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: Year ended December 31, 2016

Filing Date: March 8, 2017

Auditor: Purwantono, Sungkoro & Surja (Unqualified Opinion)

Telkom Indonesia is a state-owned public limited liability company providing telecommunications networks and services in Indonesia. The consolidated financial statements include the Company and its subsidiaries, most notably PT Telekomunikasi Selular (Telkomsel), in which the Company holds a 65% interest.

Key Financial Metrics (Year Ended Dec 31, 2016)

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

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased by 13.5% (IDR 13.9 trillion) driven primarily by a 23.3% increase in Data, Internet, and IT service revenues (IDR 58.9 trillion vs. IDR 47.8 trillion), largely due to cellular internet and data usage.
• Profitability: Operating profit rose 20.9% to IDR 39.2 trillion. Profit for the year increased 25.1% to IDR 29.2 trillion.
• Expense Increases: Personnel expenses increased 14.6% (IDR 13.6 trillion) due to pension benefit costs and early retirement programs. Marketing expenses rose 26.2% (IDR 4.1 trillion).
• Dividends: The Company paid total cash dividends of IDR 18.3 trillion in 2016 (including interim dividends), compared to IDR 16.6 trillion in 2015.
• Capital Expenditures: Cash used for acquisition of property and equipment was IDR 26.8 trillion, slightly higher than the prior year's IDR 26.5 trillion.

Guidance, Outlook, Risks, and Contingencies

• Outlook: Management continues to invest in network modernization, including the launch of the Telkom 3S satellite (subsequent event) and fiber optic expansion. The Company expects continued growth in data and internet services.
• Tax Contingencies: Significant ongoing disputes with tax authorities regarding VAT and corporate income tax assessments for various years (2007–2015). The Company has filed objections and appeals, with some amounts recognized as claims for tax refund and others as provisions. A specific case regarding a 2008 income tax penalty was decided against Telkomsel by the Supreme Court, resulting in a recognized penalty of IDR 8.4 billion.
• Legal Contingencies: The Company and Telkomsel were found liable by the Supreme Court for SMS cartel practices, resulting in penalties of IDR 18 billion and IDR 25 billion, respectively, which have been paid. Land disputes and other legal actions are ongoing, with a provision of IDR 43 billion recognized.
• Regulatory Risks: Tariffs for fixed line and mobile services are subject to government regulation and price cap formulas. Interconnection tariffs are also regulated.
• Financial Risks: The Group is exposed to foreign exchange risk (primarily USD and JPY) and interest rate risk on variable-rate borrowings. As of Dec 31, 2016, the net debt-to-equity ratio was 2.41%.

Key Facts for Investor Verification

• Revenue Mix: Verify the sustainability of the 23% growth in Data/Internet revenues, which now constitute the largest revenue segment (IDR 59 trillion).
• Tax Disputes: Monitor the resolution of significant tax assessments (VAT and Income Tax) totaling hundreds of billions of Rupiah, which could impact future cash flows and provisions.
• Debt Covenants: Confirm continued compliance with debt covenants, specifically the Debt-to-Equity ratio (max 2:1 for bonds) and Debt Service Coverage ratio (min 125%), which the Company reported meeting as of year-end.
• Non-Controlling Interests: Note that approximately 33.7% of the total profit (IDR 9.8 trillion) is attributable to non-controlling interests, primarily Telkomsel (35% ownership).
• Capital Structure: Verify the impact of the significant cash dividend payout (IDR 18.3 trillion) on future liquidity and capital expenditure plans.