Ladies and gentlemen, thank you for standing by and welcome to the Telkom Full Year 2013 Results Conference Call. [Operator Instructions] All materials for today's conference is available on our website at www.telkom.co.id. Please be advised that this conference is being recorded today. I'll now hand the conference over to your moderator for today's call, Mr. Albert Tan. Please go ahead, sir.

Ladies and gentlemen, welcome to PT Telkom Indonesia full year results ended December 31, 2013 conference call. There will be an overview from our CEO. And after that, questions and answers session will be conducted for all participants on this call. Today's presentation is available on the webcast and an audio recording will be provided after the call for the next 7 days. We released our financial results of the full year ending December 31, on March 6, 2014, and the reports available on our website, www.telkom.co.id. Before beginning, let me remind you that today's call and the responses to questions may contain forward-looking statements within the meaning of Safe Harbor. Actual results could differ materially from projections, estimations or expectations voiced during today's call. These may involve risk and uncertainty and may cause actual results to differ substantially from those discussed in today's call. Telkom Indonesia does not guarantee to any actions, which may have been taken in reliance of the discussion held today. Ladies and gentlemen, it is my pleasure to introduce you the Telkom Board of Directors who are joining with us today: Mr. Arief Yahya as President, Director and Chief Executive Officer; Mr. Honesti Basyir as Director of Finance and Chief Financial Officer; Mr. Rizkan Chandra as Director of IT Network and Solutions and Chief Technology Officer; Mr. Ririek Adriansyah as Director of Wholesale and International Service; Mr. Sukardi Silalahi as Director of Consumer Service; Mr. Indra Utoyo as Director of Innovation and Strategic Portfolio. Also present are the Board of Director of Telkomsel. Mr. Heri Supriadi as Director of Finance; Mr. Edward Ying Siew Heng, Director of Planning and Transformation. Before Arief delivers his remark, I will take this opportunity to give you a brief overview of Telkom Indonesia. Telkom is the single largest integrated telecommunication company and network provider in Indonesia, with over 148 million telephony customers and more than 60 million broadband users at the end of 2013. Telkom provides a strong portfolio of TIME as times, representing telecommunications, information, media and entertainment, directly or through our subsidiaries. We also deliver services through multi-customer portfolio, retail, enterprise, wholesale and international. As of December 31, 2013, the majority shareholders of our common stock was government of Indonesia, with 53.1% ownership and the remaining 46.9% was under public ownership. I now hand over the call to our CEO, Mr. Arief Yahya, for his overview. Arief, the time is yours.

Thank you, Albert. Good afternoon, ladies and gentlemen. A very warm welcome to all of you to our conference call for full year results ending December 31, 2013. We sincerely appreciate your participation on this call. In today's call, I will give you the overview of our achievements in 2013. Until the end of the year, we could maintain an outstanding performance in operational and financial results. I'd also like to update you on the progress of our cellular and fixed line business developments, as well as other business portfolio. Ladies and gentlemen, let me start the overview by sharing the highlights of our full year results. Telkom consolidated revenue increased by 7.5% year-on-year and net income grew double-digit at 10.5% year-on-year. This is in line with Telkomsel's performance, which recorded 10.1% year-on-year revenue increase. Telkomsel gained 6.4 million net additional customer during 2013, made total customer base to be 151.5 million. Telkomsel continues to expanding its network coverage and capacity by adding close to 4,200 new BTS during the fourth quarter of 2013, with almost 85% of them are 3G BTS. Ladies and gentlemen, our fixed broadband users increased by 28.7% year-on-year, to 3 million, and the revenue increased to IDR 4.6 trillion in the full year of 2013. Our mobile data users also increased. In the full year, it increased 10.8% from last year to 50.5 million users. We booked IDR 10.5 trillion revenue from mobile data services and grew 35.6% increase year-on-year. Total mobile data services and fixed broadband revenues increased 25.6% year-on-year to IDR 15 trillion. During fourth quarter, Telkomsel recorded 3.6 million net additional customers. That made total customer base to be 151.5 million. Until end of 2013, Telkomsel owned 69,800 BTS and 27,000 of them are 3G BTS. Ladies and gentlemen, consolidated revenue growth…

Thank you, Arief. We will now begin the question-and-answer session. [Operator Instructions] Operator, may we have the first question, please.

[Operator Instructions] Your first question comes from the line of Luis Hilado from HSBC.

I had 2 questions broken up into the other income division, as well as the OpEx side. I'm just wondering if you can give us a breakdown for the fourth quarter of the other income line. I understand that part of it is the sale, of course, of TelkomVision. But is there any other material part in that number? Second question is to get more color on the OpEx increases. General, administrative expense, you've mentioned that provisions increased during the quarter. Is there any exceptional expense for G&A in the quarter? Second is if you can give us the depreciation, amortization there's an impairment charge that you've mentioned, if you can give us the amount? And lastly, on personnel expense, is it fair for us to annualize the fourth quarter amount or is there some sort of seasonal bonus that is inside the fourth quarter number?

Okay. I will hand this question to follow my CEO our CFO.

Thank you for the question. Before I directly answer your question, let me recall what the management guidance for 2013 performance. As we already informed also to the market analyst and investor, we give the guidance for the growth for revenue for 2013 is around 7% and our achievement is more than that 7.9%. And the EBITDA margin, at the time we informed that we will be stable or slightly declined and the result is net on the adjustment of EBITDA, our EBITDA budget is increased 0.4%. And also, if you compare with our performance with the other competitors in our country, certainly we are better than Excel and also in the fact main [indiscernible] Telkomsel give the best performance for full year 2013. So talking about the other income and other expenses, mostly the other income is same from the gain on sale our pay-TV business, as mentioned by CEO in the speech. And opposite other income let me get from the satellite in-service [ph] C. And about the provision of -- that were incentives takes some understanding in our accounting standards. Before 2012, we did the individual assessment and for 2013, that on the new accounting standard, we did collective provisions. But I think this is only for one-off adjustment. Hopefully, in 2014, we can enforce this our collection and create maybe our provision of that will be decreased in 2014.

Your next question comes from the line of Sachin Gupta from Nomura.

I had 3 questions. They're actually all on cost as well. Firstly, on the operational and maintenance cost, they have increased quite a bit, and this is despite you moving your tower -- some of your tower leases to financial leases. Just wanted to understand why such a big increase in O&M cost? Secondly, I guess a bit of follow-on from Luis' question as well. This impairment you have taken, is it possible to quantify, is it all at Telkom level and does that relate to Flexi and how much it is? And also there's been some provision for doubtful debt as well, which has impacted G&A costs. Just want to understand how much is that and what that relates to? And I guess last question is on your tower leases, you have been moving the tower lease expense from operating to financial lease. Just wondering how many towers does that relate to and how do you actually determine which towers are part of operational and towers are part of financial lease?

I'll hand this over to -- the first 2 questions to our CFO and the third question to Indra.

About the O&M cost, in case, I think that in line with our network actually in Asia is selling in Telkomsel to support the business. This is where Telkomsel gets the best performance in 2013. And about the doubtful expenses, as I mentioned before, it's because their new standards of Indonesian Accounting Standards. So for example, in 2012, we booked for doubtful expenses around IDR 200-something billion. And for 2013, it's around IDR 900 million. That's mostly from cash expenses that because we put as provisions of doubtful expenses. And this is, to say again, is one-off provision in our P&L. This also because the changing in our Accounting Standard. But on the auditor, they suggest us to change the operating lease to be financial lease. That's not as easy, that's also into our O&M, but in case our depreciation and our interest expenses in our other expenses.

Pak Honesti, if I may add to your explanation here, is on the tower lease, at the moment, we run around 12,400 towers. It is -- consists of around 5,000 in operating lease and the rest goes to finance lease. So during 2013, we already booked the depreciation of the tower lease, around IDR 588 billion to the depreciation cost. So why this got big? I think in line with our deployment. We -- as mentioned by our CEO, we had around 28% of our towers, our BTS. So the growth of the lease also because of the growth of the networks, then that's already the reverse on result, as previously mentioned. This is our explanation on -- in addition to that Pak Honesti already explained.

Your next question comes from the line of Roshan Raj from Merrill Lynch.

Three questions. First, just going back to the one-off items. Sorry if I missed it, but could you just help us quantify what were the items and the associated amounts? For example, the amount you gained from sale of pay-TV, the satellite insurance fee, as well as the provision, the amounts if you could share, that would be good. The second question is on the interconnect cost and revenue. Looks like you have net -- interconnect outflow as revenue is less than cost. So are you actually revising the on-net and off-net tariffs? And the third question is on guidance. What is the underlying assumption for competition and pricing? What gives you confidence that you will end up gaining market share once again in 2014?

I'll start from the last question for the competition and how we're going to again provide a good result, and here is Pak Edward and he will explain our whatever our expectation of the market growth. Last year, we experienced 7.1% industry growth, representing by the big 3 GSM. This year, we expect the growth is about the same. We, since the beginning, we always want to be sustained in our position to be a leader in this industry so that's why we said that our objective is to maintain the market share and so on. Where is, however, the growth will be coming? Of course data will provide a lot of room to our growing. And then also, we still believe some from legacy, the SMS employees still provide some room to be exploit to give us another chance to grow because we have our network across all Indonesia, we have some positions with dominions [ph] in -- some outside of Java. So we can do some pricing based on seasonality and also based on the traffic interest and on competition. So based on that, we expect we still can however maintain our growth, at least same like industry and we expect also we can still, however, beat the industry growth. But Edward, you may.

So maybe I could add on -- this is Edward Ying. So maybe I could add on by saying that for the cellular business, clearly in 2014, why we think we can continue to perform is that we continue to invest, like what our CFO said, into coverages outside of Java and we are bringing up more 3G base station. Hopefully, to connect more smartphone customers and they will buy data bundles from us. And on top of that, we're also going to also introduce new digital services and hopefully to engage then other than just web related users, SMS communication or the standard OTT services. So those are the plans that we want to increase our revenue on.

Okay. I will answer the another question about the other income. Yes, we get gains on South Indonesia. It's around IDR 1.3 trillion. And also, we also get other income. It's around IDR 1.7 trillion from the contributed by [indiscernible] for telecom satellites fee that's already in the audits.

Thank you. The interconnect, as -- if you look at the revenue and the expense of interconnect, the expenses will be higher, but please bear in mind that the interconnect expense is not only coming from the interconnect revenue. But some of the expense is because of the increasing of the traffic in the retail side. So this expense increase is due to the higher retail traffic going out of net and also going to the international. So it's the logical consequence of having higher retail traffic going to outside of the network. Thank you.

Your next question comes from the line of Anand Ramachandran from Barclays.

Unfortunately, I had 3 questions. Firstly, if I could just bother you again on the one-off costs due to accounting changes that you spoke about, about IDR 200 billion for 2012, IDR 900 billion for 2013. Which cost had -- did this relate to? I could not get that clearly. That's question one. Question two, you talked about 8 million households already had broadband, and you have about 3 million broadband subscribers as of December. Could you share with us what your broadband target would be maybe for 2014 or 2015? Thirdly and lastly, is there any update on what you plan to do with the tower business, particularly with regard to the initiative you've talked about with regard to Mitratel?

I will direct 3 questions to 3 different individuals. The first one, I will direct to Pak Honesti on the one-off cost. Number two, on the household broadband question, I would direct to Pak Rizkan. And number three, I will direct on towers business to Pak Indra.

Okay. Excuse me, I'll explain again regarding the changes on open standard about the provision on network expenses. If you compare 2012 and 2013, in 2012, we did the individual assessment for our enterprise segment. If we recall the number at that time for individual assessment, we booked IDR 381 billion BTS [ph] cash expenses, and also the same thing in 2013. But when the accounting standard is changed, we also did the collective impairment for the unprovisioned expenses that we get from the enterprise segment, but this is noncash expenses. The impact is around IDR 674 billion. That is why the total number from 2012 up to 2013 is increased little bit higher.

And which cost here does this reflect here within the O&M expenses or within some other cost incurred?

This cost is mostly on G&A. However, then this cost is in line with our deployment in BTS for Telkomsel.

Okay. Question two on the 8 million households and broadband registrations. I'll hand over to Pak Rizkan. Pak Rizkan?

Okay. Thank you. Pak Sukardi or Pak...

Pak Sukardi. Thank you.

That one's my question? On fixed -- for fixed broadband subscribers has already grown by 28.7%, and we expect next year, we'd be -- and in 2015, we'd be 5 million subscribers.

Okay. Third question to Pak Indra on the tower business.

All right. Okay. Thank you. Regarding the unlocking the tower business strategy, we have the [indiscernible] the criteria to unlock the tower, as we already mentioned maybe in the previous conference, that -- we would like to have forecast this service to optimum value from the unlocking. Second is to partly [ph] execute big in terms of execution. Third is about certainty that this action will happen with a minimum [ph] raise. And the fourth is about securing the long-term interest on Telkomsel. So by applying this criteria, we at least -- currently, there are 5 approach that we can do for unlocking tower business. First is by maybe selling the tower. Second is merging the Mitratel with other tower company. The third is backdoor listing to the already publically listed company or tower company. And then the fourth is IPO. But we also add one more option, what we call as doing nothing. So we compare among these 5, and I think by using those 4 criteria, we come into 2 best options for -- makes the tower getting in the best form to be unlocked. The first is the backdoor listing. It means we go to the public -- offer to go public through either public company, which already being in the market. The second is IPO by ourself. So currently, we do this option parallelly and we do the evaluation very neatly, very thorough. Hopefully, we will -- we can compare and make decision which one is the best option by beginning of third quarter. Then after that, we will ask for approval. Then hopefully, then we will get the review about the process, about the legal and about the optimum value of the option that we choose. Then we expect, if this then can happen, we predict that the unlocking implementation will be in the third quarter of 2015.

Your next question comes from the line of Arthur Pineda from Citi.

Three questions for me. Firstly, what percent of your subs base are now on smartphones, and what percent would actually regularly use data at this stage? Second question I had is with regard to dividends. Any guidance with regard to the dividend payout ratios for FY '13 and '14? And last question I had is again with OpEx. Sorry to belabor the point here. You seem to have booked these expenses for 2 years in a row. You've mentioned IDR 674 billion in nonrecurring expenses in 2013. Are we correct to assume that going through 2014, we should just simply strip out these costs altogether? So I'm just wondering why the EBITDA margin guidance is flat to declining.

Can we have the first question to the Telkomsel folks for Heri in cell [ph] for smartphone and data, in Edward.

This is Edward. On smartphone, at the moment, Telkomsel has approximately 4 million subscriber base on our network. And on data users, we are now close to slightly above 60 million users on data user on our network.

Sorry. 6-0?

6-0.

6-0. 60 million, 6-0.

On the next question on dividend, I'll hand it over to Pak Honesti.

Yes. For dividend guidance, management has reported the same as given last year, 65% consists of 55% as cash dividend, annual dividend; and 10%, a special dividend.

On the OpEx side?

OpEx. Yes, I think as our guidance mentioned by CEO, we try to keep -- maintain the EBITDA margins flat or maybe slightly decline. But we also know that -- but Telkom continued to expand the network. And I think this has also increased our cost a little bit. But beside that, we also continued the cost formation strategy just to control our cost and get the profitability for us, still flat or maybe slightly decline.

I'm just curious because you mentioned that IDR 674 billion for 2013 is nonrecurring. If you strip that out, should we not see an improvement in the margin?

I think margins, as we mentioned, yes. For 2013, adjustment in margin is increased from 54.1% to be 54.5%. This is the adjusted margin. So if you compare that, if revenue increased [ph] 7.5% and next term that only increased 6.4%, means that our revenue still increase the growth bigger than growth in expenses.

Okay. I may add -- Heri speaking here. I may add some additional information for you. On the cellular side, we see that like 15% of our cost is in the U.S. dollar. So if we compare to last year, it is supposed to be a bit higher in rupiah. And then we also, coming to the I think data, that you know that the margin is not really as big as the legacy services, that will give us some pressure on the margin. But as the guidance that had been [ph] provided to you, we do some cost optimization just to maintain our margin and also by -- have a lot of other initiative for making efficient in design and also using our [indiscernible] scale. At the end, we try to maintain the EBITDA margin slightly decreased compared to previous years.

Your next question comes from the line of Choong Chen Foong from BNP Paribas.

Three questions from me. Firstly, could you give us more color on the new remuneration scheme at Telkom? What was the average increase in salary? And is there another hike schedule for this year? Secondly, on the international operations in Malaysia, could you give us an update on the progress so far? And what are your plans and targets for this year? And third question, with the shutdown in the Flexi network, are we expecting any cost savings to come out of that?

About the new remuneration scheme, because we did -- because we want to -- in line with the increasing inflation of Indonesia. So at the year, we tried to compensate the salary of our employee referred to the increasing of inflation. And also, we did this adjustment for last year. But for 2014, we predict the increasing of the personnel cost is not more than 4%, but our inflation is predicted -- it's around 6%.

Next question, Heri on the international operation expenditures.

Well, in -- we did -- or started the operation in Malaysia last November, I believe. And in Malaysia, we'll be more focusing on the MVNO, which is -- we are targeted, especially for the [indiscernible] in Malaysia, which in total, we -- there are about 1.5 million Indonesians officially, but I know we still have [indiscernible] has 4 million. On top of that then, we also targeted [ph] the [indiscernible] which -- coming back and forth between the 2 countries, which per year is about 2 million. We use a Telkomsel brand in Malaysia, so we do hope that this can be more acceptable by the people manager. And this year, we targeted at least we can have about 100,000 subscribers.

Thank you, Pak Heri. The next question on Flexi, I'll hand to Pak Indra.

Okay. Regarding the plan to return [ph] the CDMA business. Yes, one of the activities to shut down. We first shut down the rep [ph] area, the area which you've seen negative contribution or negative income. In terms of shutdown, we set a criteria that the -- we start with the tower or the BTS, where the contract already expired. So we're not extending the contract. Then the strategy to shut down, actually, we have to also consider the continuity of the service. That's why we tried to make the shutdown activity in the most efficient way. So the strategy is that we let our subsidiary, which is Mitratel, that has the competence to run the tower business. So we consort [ph] or we transfer all the tower -- or Flexi tower in operation into Mitratel. So we expect from that scheme that we'll be saving around 50% -- we expect from the scheme, because from the remaining economic value of the tower, Mitratel can sell to other tower providers. Hopefully then, Mitratel can leverage or create value-added revenue from selling to other tower provider, from the remaining rent or leasing time of the Flexi. So hopefully, we can save around 50% of the -- if we shut down just as it is to our current tower providers because the contract is quite strict. If you shut down, you have to pay in a full leasing cost. So by migrating it to Mitratel, hopefully, we can save around 50%.

Your next question comes from the line of Pankaj Suri from Nomura.

My questions are on cost again. Number one, how should we see some of the cost items going forward, namely, first one is the impairment of Flexi? Can we expect now the impairment this year? Then, for the post-link [ph] cost, should we assume that whatever we find in 4Q '13 is on the way forward. And on O&M cost, how many more towers can be brought under -- financially over the next couple of years? Then in terms of one-offs, my apologies, we have still [ph] turnout rates here, so can we request the management to kindly see a list of all the key one-offs to us, along with the impact? And that will be extremely helpful. Then my last question is, if you can tell us what is the strategy on international business and where exactly is Telkom trying to expand at this point of time. That's all for me.

Okay. On the first question, there are several parts to your first question. So I hope I've got everything. I'll hand it over to Pak Honesti.

What is the second question?

The second question, can you repeat it again? That is -- I think it's on which areas geographically, but please can you repeat your second question?

Yes, you got it right. So I was asking that for the international business, where in -- I mean, where -- which are the countries that Telkom trying to expand?

Okay. So the second question, let me rephrase that, is you're asking us which other countries are we expanding, and what is our international strategy or -- okay, yes. So the first question, I'll hand it over to Pak Honesti.

Okay. I'll just try to address the question about the impairment of Flexi. Based on our full year 2013 results, the impairment of Flexi amounting IDR 196 billion and it is one-off transaction. This is based on our best estimates on cash flow provisions from [indiscernible] in Indonesia, where we all know that CDMA feature in Indonesia is dying now. And also, we -- the calculation of the impairment of Flexi also incorporates with the improvement of [indiscernible] in Indonesia, and we set some assumption and we predict about the growth of CDMA. And if we see that the business value of the Flexi is lower than the book value, we did the impairment. But with -- on -- in the explanation, we have the initiative to move CDMA business to Telkomsel and we see that maybe this year, we can solve the case [ph] of Flexi, including the impairment of Flexi.

And the second question on the -- how much the tower lease will come to the operating lease and how much will be -- goes to the finance lease. Just around 60% approximately will go to the finance lease. The remaining go to the operating lease.

Can I ask -- in terms of numbers, can you -- will it be possible to quantify how many more towers can we expect that Telkomsel would be leasing this year? Any ballpark number would be very helpful.

Heri?

Maybe around 6,000 [indiscernible] for operating lease.

On the investment [ph] side, we will fully expand to other countries, but we will build it -- we will only expand where we can see clearly that there's a potential. One of the strategies is to fully expand to the country where the Indonesian people are living there. For instance, after this, we will take a look at the Middle East, where we will profile MVNO [ph] like biddings. Middle East has a big potential for us because there are so many -- about a couple million Indonesian who live there. And every year, about 2 million people will further [ph] enhance the number. And other than that, then we will also take a look at the expansion to follow the traffic in MVNO [ph]. This is basically -- we want to leverage the potential of our eyeball. We have a huge eyeball and so that we will take the opportunity of the building that, such as developing the network and include the CDM business.

Your next question comes from the line of Varun Ahuja from UBS.

Again, just emphasizing on the operating lease and finance lease. I suppose it was also a little [ph] too, but I couldn't understand, so if you're increasingly converting your operating lease to finance lease, your O&M and telecom services expense should come down and there should be an increase in interest expense if you're treating the finance lease part of it as interest expense. But we don't see this happening. So I just wanted to check where is the gap. And also your depreciation amortization expense for the last 2 quarters, it has been going up. I believe it's also a reflection of finance lease, but I think you had some impairment also by IDR 26 billion. So should we assume normalized depreciation and amortization of IDR 4.2 trillion for going -- per quarter going ahead?

Heri, you can answer this one.

Yes. Okay. On the finance lease and operating lease, again, we already explained to you that actually around 5,400, our towers goes to the operating lease and around 7,000 recorded as finance lease. How we are going [ph] to classify this because based on the rule, whenever we occupy most of the cellular tower will be coming finance lease. So this is the rule. Based on that one, we follow the rule, and the more we got the tower in category of us -- tower selling or colo [ph], that will go to the final [ph] lease. But if we continue to bring the tower to the new site, I think that will be operating lease. But I think going forward, we believe the tower will -- most of the tower will go to the finance lease. And then the question, how -- what happened to the cost in Q4 in O&M, why that increase was significant. We have some cost that we recognized after all the administration is completed and so on by reconciliation. So because of that, in the last quarter, we have the reconciliation to normalize all the cost that we should incur. And we have some growth in the network service center, which basically cost for the tower. And also, cost for the tower, which is also increased because of the price of electricity increase. And some of repair and maintenance with regard to the number of BTS [ph] growth. So going forward, how it may happen, I think since the beginning, we already said that we already actually predict the margin will be like -- with the margin around 56% and the net income margin will be around 29%. So it is our measure of how we recognize the completeness of documentation to recognize. But since the beginning, we know that the cost will be that way. Going forward, walking forward, I think Pak Arief, our CEO, already explained, this is the trend we are looking forward, and we hope we can improve upon the trend for the full year.

On depreciation and amortization, can you -- is it IDR 4.2 trillion? Is it quarterly, is it full consolidated basis, is it the right way for future or is it going to increase substantially?

Pak Honesti, I think they're asking about the depreciation in consolidated basis.

Yes. I think we will follow the standard accounting for the depreciation, but based on the -- how many deployment that we did in the last year. For example, for tower -- next [ph] to the tower, I think tower, why we -- our depreciation is increased because we changed our segment from operating lease to a financial lease. It means that the tower lease is treated like asset. And for asset, we did the depreciation that's on the life of the asset itself.

Okay. So this IDR 526 billion impairment, is it in depreciation amortization for Flexi?

Yes. Impairment, Flexi, we put as [indiscernible] depreciation.

I think that was our last question. And do we have time for another one question, yes? Yes, we have time for one more last question. Operator, can we have one more last question, yes?

There are no further questions at this time. I will now hand the call back over to the speaker for any additional remarks.

Okay, sure. Thank you. So thank you, everyone, for participating on today's call. Apologize for those whose questions could not be addressed. Should you have any further questions, please do not hesitate to contact us directly. Thank you.

That does conclude our conference for today. Thank you for participating. You may all disconnect.