TLK

Business Context and Reporting Period

Company: Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk (Telkom Indonesia)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Nine months ended September 30, 2014 (Unaudited)
Submission Date: October 28, 2014
Business Overview: A state-owned public limited liability company providing telecommunication networks, services, and informatics in Indonesia. The company operates through four main segments: Personal, Home, Corporate, and Others.

Key Financial Metrics

All figures in billions of Indonesian Rupiah (IDR), unless otherwise noted.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased by 7.1% to Rp65.8 trillion, driven primarily by growth in the Personal segment (Mobile Cellular) and Data/Internet services.
• Profitability: Operating profit rose 3.9% to Rp22.1 trillion. Net profit attributable to the parent company increased 3.5% to Rp11.4 trillion.
• Capital Expenditure: Significant increase in investing outflows. Net cash used in investing activities jumped to Rp15.7 trillion (from Rp5.8 trillion), largely due to acquisitions of property and equipment totaling Rp17.4 trillion.
• Asset Impairment: Recognized an additional impairment loss of Rp190 billion on fixed wireless assets (part of the Personal segment) due to market competition and declining ARPU.
• Debt Levels: Total interest-bearing debt increased to Rp24.9 trillion. Short-term bank loans rose significantly to Rp2.6 trillion from Rp0.4 trillion.
• Dividends: Paid cash and special cash dividends totaling Rp9.9 trillion in May 2014 for the 2013 fiscal year.

Guidance, Outlook, Risks, and Unusual Items

• Management Commentary: Management continues to focus on a customer-centric approach across Personal, Home, and Corporate segments. The company is actively modernizing network assets, including the replacement of fully depreciated equipment.
• Unusual Items:
  • Asset Impairment: Rp190 billion impairment charge recognized in Q3 2014 for fixed wireless assets.
  • Treasury Stock: Resold 1.075 billion shares of treasury stock (Phase II) in June 2014, generating a gain of Rp576 billion recorded in additional paid-in capital.
  • Acquisitions: Acquired 25% ownership in PT Tiphone Mobile Indonesia Tbk for Rp1.39 trillion.
• Risks and Contingencies:
  • Legal: Ongoing investigation by the Commission for the Supervision of Business Competition (KPPU) regarding SMS cartel practices; no final court decision reached as of filing date.
  • Tax: Various tax assessments and appeals are pending, including VAT disputes with the Directorate General of Tax.
  • Foreign Exchange: Significant exposure to USD and JPY. A 1% strengthening of the USD against the Rupiah would decrease equity and profit by approximately Rp28 billion.
• Subsequent Events:
  • Disbursed Rp707 billion from an escrow account related to radio frequency diversion (Oct 2014).
  • Agreed to exchange 49% ownership in PT Dayamitra Telekomunikasi (DMT) for 5.7% ownership in PT Tower Bersama Infrastructure Tbk (TBI).

Key Facts for Investor Verification

• Fixed Wireless Impairment: Verify the sustainability of the fixed wireless segment given the continued recognition of impairment losses (Rp596 billion in 2013, Rp190 billion in 2014 YTD).
• Capital Expenditure Efficiency: Assess the return on the significant increase in Capex (Rp17.4 billion in acquisitions of PPE) and its impact on future revenue growth.
• Debt Covenants: Confirm continued compliance with debt-to-equity and debt service coverage ratios required by lenders (currently compliant).
• Regulatory Risks: Monitor the outcome of the KPPU SMS cartel investigation and pending tax disputes, which could result in penalties or additional liabilities.
• Dividend Policy: Note the substantial cash outflow for dividends (Rp9.9 trillion) and its impact on retained earnings and liquidity.