Business context and reporting period
Telkom Indonesia filed an audited annual Form 20-F for the fiscal year ended December 31, 2017—not a standalone fourth-quarter report. The consolidated statements are prepared under IFRS and include the Company and its subsidiaries, notably 65%-owned Telkomsel. The figures below are in billions of rupiah unless otherwise noted; U.S. dollar amounts are convenience translations.
Telkom provides telecommunications, broadband, network infrastructure, enterprise technology and digital services, principally in Indonesia. Management’s strategy is to expand broadband and digital services while transforming the business into a digital telecommunications company.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | Rp128,256 | Rp116,333 | +10.2% |
| Adjusted EBITDA | Rp64,609 | Rp59,498 | +8.6% |
| Operating profit | Rp43,902 | Rp39,172 | +12.1% |
| Profit before tax | Rp42,628 | Rp38,166 | +11.7% |
| Profit for the year | Rp32,670 | Rp29,149 | +12.1% |
| Profit attributable to parent shareholders | Rp22,120 | Rp19,333 | +14.4% |
| Basic EPS | Rp223.30 | Rp195.99 | +13.9% |
Adjusted EBITDA margin was approximately 50.4% of revenue, versus 51.2% in 2016; operating margin rose to 34.2% from 33.7%. Net income tax expense was Rp9,958, up 10.4%. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for profit or cash flow.
Data, internet and information technology services revenue rose 16.2% to Rp68,535 and represented 53.5% of revenue. Cellular internet and data revenue increased 34.1% to Rp37,961. Offsetting pressures included lower cellular voice revenue (down 3.2%), SMS revenue (down 17.4%) and fixed-line revenue (down 11.6%). Management reported average ARPU declining from approximately Rp45,000 to Rp43,000.
Operating cash flow was Rp49,405, up 4.6%. Investing cash outflow was Rp33,007 and financing cash outflow was Rp21,052. Capital expenditure was Rp33,154, up from Rp29,199; operating cash flow less reported capital expenditure was approximately Rp16,251. Cash and cash equivalents fell 15.5% to Rp25,145.
Total borrowings were Rp35,472, comprising Rp7,498 of short-term debt and current maturities and Rp27,974 of long-term loans and borrowings. Net debt increased to Rp10,327 from Rp2,032. Current assets were Rp47,561 and current liabilities Rp45,376, giving a current ratio of approximately 1.05; reported net working capital was Rp2,185. Total assets were Rp198,185, total liabilities Rp86,354 and total equity Rp111,831.
Other notable measures: property and equipment increased to Rp129,872; pension and other post-employment obligations rose to Rp10,195 from Rp6,126. The company paid Rp11,627 in dividends to its shareholders in 2017, including the dividend relating to 2016; the 2017 dividend had not yet been decided and was scheduled for the 2018 annual meeting.
Material changes versus 2016
- Revenue and profit increased, led by data and broadband growth. Data, internet and IT services rose from 50.6% to 53.5% of revenue.
- Operating and maintenance expenses increased 16.9% to Rp19,929; total expenses rose 9.6% to Rp85,332. Depreciation and amortization increased 10.4% to Rp20,477, and marketing expense increased 27.5% to Rp5,268.
- Receivables impairment expense increased to Rp1,494 from Rp743. Trade and other receivables increased to Rp9,564, while the related impairment allowance rose to Rp4,331 from Rp2,990.
- Other comprehensive expense was Rp2,332, compared with Rp2,099 of expense in 2016, primarily reflecting Rp2,375 of net actuarial losses on defined-benefit plans.
- Cash flow from investing and financing activities increased, while cash balances declined. Capital expenditure rose approximately 13.5%.
Outlook, risks and unusual items
Management expected 2018 capital expenditure to be approximately 25%–30% of revenue, with a significant allocation to broadband. It anticipated further growth in data, internet, IT, cloud and digital services, while legacy fixed-line voice, cellular voice and SMS faced continued decline. These are forward-looking expectations, not guarantees.
Telkom-1 became unusable after a fuel leak on August 25, 2017. Services were migrated to other company and third-party satellites and restored by September 11; additional satellite capacity was leased. Telkom-4 was planned as its replacement, with launch targeted for the third quarter of 2018. The company also reported completion of the SEA-US submarine cable in 2017 and expected the Indonesia Global Gateway cable system to be completed in 2018.
Key risks include intense competition and price promotions, substitution of voice and SMS by over-the-top services, declining ARPU, network capacity and spectrum requirements, and the substantial capital investment needed to expand broadband. Other risks include foreign-exchange and interest-rate exposure, regulatory uncertainty (including potential network-sharing requirements and data-protection rules), government control, and natural disasters, cyberattacks and network outages. A Telkomsel website hack in April 2017 disrupted customer access for part of a day; the filing reports no material successful cyberattack affecting operations to date.
The filing describes the 2016 SMS cartel penalty of Rp18 billion for Telkom and Rp25 billion for Telkomsel, paid in January 2017 after the Supreme Court decision. A 2017 KPPU challenge to IndiHome bundling was decided in the company’s favor. The company also reported tax disputes and appeals, including a pending judicial review concerning international incoming-call VAT, and stated there were no material legal proceedings involving the Company or serving directors or commissioners in 2017. Other unusual items included Rp155 of insurance proceeds for damaged property and equipment and the actuarial losses noted above. Management reported no material off-balance-sheet arrangements.
The independent auditor issued an unqualified opinion on the IFRS financial statements and on internal control over financial reporting as of December 31, 2017. Management also concluded disclosure controls and internal control over financial reporting were effective.
Most important facts for investors to verify
- Reconcile the reported growth in data revenue with lower ARPU and continued declines in voice and SMS; assess whether data growth can sustain margins.
- Review cash conversion, the elevated capital-spending program, the decline in cash, and the increase in net debt and current liabilities.
- Check receivables quality, impairment assumptions and collection performance, given the rise in both gross receivables and impairment expense.
- Track pension obligations and actuarial assumptions, and assess the implications of the Rp2,375 actuarial loss and reported absence of Company contributions to its defined-benefit plan in 2017.
- Verify the Telkom-4 launch and replacement capacity, the costs and customer effects of the Telkom-1 disruption, and delivery of planned network projects.
- Confirm the final 2017 dividend decision and monitor outstanding tax disputes, regulatory changes and the effects of competition and network-sharing policies.