Business Context and Reporting Period
Company: Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk (Telkom Indonesia)
Filing Type: Form 6-K (Foreign Private Issuer)
Reporting Period: Nine months ended September 30, 2007 (Unaudited)
Filing Date: October 30, 2007
Telkom Indonesia is Indonesia's primary telecommunications provider, offering fixed-line, cellular, data, and internet services. The company operates through three main segments: Fixed Wireline, Fixed Wireless, and Cellular (primarily via its subsidiary Telkomsel). The financial statements are prepared in accordance with Indonesian GAAP, with reconciliations provided for U.S. GAAP.
Key Financial Metrics
| Metric (Millions of Rupiah) | 2006 (9 Months) | 2007 (9 Months) | Change |
|---|---|---|---|
| Total Operating Revenues | 37,199,944 | 45,287,403 | +21.7% |
| Operating Income | 17,182,884 | 19,896,569 | +15.8% |
| Net Income | 9,222,471 | 9,819,055 | +6.5% |
| Net Cash from Operating Activities | 19,606,344 | 19,306,270 | -1.5% |
| Capital Expenditures (Cash Used) | (10,597,131) | (12,117,416) | +14.3% (Increase) |
| Total Assets | 68,351,960 | 76,784,958 | +12.3% |
| Total Liabilities | 33,647,490 | 36,704,393 | +9.1% |
| Stockholders' Equity | 27,509,046 | 31,818,485 | +15.7% |
Note: Figures are in millions of Indonesian Rupiah (Rp). U.S. Dollar equivalents are provided in the source text but are for convenience only.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenue increased by 21.7% to Rp 45.3 trillion. Significant growth was driven by the Cellular segment (up 12.2% to Rp 16.7 trillion) and Data and Internet services (up 59.6% to Rp 10.2 trillion). Interconnection revenue also surged by 37.6% due to a change in accounting treatment (grossing up domestic interconnection revenue starting Jan 1, 2007).
- Expense Increases: Total operating expenses rose 26.9% to Rp 25.4 trillion. Personnel expenses increased 24.8%, and Operations, Maintenance, and Telecommunication services expenses increased 27.9%. A new line item for Interconnection expenses appeared in 2007 (Rp 1.64 trillion) due to the regulatory shift to cost-based tariffs.
- Foreign Exchange Impact: The company recorded a net foreign exchange loss of Rp 113.6 billion in 2007, compared to a gain of Rp 677.8 billion in 2006.
- Asset Base: Property, plant, and equipment (net) increased by 20.3% to Rp 58.4 trillion, reflecting continued heavy investment in network infrastructure.
- Dividends: Dividends payable increased significantly to Rp 1.44 trillion in 2007, reflecting the approval of cash dividends for the 2006 fiscal year.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- 3G Expansion: Telkomsel (subsidiary) commenced commercial 3G services in September 2006. The company is actively rolling out 3G infrastructure and has committed to covering specific provinces by set deadlines.
- Interconnection Tariffs: Effective January 1, 2007, the company implemented cost-based interconnection tariffs as mandated by the Ministry of Communications. This shifted interconnection revenue presentation from net to gross and introduced significant interconnection expenses.
- Capital Expenditures: The company has committed to significant future capital expenditures (approx. Rp 10.2 trillion as of Sept 30, 2007) for network expansion, including optical cable rings and CDMA/FWA systems.
Risks and Contingencies:
- Legal Proceedings: The company is involved in various legal actions, including land disputes and billing disputes. Notably, there are ongoing investigations by the West Java Police and the Attorney General regarding alleged corruption related to interconnection services and equipment procurement. Management believes these will not have a significant financial impact, but one former director was sentenced to one year in prison (appeal pending).
- Tax Assessments: Telkomsel received tax assessment letters in October 2007 for underpayments of withholding tax and VAT for fiscal years 2004-2005 totaling Rp 479 billion. The company plans to object to a portion of this assessment.
- Regulatory Changes: The company is subject to Indonesian telecommunications regulations, including Universal Service Obligation (USO) charges (0.75% of gross revenue) and tariff caps.
Investor Verification Checklist
- U.S. GAAP Reconciliation: Verify the significant adjustments required to convert Indonesian GAAP net income to U.S. GAAP net income (e.g., pension accounting, revenue recognition, goodwill amortization). U.S. GAAP net income for the period was Rp 8.68 trillion, lower than the reported Indonesian GAAP figure of Rp 9.82 trillion.
- Foreign Exchange Exposure: Review the net liability position in foreign currencies (approx. Rp 6.25 trillion net liability as of Sept 30, 2007) and the impact of Rupiah volatility on debt service and earnings.
- Debt Covenants: Confirm compliance with financial covenants in major loan agreements (e.g., Debt-to-Equity, Debt Service Coverage), particularly given the high level of capital expenditure and interest payments.
- Tax Disputes: Monitor the outcome of the Rp 479 billion tax assessment objection filed by Telkomsel and the status of the ongoing corruption investigations.
- 3G License Commitments: Verify progress against the 3G license requirements, including network coverage targets and the payment of annual usage fees (BHP).