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: Nine months ended September 30, 2018 (Unaudited)

Filing Date: October 29, 2018

Telkom Indonesia is a state-owned public limited liability company providing telecommunications network and information services in Indonesia. The Group operates through four primary reportable segments: Mobile, Consumer, Enterprise, and WIB (Wholesale/Interconnection). The financial statements are prepared in accordance with Indonesian Financial Accounting Standards (SAK).

Key Financial Metrics (Nine Months Ended Sept 30, 2018)

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased by 2.3% to Rp99.2 trillion, driven primarily by growth in Data, Internet, and IT services (up 11.5%) and Network revenues (up 43.5%). However, Cellular usage charges declined significantly.
• Profit Decline: Operating profit decreased by 17.3% to Rp29.4 trillion, and Net Profit attributable to the parent company fell by 20.6% to Rp14.2 trillion. This was largely due to increased operating expenses, particularly in Operation, Maintenance, and Telecommunication Service expenses (up 23.3%) and Interconnection expenses (up 43.3%).
• Increased Leverage: Total debt increased by 31.6% to Rp46.7 trillion, resulting in a Net Debt-to-Equity ratio rise from 11.14% to 36.46%. This reflects significant borrowing to fund capital expenditures and acquisitions.
• Cash Position: Cash and cash equivalents decreased by 45.6% to Rp13.7 trillion, primarily due to higher capital expenditures and dividend payments.
• Dividends: The Company paid cash dividends totaling Rp26.7 trillion during the period (Rp16.6 trillion to parent shareholders and Rp10.1 trillion to non-controlling interests).

Guidance, Outlook, and Risks

• Capital Expenditures: The Group committed to significant capital expenditures (approx. Rp9.9 trillion remaining as of Sept 30, 2018) for network modernization, including submarine cable systems (SMPCS, SKKL) and fiber optic expansion.
• Acquisitions: The Group completed the acquisition of Swadharma (51% stake) and increased ownership in TSGN and Telin Malaysia to 70%, consolidating these entities to strengthen the ICT and satellite service portfolio.
• Tax Disputes: Significant ongoing tax assessments and judicial reviews exist regarding VAT on international incoming call interconnection services. While the Supreme Court has ruled in the Company's favor for certain periods, judicial reviews for other periods remain in process, creating uncertainty regarding potential liabilities or refunds.
• Regulatory Risks: The Company is subject to Universal Service Obligation (USO) contributions (1.25% of gross revenue) and spectrum usage fees. Arbitration regarding outstanding USO receivables is ongoing.
• Financial Covenants: The Group remains in compliance with debt covenants, including debt-to-equity and debt service coverage ratios required by lenders.

Investor Verification Checklist

• Debt Servicing Capacity: Verify the sustainability of the increased Net Debt-to-Equity ratio (36.46%) against future cash flows, given the high level of variable-rate borrowings.
• Tax Litigation Outcome: Monitor the status of ongoing Supreme Court judicial reviews regarding VAT assessments, as the resolution could materially impact future tax liabilities or cash refunds.
• USO Receivables: Track the collection status of outstanding receivables from the Universal Service Obligation program, which are subject to arbitration.
• Cost Management: Assess management's ability to control rising interconnection and operation/maintenance costs, which are eroding operating margins despite revenue growth.
• Dividend Policy: Confirm future dividend payout ratios given the significant cash outflow for dividends in the current period and increased capital expenditure commitments.