than 1 year is around IDR 500 billion. So I think it's manageable..

Understood. And if I could just follow up, fixed-asset impairments, there was nothing more taken in the third quarter. I mean, there's some in the first quarter, let's say..

So as far as Flexi, right? In terms of Flexi, right?.

Yes..

There is no more impairments or Flexi asset. So we did it on the first half. And after that, no more impairment of asset regarding Flexi. Second question regarding tariff, interconnect regulation. Yes [indiscernible].

Anand, on the interconnect tariff this year, actually, we don’t expect any change until December. Right now, government's still reviewing the current game. We know that the expectation from government want to, I think, expand the sulphate to the outside of Java.

But considering that cost is quite high in outside Java, they tried to improve any possibility to implement at a metric scale. Right now, I think government still considers some option on this one. So it's doing a symmetric, which is among and between operator will determine how much the cost will be applicable.

The big -- I think a radical office, maybe there's no change on the current scheme, considering the cost outside of Java are a lot higher to compared in Java. So the possibility is quite -- I think, also there's no change.

I'll follow what we see from this interconnection, at least for us -- actually, the interconnection is attributable about 7% of total revenue or in the net result, it's about 1% of the revenue.

And we're considering that most of the growth will come from that data in the legacy in which play voice and SMS interconnection, not kind of that we're going to big and back in the future for us..

Your next question comes from the line of Colin McCallum from Crédit Suisse..

Just a couple of questions from me.

On IndiHome, could you share with us the ARPU level for the fiber customers? And also, could you give us the ARPU level for the previous kind of ADSL customers before they were upgraded to fiber? So just we can see the level of uplift that you're getting in revenue per user when someone shifts from ADSL onto the fiber, that would be very helpful.

Secondly, is it possible for you to give us the approximate penetration rate for homes-passed that you've rolled out? How many of those or what proportion of those homes out of the end of September had taken the fiber product? So just to see how well you're utilizing what you've been building on the fiber network?.

Colin, I'm Dian speaking. Let me try to answer your question about the ARPU. In fact, the ARPU of IndiHome triple play is recorded as IDR 300,000 compared to the former speed is about IDR 120,000..

Got it.

And the utilization?.

Okay. And then the figure of the homes-passed, we're now up already at 6.3 million. And then we keep continue to rollout for the next year, it's about double figures. Thank you..

The next question is from the line of Roshan Raj from Bank of America..

2 questions. First on this IndiHome roll out plan, what sort of impact should we look at the revenue margin and investment of CapEx because of this rollout? And can I just reconfirm that you're looking at accelerating the number of households you will be connecting on IndiHome? That's question one. The second one on the tower deal.

I believe previously you had indicated 3 options. First one was possibly to inject into a listed tower co.

So should we assume that the other 2 options, which is possibly listing the asset or just growing the asset organically on your own, those are the 2 options that you'll be focused on now going forward?.

Alex speaking here. Regarding IndiHome -- or regarding margin of the consumer, IndiHome actually under consumer divisions. As we are talking about the consumer divisions, the margin around 80% EBITDA margin. But if you are talking specific for the IndiHome only, EBITDA margin around 29%.

And about the CapEx cost for last mile, around USD 300 for connections, I mean. So for the next question, regarding tower, I think, we'll pass to [indiscernible] So just for additional informations, actually have connected for the fiber as at home connected, not only for the home connected, specifically.

But also, we have fiberized our tower -- fiberized our enterprise client. So basically, it's the paired we what we call homes-passed. But we're not only for the home connected, but also for the tower for the com sell also for our enterprise client. Yes, using the same fiber. Using the same method..

All right. So just to kind of check a bit more on that.

So is it fair to say that going forward, over a period of time, you'll start raising the ARPU that you kind of -- or the price that you kind of offer to customers on IndiHome price or IndiHome plan?.

First, like Dian mentioned before, the ARPU of the IndiHome itself is around IDR 300,000 and the ARPU of the blended in the consumer is around IDR 120,000. So basically, if we put more IndiHome in our network, hopefully, we can increase our ARPU..

So for the next question, I think Pak Indra. Sorry..

Sorry. Okay, regarding the plan for towers, I think as we also noted, tower is -- for us, is considered as a group in the [indiscernible] Telkomsel. But at this moment, we are repeating their strategy as development has been happening in Mitratel. So the tower number is also readily increasing to currently around 6,500 towers.

So we need to revisit this strategy. But I think the objective is, of course, considering the -- how to have the, what? The ideal form and also considering the -- and protecting also the interest of our partner from Singtel, yes. So the form is, of course, this can be buy or borrow. And so buy or build, but it has to be a public listed firm..

Your next question comes from the line of Navin Killa from Morgan Stanley..

I have 3 questions. First question was with regards to your base station additions, which seem to have slowed down in the third quarter.

I was just wondering if there's any specific reason for that, and I guess, in that context how should we look at your full-year CapEx and if you could break it down for mobile and nonmobile as well? Second question I had was on the old Flexi business.

So with the asset being impaired, how are you -- where do you stand right now in terms of migrating the customer base into Telkomsel? And I was wondering could part of the reason why the revenue growth at Telkomsel for the last couple of quarters has been very strong could be the conversion of these Flexi customers into Telkomsel? So if there's any number that you can share on the customer base converted, et cetera, that will be helpful.

And then, lastly, I actually wanted to kind of go back to the answer you had on homes-passed. So just to clarify, you mentioned 6.3 million homes-passed, but that includes towers and enterprise as well.

So can you please help me clarify, again, how should we read into this? So is this 6.3 million residential units where your network is ready to connect or if not, how do you define that?.

Navin, Heri speaking here. On your first question on the BTS addition, up to third quarter, we're already at about almost 15,000 of new BTS. Actually that's already exceeding total number of BTS we expect to be built during 2015.

So whether our homework is try increase the, I think, productivity of the BTS, right now, we are not slowing down the speed of the development of the -- our network. We are now preparing for 2016. The way we develop our BTS actually for each corresponding year, we build until the third quarter. In the last quarter, we prepare for the next year.

We are planning that way and that pattern, we continue going to build our networking. On the second question, on the Flexi impact to our businesses out here. In this there's a positive impact for us. There's about 1.4 million of Flexi subscriber migrated to us. It is by option.

By then, by incentive also, because we are also asking them to migrate to our network. That already provide a good result for us. It is, I think, a positive result of this corporate action..

So if I can follow up, I guess, before we go to the fixed broadband question.

So this 1.4 million, is it fair to say a lot of these have come through in the third quarter? And can you also, perhaps, share how much revenue they might be contributing in the third quarter?.

It is since the first quarter. Basically, we are discussing in the -- from the, let's say, the second half -- I think right now, on the, I'd say, third quarter. So basically, from the beginning of the year, we already promoted them to migrate to us and then this fit or these have been seen since the second quarter and the third quarter.

So at the end, we already have 1.4 million of the possible that we identified previously Flexi subscriber becoming our subscribers..

Okay. Navin, let me answer the third question about the homes-passed. I was talking about 6.3 million homes-passed is surfing only for the IndiHome, excluding the fiber to the mobile, fiber to the building.

The one is -- what Heri is saying is the way we build up the last mile, we developed the same road to the mobile, to the homes, to the building, in the very integrated plan..

Your next question comes from the line of Arthur Pineda from Citigroup..

Three questions for me. Firstly, a housekeeping question. What's driving the significant drive in depreciation expenses? It seems to have jumped up 27% Q-on-Q. Was there any accelerated depreciation booked as well? Second question I had is with regard to your bottom line.

We have seen a number of quarters where you have strong operating trends and revenue EBITDA but it fails to translate into bottom line growth because of various costs such as impairments or ERP.

When can we actually see a cleaner bottom line? Should we expect the fourth quarter to be free of all these one-off expenses? Lastly, just to clarify, on the fiber, again. Sorry, to belabor the point.

Just, you mentioned that you expect to double the fiber homes-passed next year from 6 million to 12 million, is that correct? I'm not sure if I heard that properly.

And how much does it actually cost for you to pass the line to a home?.

Yes. Number one, we will answer your first question regarding significant depreciations. If you look at our number on the first half, we have what we call Flexi impairment around IDR 600 billion. So this is the most ingredients that boost our business and this grew quite significant. So this is -- this comes from Flexi impairment.

I mean Flexi asset impairment. And also another -- network infrastructure deployment and -- on cellular and fixed businesses, it created also a depreciation. But the mostly comes from the impairment of the Flexi assets. The second regarding EBITDA and net income, I think if you normalize, our net income still have a good number.

If you are talking about how long the ERP? ERP is one of the most significant impacts in our net income. I think ERP will -- we have planned until 2017. And at until 2017, we will have ERP as around 300 -- under IDR 500 billion each year. And the number 3, I guess I'll pass it to [indiscernible]..

Yes, the third question, Mr. Arthur, inside the homes-passed up to now 6.3 million -- around 6.3 million. And then our target sales in next year 2016 could be 3 million. So that's why we are committing to rollout the last mile is about double, is about 12 million homes-passed to secure our target 3 million homes connected.

In fact, in the deployment of the homes-passed is not purely the new homes-passed, but we are expanding the existing homes-passed the same road to several type of provisioning. Thank you, Arthur. Hopefully, it can answer your question..

If I can just put a follow-up question on the fiber.

How much would it cost to double your homes-passed from 6 million to 12 million?.

It's not linearly double in the number of homes-passed. I mean, it's not twice than previous 6.3 million, but is quite a complicated calculation. It's -- I am saying is the same route can be more cheaper than the new routes, something like that, Navin -- Arthur.

We are planning to adopt the mobile data location, because the Internet user normally using Internet is in the sitting still, is they are not moving, so we are intended to collect the mobile data location to be a driver to know, to recognize, which location we are intended to target the marker.

So by this way, we can deploy more effective and more efficient. Thank you, Arthur..

The next question comes from the line of Jimmy Chen from Bernstein..

Just want to get the management's broader view on the fiber rollout and opportunity there. Firstly, can the management talk about whether there's any regulations or competition that will impede your pricing? Any particular names would be good.

Secondly, in terms of the size of the potential numbers of homes that you may pass, how do you sort of juggle between the economic feasibility of attaching those homes given how much it costs and affordability of these services? And then lastly, the current EBITDA margin sounds low.

Can you explain what is driving that? Is that just a scale issue? And what's the long-term return on capital that you'll be expecting?.

Yes. Jimmy, it's a good question about the competitors. We can name the competitors, it's quite big is -- was First Media, but they are deploying is not on the 100% fiber, but on the hybrid fiber quad shells. Technologically, it's not so advanced and they achieve only 300 -- sorry, 800 subscriber until -- since they operate 8 years ago.

And then the new coming up competitors is, we can name it MNC, which is very small scale numbers. And Biznet, Biznet focused on the small, medium enterprises. They are targeting those areas. And then the next, I heard about MyRepublic that won the ISP from Singapore and they have operation in New Zealand, I heard.

And then, the third country is Indonesia. But just heard the name, not big enough on the operation yet here. So they are mostly operating on claiming areas in the major cities. It's not like us, across the country from the east or west. Thank you, Jimmy..

And also, can you expand a bit on whether there will be regulations that requires you to either provide wholesale access to your network for resale, if any?.

About the regulation of -- about the fiber wholesale, we don't find yet about the regulation from government from the regulatory body. But in fact, our telcom, our company is very welcome to the -- what we call it the unbundled network elements, so we can sell as the wholesale hand in hand with the retail side. Thank you..

So sorry, this is Heri. To answer your question regarding the margins. For the -- in [indiscernible], the margin around 30%. And EBIT additional, from Dian actually. Data traffic strategy, we copy like Telkomsel, the cluster of traffic strategy. If there is head to head with our competitor, we put it slightly, slightly below our competitor.

But if there's no competitor like what Dian mentions, we can charge even double because there's no competition there. So actually the pricing really, really depends on the market, on the what we call the cluster of pricing..

Okay. Because you mentioned that the rest of the consumer division has really high margin and I'm assuming that's also referring to your fixed services.

If that is the case, given this is a highly fixed investment sort of business, do you think the margin should actually go up and the retention actually go up over time?.

For the existing business, as CEO mentioned in the beginning, our guidance is in the future, the legacy business, our legacy business is slightly down margin because of -- from this trend..

Okay. Understood.

And by the way also the second question, I think, we missed is what is the number of economically feasible households that you think the fiber network can serve and pass through given the cost of pass through and how much ARPU they can afford?.

So far if you look at the number, our ARPU on the IndiHome is around 300,000. So the draft markup for our IndiHome around 20 million households..

20 million..

From the 60,000 households, yes -- 60 million, sorry, 60 million households in Indonesia..

Got it..

Alex here. There's a lot of questions, I think, from all of you regarding the fiber-optic. Let me explain more in detail. Our strategy actually is like this. We use fiber-optic for broadband highway, this and another things.

But you mentioned, I can't remember who is asking about this, we also said the highway broadband backbone, we also said to other operators. But, of course, we have a strategy to protect Telkomsel, okay? So it's not been all area we sell that, or we lease the fiber to other operators, number one. Number two, we're talking about homes-passed.

Actually, we are not rolling out the fiberoptics only for home. But using the same fiberoptic, we use that fiber to modernize the BTS' backhaul and also to modernize the copper cable to our enterprise client.

We used the same fiber, of course, if you roll out the fiber, of course, there is a lot of houses passing the fiber to the BTSs and also to the enterprise client. We call it as a home pass. And then, we monetize that using the same fiberoptic to provide the IndiHome service to the houses. So I can say that, one CapEx, 4, 3 kind of services.

One modernizing this backhaul of BTSs of Telkomsel; number two, modernizing the copper cable to the fiber to the enterprise client; and the same fiberoptic we use for providing the IndiHome service to the houses.

Up to now, we have already allowed 6 million home pass, not really dedicated to the home, but passing the home, because we modernized already the BTS's backhaul and also modernizing already the copper cable to fiber to the enterprise client. But addressable market in the total domestic demand is around 20 million.

So if we have now 6 million homes-passed, we still plan to roll out more using the same strategy, because most BTSs of Telkomsel also around across the country, including also the enterprise client premises. So that's, I think, our competitiveness. We can use the same fiber to provide 3 services using the same fiber.

So the CapEx is more cost efficient, more efficient compared to our competitors. Our competitors roll out the fiber is only for providing the service to the home.

But Telkom fiber, at the same time, do the 3 things, modernizing the BTS backhaul, modernizing the copper cable of enterprise clients and at the same time, providing the new service we call IndiHome to the houses.

So it's more efficient, I think, compared to the competitors and the ARPU for IndiHome at the moment, we can say roughly around IDR 300,000 because it's not really the same across the country. Yes, we have a cluster base also. And another question, I think, related to the EBITDA margin of consumer.

If you're talking about Telkom, we can say that IndiHome is a new engine for the future. At the moment, we have fixed phone and also the high-speed Internet, but they're growing, I think, is -- how to say, start already, especially the fixed phone to the houses. But even spot, we still can get the EBITDA margin quite high.

But the scale, almost impossible for the future. That's why we created a new product we call IndiHome that consists of triple play, so we can bundle all those.

Means, we capitalize the legacy business, but the EBITDA margin, we cannot keep around 80% because IndiHome also there is a cost for content, that's why the EBITDA margin also becomes slowed down. But the scale, I think, will be the new engine for us for the future. Hopefully, we answered your question and also the other guy the question before..

Yes. That was very helpful. Just one clarifying thing.

For any customers that you're connecting, not just passing through, but connecting onto your fiber network via IndiHome or otherwise, what are the expenses of the connections? And are you expensing it or capitalizing it? Or is the customer actually paying for it right now?.

We call it expenses on the last -- of the installation of the IndiHome. Now we put it on -- as an expenses..

Operation and maintenance..

Operation and maintenance. In operation and maintenance. Other operation and maintenance..

But again, that's always skewed, right? We roll out using a CapEx. After that, we net operating and maintenance. Probably the -- your question is probably like this.

Is there any difference between the legacy one using copper and fiber? Which one is more efficient between copper and fiber? I'll give you the answer, that fiber operation and maintenance cost is lower than copper cable.

And the CapEx for all those 3, as I mentioned before, modernizing the assets and also modernizing the 2 enterprise client, I think, I will say, those strategy is very efficient compared to competitors, because they only provide one service to the houses. There is no BTSs and enterprise client in their customer.

So I think for CapEx point of view, our strategy, how to make it more efficient CapEx. And after that, of course, there is always operating and maintenance that means costs. But compared to fiber -- fiber to the copper, I can say because the strategy of rollout will also mean same strategy in operating and maintenance.

So operating and maintenance cost also will be lower than previous technology. Hopefully, it answered your question..

There are no further question at this time. Mr. Andi, please continue..

Okay. I think we can have one more question, please. Last question, I think..

Last question comes from the line of Sachin Gupta from Nomura..

Just have one final question.

Given a lot of the comments you made about the networks and the fixed line business and also taking into consideration the performance so far, is there any reason why we shouldn't expect revenue growth to be in the high single digit for the next -- in the foreseeable future? And even on the margins, I think your comment that the legacy business declines, but given the Delta you could potentially see from a fixed line business and all the pricing mechanisms you are implementing, that margins actually may surprisingly upside as well?.

I think, Heri was going to answer you on the fixed line. Sachin, Heri speaking here from Telkomsel. As long as we can get more productivity with the current investment with aim to maintain our EBITDA margin. But we know that the challenge is coming from the data and data pricing now is not really as competitive as lucrative in the region.

But we're assuming there's is no pricing war in the future, with more productivity, we aim at least to maintain the margin. A lot of -- I think, it is a bit coming from the more efficient CapEx, more productivity of the asset and also, I think, higher utilization of the network itself. That was in, really, fixed.

But in general, it is supposed to decline with this current pricing, but we expect with a more favorable environment it can be sustained, I think, at the current level..

Okay. On the Telkom group, we have still confidence that in the near future, we still have a number of growth because now, as you know, our number of subscriber in IndiHome growth is double-digit and also knowing that IndiHome itself has ARPU higher than legacy business, having the revenue and EBITDA, we expect that it will grow also.

Our challenge actually how we have to make our business, our IndiHome, our operation more efficient so we can have our net income growth also follow the EBITDA growth. So our challenge is actually how we are as efficient as possible with our operations to make our IndiHome in the future more profitable.

So into our revenue and in the EBITDA, I still believe that we can grow. There's a lot of room to grow. Our challenge is how we make our operation as efficient as possible. I think this is from me..

I think we have to conclude our discussion. Thanks all..

This concludes the conference for today. Thank you for participating. You may all disconnect..