Good day and welcome to the Telkom's First Half 2017 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Andi Setiawan. Please go ahead..

Ririek Ardiansyah as President Director; Heri Supriadi as Finance Director; and Alistair Johnston as Marketing Director. I now hand over the call to our CEO, Alex Sinaga, for his overview. Please, Alex..

Thank you, Andi. Good afternoon, ladies and gentlemen. Welcome to our conference call for the first half 2017 results. We really appreciate your participation in this conference.

Ladies and gentlemen, in the first half 2017, Telkom still maintained its strong momentum, recorded triple-double-digit growth in revenue, EBITDA and net income of 13.4%, 15.4% and 21.9% year-on-year respectively. Level of profitability is improving with EBITDA margin of 51.9%, increased from 51% last year.

And net income margin at 18.9% better than 17.6% last year. Data, Internet & IT Services segment was the engine of growth. And for the first time it overtook Cellular Voice & SMS segment in term of revenue contribution. It jumped by 19.8% with contribution to the total revenue reached 42.4%, increased from 40.1% last year.

On the other side, we successfully managed our expense which increased by 10% lower than revenue growth. Operation and maintenance expenses grew by 13.8% in line with the continuous infrastructure deployment both in cellular and fixed line businesses in an effort to grow Digital Business.

Marketing expense increased by 18.6% in line with aggressive promotion for 4G service in mobile and IndiHome in fixed line businesses.

Ladies and gentlemen, our mobile businesses Telkomsel maintained its strong performance until the first half of 2017 with triple-double-digit growth in revenue, EBITDA and net income of 11.9%, 14% and 15.6% year-on-year, respectively. This solid performance was on the back of fast growing Digital Business coupled with Cellular Voice which still grew.

Digital Business revenue increased by 26.9% year-on-year driven by data which increased by 26.3% and digital services which grew by 32.7%. Digital businesses accounted for 39.3% of total Telkomsel's revenues, increased from 34.6% a year ago.

Our data traffic down (sic) [ increased ] 118.7% fueled by high growth in smartphone adoption which grew by 28.3% to 89.9 million users or 50.5% of our customer base. We were able to sustain our legacy business growth, despite the presence of various other data products.

It still grew by 3.9% as a result of successful customer migration from Pay As You Use to voice and SMS package, implementation of smart cluster based pricing, sharp marketing segmentation and superior network performance.

Voice revenue grew by 8.7%, while SMS revenue decreased by 14%, while traffic in both voice and SMS decreased by 11.9% and 23%, respectively. Despite the market saturation, Telkomsel was still able to grow its customer base by 13.1% to 178 million as a result of effective sales and marketing programs.

To maintain network quality we deployed 17,538 new BTSs during the first half of 2017, all of which were 3G and 4G BTSs. This is in line with our philosophy to always lead in network supply and grow our digital businesses. In total, by end of June, our BTS on-air reached 146,571 units, of which around 2/3 were 3G and 4G BTSs.

Ladies and gentlemen, our strong effort in reviving fixed line businesses through fixed broadband IndiHome has shown positive result. Total IndiHome subscribers has exceeded 2 million customers by end of June 2017. The figure was gained in 2.5 years which is an outstanding achievement even for global benchmark.

In order to further increase customer growth, we launched IndiHome Netizen, we call it Dual Play, with [ digital ] fixed phone and Internet. And by end of last year, only 7 months after it was launched, we recorded 389,000 customers that represent almost 20% of total IndiHome subscribers.

Going forward, we will accelerate IndiHome customers growth supported by this Dual Play product. Furthermore in June 2017, we introduced another version of Dual Play product which consists of Internet and IPTV.

ARPU of IndiHome in second quarter of 2017 was IDR 344,000 slightly declined from IDR 350,000 in the previous quarter as a result of higher contribution from Dual Play customers.

In order to improve ARPU, we consistently approach our customers to purchase various add-ons subscriber to higher speed, upgrade to Triple Play service or add another set-top box. In the enterprise market, Telkom remains focused on provision of digital and managed solution through ICT and various smart enabler platforms.

We're benefitting from State Owned Enterprises synergy program that has been pushed by The Ministry of State-Owned Enterprises in the past few years.

Ladies and gentlemen, we keep expanding our network infrastructure while SEA-ME-WE-5 has started to operate in January this year, SEA-US projected a project which is another fiber-based backbone that connects Indonesia to Los Angeles has reached 96% progress and is expected to commence operation in August this year.

In the meantime, Indonesia Global Gateway project or IGG that will connect to -- SEA-ME-WE-5 and SEA-US has reached 40% progress, and is expected to commence operation in the first quarter of 2018. The operation of SEA-ME-WE-5, SEA-US and IGG will strengthen our network and it's a milestone for Telkom Indonesia to become a global digital hub player.

Now let me wrap up my overview by reiterating our guidance for the full year 2017. We expect Telkom and Telkomsel's revenue will grow better than industry rate. We estimate the industry will grow at mid to high single-digit in 2017.

EBITDA and net income margin are expected to slightly decline in line with revenue shift towards digital businesses and continued infrastructural development. Capital expenditure for the group is expected at around 23% to 25% of revenue, with investment focused on mobile and fixed broadband infrastructure. That's ending my remarks. Thank you..

Thank you, Alex. We will now begin the Q&A session.

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

[Operator Instructions] Our first question today comes from Roshan Raj or Merrill Lynch..

Just 2 questions. First, could you share some thoughts on how competition is evolving in Java and outside Java? And how is your response in these 2 areas? We understand you are in a significantly dominant position in ex-Java areas.

Second, some thoughts on your expectations for mobile pricing, particularly data pricing for the remainder of 2017?.

Roshan, so I think overall I'd characterize the market as very competitive, extremely competitive. I think in particular as competition is focused around data service and it's focused around the starter pack market. So what we're seeing amongst all operators is the most competitive prices in the market are probably in the starter packs sector.

The outlets [indiscernible] subsidizing these packages which means that we're driving a lot of customer acquisition but also a lot of customer churn. What that generally mean is everyone's customer base goes up as a result of those customers waiting to churn off. So I think very competitive. We continue to trade on our core bases.

I think we have a regional pricing structure, will be priced differently depending on the market condition in a cluster. And I think, we continue to price at a significant premium to the competition based on our superior network.

And I think that remains our plan to continue to invest heavily in our network maintaining the experience gap that we have from the competition. I think the picture -- Java versus ex-Java, I think it's pretty much unchanged from what we've seen before.

I think there is probably a bit of an increased competition in some parts of area 1 and area 4, but our market share, I think, remains pretty stable overall. Obviously, Java remains competitive, but again we have a better network experience, which means we can trade at a premium.

Sorry, the second part of the question on data pricing, I think data pricing continues to be under a lot of downward pressure. We will maintain a premium over the market and [ kind of will be so harsh ]. I think we are seeing a lot of indications from Indosat that came for the market pricing to normalize.

I think Excel hopefully more aggressive, but I think ultimately it's in everyone's interest for that to happen. We will continue to try and price in a clever way to make sure that -- to try and stabilize the market, but it's difficult to predict..

Thanks, Alistair for those responses. Just quickly on the first one with regard to your market share outside Java.

So that's been also fairly stable, is that a fair statement?.

Yes, I think that's a fair statement. In fact, if you look at our revenue market share overall, I mean it continues to grow, and we've continued to outperform in terms of revenue growth quarter-on-quarter for quite some time now.

So the direction of growth in revenue market share is good and that comes from a mix of east and west, but also of the central part. It's pretty consistent..

We will now take a question from Colin McCallum of Credit Suisse..

Couple of questions from me on more of the -- sort of the fixed line division. First of all, can you just update us on what does -- number of homes passed is now on the fiber network? And that's the first question. And then secondly, I think you mentioned that the number of Dual Play customers was around 20% of total IndiHome customers.

Can you just confirm that is what you said? And what is the ARPU level of the Dual Play customers -- the Dual Play segment? That would be helpful. One other question, if I may, which is just on employee numbers. The number of employees declined further in the second quarter due to natural kind of retirement age being reached.

If you can just confirm that as well that would be helpful..

All right. The Dual Play customers it's -- to be precise, it's about 18% to 19% of total cost of our existing IndiHome customers. And our collateral of the Dual Play customers is IDR 306,000 by end of second quarter. And total homes passed we had was 17 million by end of second quarter.

In terms of headcounts, yes, there was some natural retirement for the first semester [indiscernible], but we don't have the number with us at the moment. And we are yet to do any employee retirement program up until now. Normal retirement is roughly around 1,000 persons every year. That's pretty much the average..

We will now take a question from Ranjan Sharma of JPMorgan..

It's Ranjan Sharma. 3 questions from my side. Firstly, on the fixed line segment, can you also share if you see increased competition and pressure on pricing, especially in the urban densely populated areas? Secondly, if I look at your financial statement, you have seen a strong increase in network in other telco services revenues.

If you can shed light on what is behind this? And also the third question is similar that you have seen a strong increase in costs related to operational and maintenance expenses. It's a big jump quarter-on-quarter.

If you can shed some more light on that as well?.

Competition in the bigger city is obviously the most competitive areas, in bigger cities like Jakarta and Surabaya. It's always been like that. And from time to time, we and our competitors kind of pick turn in terms of having promotions in -- particularly in the dense populated areas.

But obviously, we have the advantage of being able to operate literally throughout countries, which none of our competitors is able to do so. In terms of the other telco services, it comprises things like E-health, property development and management and also Universal Service Obligation and compensation and so on.

There is also e-payment business arising from the e-voucher distribution that is done by one of our subsidiaries. There is an element of seasonal factor in this, that's why it jumped quite significantly given the Ramadan and Hari Raya period by end of June.

In terms of O&M, it increased, almost 22% year-on-year mainly driven by higher operating costs in anticipation to the higher traffic during the Ramadan and Hari Raya festive seasons..

So is it seasonal, the increase in cost, that these are the 2 [indiscernible] additional quarter-on-quarter?.

It's seasonal..

Our next question today comes from the Miang Chuen Koh of Goldman Sachs..

A few questions for me. Firstly on the 3G and 4G BTS increase for this quarter, appears to be highest we have ever seen. That's also a substantial QoQ increase in CapEx for the entire group.

Can you talk about which your geographies you're adding the BTS in CapEx? And just to confirm is this a reaction actually to competition increasing in some of those areas? And the second question is to revisit your revenue market share statement where you mentioned that things have been rather stable in recent quarters.

But if you track it, I believe that Telkom has actually lost revenue market share since the first quarter 2017. So just wondering how comfortable is the company with some revenue market share decline? Where is perhaps the threshold where you would look to defend? And then the last question is again on the O&M.

It seems like the O&M expenses of Telkomsel appears to be rising a bit slower than on the consolidated basis. Given that you're also expanding Telkomsel 4G coverage, I'm just wondering like why is the discrepancy between the fixed and mobile..

Okay. I'll start with your first question on the 4G and 3G that has increased. I think, yes, because you know now that traffic of 4G almost carry half of our total traffic of the data. So we need to increase the number of our 4G BTS. Up to first half we are doing about 65% on 4G.

Moving forward, as some of the site also already quite heavy with traffic, we need to put additional capacity on that one. So moving forward, I think the number of BTS that we are going to increase -- to add going to fiber and slightly higher than what we predict before because of the traffic on demand on this one.

So how we see this moving forward? Beside that one, we also need to increase our [ capitalization ] and also customer experience. From the city outside of Jayapura despite more competition we need to expand the reach. So we're also going to add additional per GB days on that one. So that's our strategy to -- in our network basically.

And then whether this is going to increase our total spending in Telkomsel, yes, we believe so. But in group level I think this remain the same [ using H1 ]. But basically, we not only are seeing a short-term trend, but also looking on the most strategic view on the medium term and long term about the, I think, consumer behavior towards 4G services.

And on the Telkomsel, a lot of big revenue market share. If you see the growth, it's our competitor, you see in the first quarter about 6%. Excel I think declined about 6% as well. Although, after the first half becoming [indiscernible] around 1% of revenue increase. So I think [indiscernible] see that actually we are losing market share.

So I think my colleague Alistair can explain more on this one..

Yes, I mean, I think on both points I think adding to what Harry has said, I think obviously we spend somewhat ahead of demand on our network to make sure that we have a quality advantage. And that we measure quality as well as the third party's and it shows our network is better quality, which means we have better pricing power.

In terms of where, the short answer is everywhere. We obviously prioritize based on demand, but because with Telkomsel, we also influence national coverage, which means that really -- it means that we continue to dominate east and west. So I wouldn't really say it's due to competitive response.

I would say that our competitors are also building network for lots of the same reasons. But we're certainly trying to stay ahead. I think on revenue market share, I think Harry is right. I think if you look back over the last 5 years, we've delivered double-digit revenue growth. The others haven't over that period.

We are seeing revenue market share growth. On a quarter-by-quarter basis, there may be fluctuations based on slightly different seasonal patterns between the operators, but we would expect to outperform the market again this year. In terms of threshold for action, I mean we're looking at that on a daily basis.

We look at micro clusters across the country. So anywhere we feel that we have been outcompeted than we take some action around that. So it's an ongoing exercise..

And the question about the operation and maintenance expenses from Telkomsel grew slower, yes, because most of our sites we use for 4G. It is 65% of our new additional BTS. It's actually in the same location of colocation thus I think requiring a bit less cost compared to a new site..

[Operator Instructions] We will now take question from Choong Chen Foong of CIMB..

2 questions for me. Firstly on the IndiHome business. Do we see any Triple Play subscribers downgrade to globally Netizen products because obviously if that happens, there would be negative revenue indications.

And any big promotions were run in a quarter with regards Netizen, any big price discount that were given out to drive subscriber acquisition? That's my first question. And then second question, regarding the taxes so far it's been quite normal in the first half of this year.

Are we expecting any capital gain tax or deferred taxes to be booked in the second half, and if so, how much?.

Okay. For the 3P customers who are downgrading to 2P, there is very little customers that did so. Our record indicate that about only 0.6% of the 3P customers downgraded to 2P. But on the other hand, the 2P customers who are upgraded to 3P were a lot higher.

With regards to the promotional, yes, we had a promotional program during the Ramadan season that was ended yesterday and the result was quite encouraging. And it's not only to attract new customers for 2P, but also for 3P.

Your second question, yes, there will be tax deferred benefit from the asset revaluation that would be booked in third quarter this year..

And what is the amount?.

Slightly over IDR 1 trillion..

Our next question today comes from Arthur Pineda of Citigroup..

3 questions please. Firstly housekeeping question. Are there any one-off items booked in the second quarter? Second question, Alistair, regard to competition. On your mobile business, it seems that your competitors have been pushing outside of Java with more aggressive voice offers.

Are you seeing any pricing pressure materialize there? Can you keep your premium pricing on the voice and Java? Third question, Alistair, regard to your base station with a follow up question as well.

What percentage of your base stations are now fiberized?.

Yes. There is only one-off item in the first semester, which is the [ fee AP ] of IDR 300 billion that had to be paid by Telkomsel as per court order, because they -- the court decided that Telkomsel underpaid sometime back. So that's about it, IDR 300 billion..

And on the question of competition in Java, yes, absolutely right. Our competitors have both been pushing aggressive all net calling offers to their customer base. I think we have seen an impact of that in increase in traffic from our competitors to our customers. But we haven't seen an overall shift in market share.

I think our competitors are using voice to try and promote their data products to win overall share, but obviously that's something we monitor closely and we haven't yet seen a major shift in market share..

And then on the fiberized BTS, we have around 40% of our BTS already fiberized..

[Operator Instructions] We will now take a question from Roshan Raj of Merrill Lynch..

Just one more question.

Could you share any color on your current network utilization levels and any thoughts on the spectrum auction, any timelines there?.

Okay. Roshan, on the -- our data network, the utilization right now around 60%, but if we go deeper to site by site, we have I think about right now 20% of our site also already -- fixed asset, 20% or more on the run. That's why we need to accelerate it and adding some capacity in the second half of this year..

[indiscernible] On the spectrum now, we don't know what the dates have been but based on the recent conversation with [indiscernible] that this can be conducted -- the auction sometime this quarter or quarter 3..

We now take a question from Colin McCallum of Credit Suisse..

One other question, I guess for Alistair, what would be the 4G penetration amongst your subscriber base as at the end of June? And how quickly is that growing now with more handsets coming in?.

Okay. So our 4G users year-to-date is almost 30 million, 29.7 million. To give you an idea of the run rate that figure at the end of first quarter was 21.9 million. So I guess you're looking about 3 million a month.

I think if anything that's probably going to continue perhaps even accelerate just through vital impact of people knowing about 4G and feeling the better experience, and also the -- what else drives that is obviously the handset supply. So the market now is standardized on 4G devices.

And also we do a lot of marketing activity too and get customers to change their SIM cards which is required to use -- for them to use 4G. So the best estimate I can give you it's about 3 million a month at the moment and that should continue perhaps accelerate slightly..

We will now take a question from Miang Chuen Koh of Goldman Sachs..

One more question from me.

Can management reiterate the IndiHome subscribers versus ARPU targets for this year? And given the first half numbers, how are we matching against that guidance?.

Yes. It's not an easy question to answer in terms of the ARPU target, because it would really depend on the composition of the 3P and 2P. Yes, we do find that in some segments and in some areas it's more effective to attract new customers to subscribe to 2P first and then approach them to be upgraded to 3P.

And also, obviously, from time to time we need to give out some promotional program. In fact, we're planning to have another one in August this year, because we have our National Independence Day coming up by 17 of August.

In terms of the target of subscriber for full year this year, we are quite certain that we -- in the rest of this year we will reach minimum 500,000 new customers for second half of this year, minimum..

Got it. If I could follow up just around the home pass, right. I mean you have increased that to 17 million. Is that a number you want to kind of keep there, because given the subscribers even by year-end it's roughly 2.5 million. There's still a lot room to grow.

Why would there -- or would there be a need to keep increasing home pass in the next few quarters?.

Please bear in mind that our home pass is rather unique. You cannot compare with any other fixed broadband players, because the home pass is -- our home pass is created because in our effort to fiberize our Node-B, our BTS. So at the same time, we draw the fiber through the residential and corporate areas before it reaches the Node-B.

While we fiberize Node-B, we pass on the residential and corporate areas, because we have all these kind of customers, right, homes, corporates, and obviously the mobile subscribers, unlike any other competitors..

We'll now take a question from Hussaini Saifee of Citi..

A few housekeeping questions from me. First is on the Mitratel.

So how many towers you have right now? And what is the tenancy levels over there? Second question is on the MRP charges for the second half, any indication on that side? And third is on the -- you have booked higher provision for accounts receivable impairment, so just want to understand how it was -- what factors it was related to? Was it related to IndiHome subscribers?.

Can you repeat the second question, please?.

MRP charges for second half, any indication on that side, retirement program charges?.

Are you referring to interconnection or you mentioned retirement charges, which is it, sorry?.

ERP, Employee Retirement [Technical Difficulty]..

ERP, okay, all right. Okay. By end of this semester, we have around 9,700 towers on Mitratel site. It's our wholly-owned subsidiary. And dependency ratio was 1.16%.

In terms of ERP, we do have an ERP program plan to be conducted in second semester, but the execution would really depend on the performance of the company up to the fourth quarter of this year.

For the accounts receivable provision, I think there was improvement in the accounts receivable policy there, so that's why you see a negative number in the second quarter of this year..

We now take a question from Choong Chen Foong from CIMB..

I got a few more questions. On the mobile competition side, your competitors have said that they have been expanding their network into ex-Java over the last 6 to 12 months.

Do we have any indication of how much the network coverage gap has been narrowed between Telkomsel and the peers year-to-date? And any sense of whether competitors started showing up in a lot of new areas in ex-Java competing for the business? That's the first question.

Second question on the O&M cost increase, just to follow-up on the previous question asked, at the consolidated level it's gone up a lot, but less so at the Telkomsel level.

Is that because the site rental for new sites and tower leases are all booked at the consolidated level and not at the Telkomsel level? And third question on CapEx, the first half CapEx of about close to IDR 17 trillion appears to be tracking quite a bit ahead of your full year guidance.

So should we expect the CapEx to tone down in the second half or is there some upside risk to the guidance?.

On the first part, I think some of our competition, yes, I think we've seen the competitors more active in what we call area 1 and area 4 and in certain areas. I mean, a lot of the investment is 4G related and is actually in footprints where they already had coverage in the past.

So I don't think we are seeing a massive change in the coverage areas, more about investing heavily in 4G and converting to 4G. So I don't think we are seeing a massive rejoin of the competitive situation. Obviously our own CapEx and investment is designed to keep us ahead in terms of quality.

So we will continue to kind of do that and manage the quality thresholds. In terms of O&M, it was good and in terms of increase the number in Telkomsel level was lower. So most of the consolidated increase that you saw were more or less contributed by the non-Telkomsel business.

Among others the item that we can share with you, like for instance, the cost of IT services, leased line and CPE, power supply and so on. And obviously there is also some new O&M items resulted from the new asset that just came into our books like some of our submarine cables that were just opened by beginning of this year..

CapEx level?.

For the CapEx level for the rest of this year, pretty much would be in line with our guidance and we still expect that for full year this year, around 35% of the revenue. The number on first semester reach-out was about 35% to 36% of the revenue. So we are still pretty much on track as per our previous guidance..

Just with the O&M cost, do we expect the O&M cost to start tapering off into the second half? The second quarter was a seasonally high quarter for O&M?.

Yes, there was a seasonal factor to it given the Ramadan and Hari Raya was in the first semester this year..

So that affected some of the cost items for non-Telkomsel cost O&M?.

Yes, yes..

As there are no further questions at this point of time, I would like to turn the call back over to your host today for any additional or closing remarks..

So we can conclude the call then. Thank you everyone for participating in today's call. We apologize for those whose questions could not be addressed here. If you have any further questions, please don't hesitate to contact us directly. Thank you, everyone..

That will conclude today's conference call. For your information, the presentation material of today's conference call will be available under company's website www.telkom.co.id. Thank you for your participation. You may now disconnect..