TLK

Business Context and Reporting Period

This Form 6-K filing presents the audited financial results for Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk (Telkom Indonesia) for the fiscal year ended December 31, 2010. The company is a state-owned public limited liability company and the dominant telecommunications provider in Indonesia. The report covers consolidated group results as well as specific performance data for its major subsidiary, Telkomsel.

Key Financial Metrics (FY 2010)

Operational Highlights

• Cellular (Telkomsel): Customer base grew 15% YoY to 94.0 million (91.9M prepaid, 2.1M postpaid). Net adds totaled 12.4 million.
• Broadband: Fixed broadband (Speedy) subscribers grew 44% to 1.65 million. Mobile broadband (Flash) subscribers grew 128% to 3.8 million.
• Fixed Line: Subscribers remained flat at 8.3 million (-1% YoY).
• Fixed Wireless (Flexi): Subscribers grew 20% to 18.2 million.

Material Changes vs. Prior Period

• Revenue Mix Shift: While total revenue grew modestly (1.4%), the composition shifted significantly. Fixed line revenue declined 9.4% due to lower usage charges. Conversely, Data, Internet, and IT services revenue increased 7.0% (contributing 28.9% of total revenue), driven by strong growth in Speedy and Flash subscribers.
• Margin Pressure: Operating income declined 1.3% despite revenue growth, primarily due to a 10.3% increase in Operations & Maintenance (O&M) expenses and a 11.8% rise in marketing expenses to counter intensified competition.
• Balance Sheet Strengthening: Total liabilities decreased by 10.1% (Rp 4.9 trillion) due to debt repayments and lower taxes payable. Total equity increased by 14.9%.
• Accounting Changes: The company adopted PPSAK 1 (withdrawal of PSAK 35), resulting in interconnection revenues being presented on a "gross" basis rather than "net," affecting revenue and expense presentation.

Outlook, Risks, and Management Commentary

• Competition: Management noted heightened competition in Q4 2010, with operators offering aggressive pricing and promotional packages. This led to a decline in Average Revenue Per User (ARPU) for prepaid cellular services and a 12% drop in blended ARPU for the full year.
• Regulatory Changes: A new formula for 2G frequency fees based on bandwidth was implemented in December 2010. Management expects frequency fees to remain flat in 2011 despite increases in CDMA and 3G fees.
• Strategic Investments:
  • Infrastructure: Completed the Palapa Ring submarine cable linking Java, Kalimantan, Sulawesi, Bali, and Lombok. The Mataram-Kupang extension is expected in Q2 2011.
  • Satellite: TELKOM-3 satellite construction is underway (cost ~US$179M), with deployment expected in early 2012.
  • Services: Commercial launch of IPTV is planned for May 2011. Tower lease business expansion is a key focus for 2011.
• Capital Expenditure: Actual Capex for 2010 was Rp 12.65 trillion, significantly lower than the original budget due to a scale-back in Telkomsel's network infrastructure spending.

Investor Verification Checklist

• ARPU Trends: Verify the sustainability of revenue growth given the 12.5% decline in blended cellular ARPU and the impact of aggressive competitor pricing.
• Fixed Line Decline: Assess the long-term strategy for the fixed line segment, which saw a 9.4% revenue drop and flat subscriber base.
• Debt Covenants: Confirm continued compliance with Telkomsel's financial covenants (EBITDA to Debt Service ratio was 3.73 vs. required 1.25).
• Capex Efficiency: Review the rationale behind the significant reduction in budgeted capital expenditure and its impact on future network capacity.
• Regulatory Fees: Monitor the actual impact of the new 2G frequency fee formula on 2011 operating expenses.