Business Context and Reporting Period
Company: Perusahaan Perseroan (Persero) P.T. Telekomunikasi Indonesia Tbk (TELKOM)
Reporting Period: Fiscal Year Ended December 31, 2002
Business Overview: TELKOM is Indonesia's principal provider of fixed-line and mobile cellular telecommunications services. The company operates through seven regional divisions and a network division. Key subsidiaries include Telkomsel (mobile cellular, 65% owned), Dayamitra (KSO VI), and Pramindo (KSO I, 30% owned but consolidated due to control). The company is majority-owned by the Government of Indonesia (51.19%).
Key Financial Metrics (2002)
| Metric | Value (Rp. Billion) | Value (US$ Million) |
|---|---|---|
| Total Operating Revenues | 21,399.7 | 2,400.9 |
| Operating Income | 9,401.7 | 1,054.8 |
| Net Income (Indonesian GAAP) | 8,345.3 | 936.3 |
| Net Income (U.S. GAAP) | 9,274.2 | 1,040.5 |
| Operating Margin | 43.9% | - |
| Net Cash Flow from Operations | 10,460.3 | 1,173.6 |
| Total Assets | 42,322.2 | 4,748.4 |
| Total Liabilities | 22,979.0 | - |
| Long-Term Debt | 10,371.0 | - |
| Cash and Cash Equivalents | 5,699.1 | 639.4 |
Note: US$ translations based on Rp 8,913 = US$1.00 (Reuters rate, March 14, 2003).
Material Changes vs. Prior Period (2001)
- Revenue Growth: Total operating revenues increased 32.7% to Rp 21.4 trillion. Growth was driven by Fixed Line (+29.8%), Cellular (+32.3%), Interconnection (+118.1%), and Data/Internet (+133.4%).
- Profit Surge: Net income nearly doubled, rising 96.4% to Rp 8.35 trillion. This was significantly boosted by a one-time accounting gain of Rp 3.2 trillion from the sale of a 12.72% stake in Telkomsel to SingTel Mobile.
- Expense Increases: Operating expenses rose 40.9% to Rp 12.0 trillion. Personnel expenses more than doubled (+103.3%) due to a Rp 906 billion accrual for early retirement benefits and consolidation of KSO I (Pramindo) costs.
- Subscriber Growth: Fixed lines in service grew 7.4% to 7.75 million. Telkomsel mobile subscribers grew 84.8% to 6.01 million, with prepaid subscribers comprising 84.6% of the base.
- Consolidation Changes: TELKOM consolidated Pramindo (KSO I) in 2002, eliminating intercompany MTR/DTR revenues that were previously recognized, which contributed to a reported decline in KSO revenues despite operational growth.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Strategy
- Market Liberalization: TELKOM's monopoly on fixed-line services ended in August 2002, with Indosat granted a license to compete. TELKOM expects to receive an International Direct Dialing (IDD) license in August 2003 as compensation.
- Capital Expenditures: Planned Capex for 2003 is Rp 4.1 trillion, focusing on fiber optic backbones, CDMA fixed wireless, and mobile network expansion.
- Divestitures: The company plans to divest non-GSM mobile affiliates (Telesera, Metrosel, Komselindo, Mobisel) to focus on GSM technology.
Risks and Contingencies
- AriaWest Arbitration (KSO III): A major dispute with KSO Investor AriaWest remains unresolved. AriaWest claims damages exceeding US$1.3 billion. A conditional sale and purchase agreement to buy AriaWest failed to close in 2002 due to debt restructuring issues. Arbitration is suspended until April 17, 2003.
- Tariff Uncertainty: A planned 2003 tariff increase was suspended by the government in January 2003 due to public protests. Future revenue growth depends on regulatory approval of tariff adjustments.
- Currency Risk: Significant exposure to foreign currency debt (US$, Yen, Euro). Depreciation of the Rupiah increases debt service costs, though the Rupiah appreciated in 2002.
- Regulatory Risk: Uncertainty regarding the establishment of an Independent Regulatory Body and the finalization of interconnection and Universal Service Obligation (USO) regulations.
Unusual Items
- Gain on Sale of Telkomsel: A non-recurring gain of Rp 3.2 trillion (accounting basis) from the sale of 12.72% of Telkomsel to SingTel Mobile.
- Early Retirement Accrual: A significant one-time charge of Rp 906 billion for early retirement benefits accrued in 2002 for implementation in 2003.
Investor Verification Checklist
- AriaWest Resolution: Verify the status of the AriaWest (KSO III) arbitration and the potential financial impact of the US$1.3 billion claim or the cost of acquiring the unit.
- Tariff Implementation: Confirm whether the government will approve the suspended 2003 tariff increases, which are critical for margin recovery in the fixed-line segment.
- Competition Impact: Assess the actual market share erosion and pricing pressure from Indosat's entry into the fixed-line market post-August 2002.
- Debt Refinancing: Review the company's ability to service its significant foreign currency-denominated debt (approx. US$1.3 billion in long-term debt) amidst potential Rupiah volatility.
- Capex Funding: Verify the availability of funding for the planned Rp 4.1 trillion capital expenditure program, particularly given the shift away from government two-step loans.