Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk (TLK) Q2 2016 Earnings Report, Transcript and Summary

Thank you for standing by, and welcome to the Telkom First Half 2016 Result Conference Call. [Operator Instructions] I must advise you that the conference is being recorded today, Tuesday, the 2nd of August 2016. I'd now like to hand the conference over to your speaker today, Mr. Andi Setiawan. Please go ahead.

Ladies and gentlemen, thank you for standing by. Welcome to PT Telkom Indonesia First Half Ended June 30, 2016, Conference Call. We released our results on July 22, 2016, and the results are available on our website, www.telkom.co.id. Today's presentation is available on the webcast and an audio recording will be provided after the call for the next 7 days. There will be an overview from our CEO. And after that, all participants are given the opportunity to participate in the Q&A session. Before we start, let me remind you that this call and the responses to the questions may contain forward-looking statements within the meaning of safe harbor. Actual results could differ materially from projection, estimations, or expectations poised during today's call. These may involve risks and uncertainties and may cause actual results to differ substantially from what we have discussed in today's call. Telkom Indonesia does not guarantee to any actions which may have be taken in reliance of the discussion held today. Ladies and gentlemen, it's my pleasure to introduce the Telkom's Board of Directors who are joining with us today: Mr. Alex J. Sinaga as President Director and Chief Executive Officer; Mr. Harry M. Zen as Director of Finance and Chief Financial Officer; Mr. Abdus Somad Arief as Director of IT, Network & Solutions and Chief Technology Officer; Mr. Honesti Basyir as Director of Wholesale & International Services; Mr. Indra Utoyo as Director of Innovation & Strategic Portfolio; and Mr. Muhammad Awaluddin as Director of Enterprise & Business Services. Also present are the Board of Directors of Telkomsel: Mr. Ririek Ardiansyah as President Director; Mr. Heri Supriadi as Director of Finance. Before Pak Alex delivers his remarks, I will take the opportunity to give a brief overview of Telkom Indonesia. Telkom is the single largest integrated telecommunication company and network provider in Indonesia. Telkom provides a strong business portfolio of TIMES: telecommunication, information, media and edutainment. We also deliver services to multi-customer portfolios in retail, enterprise and wholesale. As of June 30, the majority shareholder of us was Government of Indonesia with 52.1% ownership and the remaining 47.9% was under public ownership. I'll now hand over the call to our CEO, Mr. Alex Sinaga for his overview. Alex, the time is yours.

Thank you, Andi. Good afternoon, ladies and gentlemen. Welcome to our conference call for first half 2016 result ended June 30, 2016. And we sincerely appreciate your participation in this call. Ladies and gentlemen, in the first half of 2016, we continued strong performance both in terms of operational and financial. Telkom successfully achieved triple double-digit growth for the first half of 2016. Our revenue grew 15.6% year-on-year while EBITDA and net income grew 22.8% and 33.3% year-on-year, respectively. We also successfully maintained healthy level of profitability with EBITDA margin of 51%, improved from 48% in the first half last year. And net income margin was recorded at 17.6%, increased from 15.2% last year. Data, Internet & IT Services grew sharply by 50.7% year-on-year. As a result, its contribution to total revenue also increased significantly from 40.1% -- to 40.1% from 30.8% last year. In the meantime, our expense increased by 8.5% year-on-year, lower than revenue growth, partly driven by operating and maintenance and marketing expenses. Operation and maintenance expense, which accounted 44.2% of the total expenses, grew by 14.6% in line with the continued infrastructure development both in cellular and fixed-line businesses in an effort to grow Digital Business growth. Marketing expense increased by 22.3% year-on-year due to active promotion in 4G LTE and aggressive marketing and sales activities on the occasion of festive Ramadan season. Our strong result in first half of 2016 were in line with solid performance of our cellular business. Telkomsel gained almost 5 million net additional customers during first half 2016. Gross total customer base grew 157.4 million, a dramatically high SIM card penetration and hitting up the competition. Telkomsel continued expanding its network infrastructure aggressively by adding more than 15,000 new BTSs during the period with around 90% 3G and 4G BTSs, reflecting our focus on growing the Digital Business. As a result, mobile data payload increased significantly by 82.7% with strong smartphone adoption with increased 45.7% year-on-year to 70.1 million users. Ladies and gentlemen, Telkomsel continued its strong performance during first half 2016 and again delivered another triple double-digit growth in revenue, EBITDA and net income, which grew by 16.1%, 23.9% and 32.7% year-on-year, respectively. Revenues increased to IDR 41.1 billion with Digital Businesses continuing to be the growth engine with 46.7% year-on-year growth. Digital Business contribution to total revenue substantially increased to 34.6% from 27.4% last year. In Legacy business, we are still able to sustain healthy growth in voice, which grew by 8.5% year-on-year, mainly attributable to higher usage, which increased by 14.7% year-on-year. It's mainly due to improvement in network quality, such as full voice packaged products as well as growth in our customer base while revenue from SMS grew by only 1.7% year-on-year, driven by the decline in SMS traffic of minus 16.1%. We have cautioned that popularity of instant messaging application is inevitable and predict further deceleration in the SMS growth. Ladies and gentlemen, on the fixed broadband side, our flagship product, IndiHome Triple Play, recorded total subscriber of 1.5 million. We keep enriching our content of IndiHome so that our customers now can enjoy 95 TV channels for a basic package. Besides linear content, we also provide video streaming service, such as iflix, CatchPlay and Viu, to enhance customer stickiness and attract potential subscribers. To accelerate IndiHome expansion throughout Indonesia, we continue to enhance our human resources both in terms of capabilities and quantity. In June 2016, we have 4,400 fiber technicians for IndiHome installation. Ladies and gentlemen, on June 29, 2016, we successfully placed out 864 million of our treasury shares with net proceeds of IDR 3.25 trillion. This proceed mainly will be utilized to support our capital expenditure and recapitalization of our subsidiaries. The transaction was the biggest treasury share placement in Indonesia by [indiscernible]. Ladies and gentlemen, now we'd like to share with you on the asset leveraging initiative that we started this year. Telkom has saleable assets in the form of unutilized land bank as we have around 1,200 hectares. And we plan to develop that asset into assorted investment property project. In the first phase, the development will be focused on enhancing operational efficiency by providing office space for the group. In 2015, we spent almost IDR 1.1 trillion for office space rental in various places. And we intend to significantly reduce this rental expense over time by developing office buildings on our land bank. Now let me reiterate guidance for the full year 2016. With strong set of result in the first half 2016, we expect both Telkom and Telkomsel's revenue to grow better than market rate by continued effort to increase Digital Business' revenue. We estimate that the industry will grow by around 10% in 2016. EBITDA margin is expected to slightly decline in line with continued infrastructure development and revenue shift from Legacy to Digital Business. EBITDA expenditure for the group is expected around 20% of revenue with investment focused on mobile and fixed broadband infrastructure. That's the ending of my remarks. Thank you.

Thank you, Pak Alex. We will now begin the Q&A session. [Operator Instructions] Operator, may we have the first question, please?

[Operator Instructions] We will now have our first question from Miang Chuen Koh from Goldman Sachs.

Three questions for me, first is on mobile. The first half postpaid ARPU declined year-over-year. Can you talk about why that is the case? Second question is on fixed broadband, IndiHome specifically. The ARPU is about IDR 300,000 at the end of first half of this year. And this is lower than in the first quarter. This is a bit odd as we see that your price trends are generally fairly stable. So can you explain why it declined? And what are the expectations ahead? Last question is also on the IndiHome, just a question on the subscribers. So you reached about 1.5 million in the first half of this year. So it's about 400,000 additional subs versus end of last year. So this is a bit behind your run rate of last year. So perhaps you can give a guidance of target by end of the year?

Okay, thank you for the questions. Heri Supriadi speaking here from Telkomsel. On the postpaid decline of ARPU, this is mainly coming from because we increased the number of M2M subscribers with the lower ARPU per line. The second, we're also addressing our high-value prepaid customers, so swaying them to becoming postpaid subscribers with lower ARPU compared to the, I think, most of the regular postpaid that we have already. So they are bringing altogether to [indiscernible] becoming [indiscernible] line but [indiscernible] are increased.

So for second and third question, this is Abdus, CTO of Telkom Group. So first, about the ARPU of IndiHome, it has slightly declined from first half -- first quarter 2016. It is because of we are introducing a new package that is targeted for competitive areas that are already grabbed by our competitor. That is to grab the demand that's there. And this package, a little bit slightly below the existing price. But we have a basic price, and then add-on as an option for the customer. So it will impact this quarter. And the target of our ARPU, then around IDR 300,000 right now out in the full year. Second, about the subs, reached 1.5 million. It is -- the demand is still there. We are sure that it is still strong demand. We've prepared already the brand that we planned from the beginning of the year for the people, the [indiscernible] or the [indiscernible] and also their infrastructure. It is well prepared, and now it is ready in the market. We still have some problem in customer side and also in the field, for example, the wiring in-house of the customer. It is a transformation of [indiscernible] of the people and also the contractors. So the speed of the contractors is a problem for us. Therefore, it is a little bit behind. But we are now changing the standard of the in-house wiring. We use an alternative, not using fiber optic. We also will use QVT cable. So by this approach, we do hope that the speed of the sales can be improved. And expected, we'll be around 2 million until the full year.

Maybe if I could follow up just quickly on a couple of things. Can you describe a little bit on the mobile side, you talked about the M2M subscribers, what kind of M2M subs are you talking about? And then secondly, again on the IndiHome, I didn't quite catch what you mentioned earlier. You said that instead of using fiber optics, now what are using now again to kind of wire in-housing?

This is Edward Ying. M2M, they are mainly services we offer into the market. One of them predominantly, they are actually now serving the EDCs, which means now we can measure whether the EDCs -- actually, those are the machines where you pay your Visa card, your MasterCard, you swipe, how we can manage the uptime, we know how many transaction they do. So I'd like to use the word, most of the time, Indonesia are working with us. I think for numbers, I don't want to disclose. But I'd like to say that they are close to 200,000, okay? And yes, not in social media still will be our key bytes and our OBU that measure card performance and management. This also imbues to the system we put on the market in trying to get traction on it and scale. So this is the majority of what we do. There's more news of this coming onboard shortly. I hope I answered your question.

Regarding the single cable, yes, it's an option to use again copper. But it is too big a [indiscernible] since the bandwidth that's required for Triple Play is below 100 max. With respect of utility cables still reach that speed, so it is an option. And the contractor is more ready for this kind of installation. Therefore, we choose this option instead of also [indiscernible] installing the fiber.

Our next question comes from Colin McCallum from Crédit Suisse.

Just three questions for me. First of all, just on the IndiHome ARPU question, could you split for us the ARPU level that you're getting from fiber customers that are IndiHome versus the ARPU level from non-fiber IndiHome customers? If you could give us those 2 numbers, that would be helpful. Second question is just on CapEx. I think in your introduction, you talked about kind of CapEx to sales ratio of like 20%. I think previously you talked about CapEx to sales of maybe 20% to 25%. Were you just abbreviating what you were saying in the intro there? Or is it actually a reduction to 20% from previously 20% to 25%? Just want to get your meaning there. And then the third question is just on one off items. I know there's a couple in the second quarter. Can we expect further one-off items, for example, early retirement program charges in the second half of this year? Any color on that would be helpful.

Okay. For first question regarding the split between ARPU, fiber and non-fiber, so the fiber ARPU is around IDR 350,000 per month and then non-fiber is around IDR 250,000. So in blended, we get the IDR 300,000 per month.

Our next question comes from...

It's Harry here, CFO of Telkom. On the second and third questions, our CEO did mention it was 25% of sales. So that's not 20%. So that's the guidance towards the end of the year, 25% in terms of CapEx to sales. And for the ERP, towards the end of this year, we have budgeted totally around IDR 400 billion. For ERP, that would be hopefully completed within the third quarter of this year.

In Telkomsel, about IDR 150 billion of additional.

So just to check, so I think those IDR 200 billion was accrued in the second quarter. So does that mean an additional IDR 400 billion will come in the second half or just an additional IDR 200 billion?

The total would be, more or less, IDR 400 billion. So additional IDR 200 billion will be coming in, in the third quarter.

Okay, that's very clear.

Plus another IDR 150 billion on Telkomsel's side also for ERP. They will be coming in the third quarter as well.

Our next question comes from Choong Chen Foong from CIMB.

Three questions from me. Firstly, on the Telkomsel margins, right, that was very strong for the first half of the year. Do you think that's sustainable going into the second half? Or do you see any sort of cost pressure coming through that might actually cause your margins to ease half-on-half? And then second question, on the IndiHome side, right, can you tell us a bit about the content cost? I mean, at IDR 300,000 ARPU, is it profitable? Given the fact that you said you have 95 channels and all that, is the content cost a big cost element there? And third question is on the -- you mentioned by the development of some of your land bank and you could potentially save about IDR 1.1 trillion in rental cost. Can I understand when that might be realized? Because I realize -- I mean, I'm aware that you have a building that's being constructed next to your headquarters. So is it about to be completed very soon and therefore you start to get the savings on the rental?

Okay. On the margin side on Telkomsel, if you see our figure -- actually, this year, we have 1 day more in February. It was 29 days as compared to last year's 28 days. So we recorded about IDR 229 billion additional revenue from that day. And then the second, last year, we did record some one-time expenses in early retirement program, which was about IDR 161 billion and also the occasion of the use of cash in which we need to record as expenses worth IDR 102 billion, which happened this year. That altogether bring us to better ARPU compared to -- better margin compared to last year. So how is the figure until the end of the year? As we always mention to you, actually we're growing our business primarily coming from the data which give us less margin compared to the Legacy. So again [indiscernible], we say that by growing more to digital and data, the margins are supposed to decline a bit. But we try to do our best to maintain our margins at least similar to last year.

So regarding the second question, the content cost, content cost in IndiHome, it is -- there are 2 packages, 2 basic packages. First, cost per content is around IDR 30,000, and then the higher package costs around IDR 60,000. So it is still in the corridor of low pricing. And then EBITDA margin is around 20% until -- 25% -- 25% to 30%, so it is profitable. The third question, [indiscernible].

Yes, for the third question, one building have been completed, which is the new office of Telkomsel. So Telkomsel, their previous head office used to be an [indiscernible] building, so they just moved to the new head office about 2 months ago. And another building, which is going to be the new head office of Telkom Group, is also in the final stage of construction. We are hoping that this will be completed in the next 2 to 3 months. And then we are in the process of preparing construction of smaller offices in a few different cities in Indonesia both for Telkomsel and for Telkom.

So the cost savings will come through -- that will come through next year?

Yes, we believe that we would realize some cost savings starting next year. It's just that in terms of amount, we still cannot figure out by how much. Some of our subsidiaries that are currently still occupying external buildings are going to move into our new head office towards the end of this year. So we will have less rental expense the next year.

Okay. And one last bookkeeping question, what is your ARPU for non-IndiHome broadband, i.e., your former Speedy subscribers?

So for the program Speedy, from IDR 100,000 to IDR 150,000, so below the IndiHome.

Okay. But we have an exact number for the second quarter?

Second half or second quarter?

Second quarter, yes.

It's around IDR 175,000.

Our next question comes from Jeremy Chen from Bernstein.

First question on the stock placement, just want to understand why the placement -- I understand you said it's to fund CapEx. But I remember a few years back, there was a plan to increase dividend payout, correct me if I'm wrong. So why the need for extra capital when there was originally a plan to return capital? And then secondly, in terms of the pricing for the stock placement, how did you decide the current price at which you placed it at? Second -- third question on the land bank, the investment properties, I heard at the beginning that this is the first phase. It sounded like there are further phases. Just want to clarify whether you're only developing properties for your own needs. Or are you also entering into the property investment business? And lastly, also to clarify, on the ERP, I heard it ending Q3 this year. Is that the end of the ERP program altogether? Or will there be further terminations or early retirements in the next few years?

Yes, thanks for the questions. For the treasury stock sale, as a stable enterprise, it is very complicated for us to get through to, let's say, do anything else besides sell it. So let's say we want to cancel it, it's very complicated for us to get the approval. So the proceed that we get, we are going to use it to partially to support our CapEx and as well as to recapitalize some of our subsidiaries. In terms of the pricing, there is one clear local regulation issued by OJK, the capital markets supervisory body, that the sale price has to be not lower than the average of the buying price and has to be not lower than the closing price of the -- on the day -- on the previous trading day. So hence, the price that we executed the treasury stocks, that was IDR 3,820, which is on par with the closing price of the previous trading day.

Sorry, so just to interject there, on the pricing, was there any kind of valuation for the company that was done to determine what the appropriate purchase or the sales price would be for the stock?

Say that again, please?

Was there any kind of valuation done to sort of price the company's own stocks and decide that the current price is appropriate for selling?

No, we simply have to follow the OJK regulation. Okay, on the asset leverage program, we do have some plan to enter selectively and carefully commercial property projects. We are currently talking to some potential partners, including some reputable retailers' names. But we expect that these commercial property projects will be starting in next year. So this year will just be a preparation stage.

And on that, two more questions. One, will you be only providing the funding and the partners will be doing the construction, et cetera? And also how much capital or how much CapEx are you planning for this?

We're still in the process of preparing the budget as well as the capital. With regards to funding, there's always an option whereby we will co-invest together with some potential partners. And on your last questions on ERP, we do expect to continue ERP at least as the current level up to year 2020. Obviously, we need to consider the company's condition before we execute the plan every year going ahead until 2020.

Our next question comes from Arthur Pineda from Citigroup.

Three questions for me. Sorry if this has been asked before, but IndiHome takeup rate [ph] have decelerated in the second quarter. What's driving this? Is it demand softening? Or are there bottlenecks in some areas? Second question I had is with regard to IndiHome pricing. If I recall correctly, this was being discounted quite heavily in the market initially when you were rolling out. Are we seeing any changes with regard to the pricing strategy for IndiHome? Third question is with regard to the regulations. Any update on the interconnection rate cut and the proposal to cap off-net versus on-net rates?

So regarding the demand, yes, it is still -- we are optimistic about the demand. So third and fourth quarter will be -- we expect that the sales will be higher than the first and second quarter. Therefore, we're optimistic to reach at least IDR 2 million in the end of this year. So by accelerating not only the infrastructure we have but also all the stakeholder that's involved in this sales activity, including, as I mentioned previously, the contractor of house wiring installation. That has now become a little bit of problem for us because the speed and the numbers of the contractor is not sufficient for today, and we collaborate already with the association of the contractor. We do hope that, that will be accelerating the speed of the sales. And the second one, pricing, yes, we introduced discount for entry level but not more than 20%. And we introduced also add-on of the new packages, and we haven't calculated yet to the ARPU for this add-on packaging so just new channels and also some initiative in digital services. So we do hope we will -- it will take up the ARPU next quarter. Thank you.

Harry Z here. Regarding the interconnection new regulations, they are still in progress, not finalized yet. But we predict that will be -- the process time is around September, the -- all due process to discuss with the government how to get the best solution for interconnection regulation. Thank you.

Okay. I just have one follow-up question with regard to your capital. You've obviously canceled the Teleguam deal. Plus, in addition, you've raised capital with your share sale, and you've got more on your books. What should we expect to see with regard to the freed-up capital? Do you expect to just reinvest that into the business? Or is there room for you to actually raise payouts?

Yes. That would be used for our CapEx, and obviously, it will be additional war chest for potential M&A in the future.

Our next question comes from Gopakumar from Nomura.

Sorry, I missed the early part of the call, so sorry if you've already discussed this. But 3 things that I'd like to understand. Firstly, can you talk a bit on the medium-term growth outlook for Telkomsel? What's your plan to address any potential impact of data-cannibalized interest in the longer term? Secondly, can you help me understand IndiHome? Do you disclose the split between fiber versus non-fiber customers? And going forward, would you -- or what's the plan? Would you plan to add or plan to focus more on fiber subscriber additions? And what does that mean -- or is it on the non-fiber? And what does that mean to ARPUs? And thirdly, a bit of housekeeping. In terms of your 2Q results, was there any benefit from Hari Raya shifting forward by a few days? And if that's the case, consequently, how would the growth in the 3Q -- would there be an impact on 3Q growth rates from this?

This is Edward. I'll try to address the question about the medium-term growth of Telkomsel. I think Telkomsel would continue to grow in the mix, medium term, whether it's 6 months, 12 years (sic) [ months]. I think there's good demand on like the wireless business. There's still huge demand for broadband business. But surely one thing -- we see pressure in SMS. We see voice continue to grow but SMS continue to face pressure, meaning less usage. But on this real growth, we are looking at increasing -- as we said earlier, we got M2M customers, and we look at the new growth in financial -- fintech's revenue using TCASH and other management in M2M and IOT that we hope will grow the mix maybe longer term in the future. On the short term and to summarize, I think we'll continue with voice. Data will be a key driver for the next 12 months. Notwithstanding the competition, I think there's still demand and -- especially in data in that business. So we believe we'll be able to continue the growth. As we earlier said that we continue to believe that with that in the mix, you'll finish the financial year closing at double digits. [indiscernible], third question?

So about the second...

As you say, is it double digit -- I'm sorry, yes, go ahead.

Okay. For IndiHome, thank you for that question. So regarding the fiber versus copper, so we are forecasting on adding, of course, new subscriber from fiber. For the time being, the new sales comes from fiber on average between 70% to 90% per day. So most of the new subs are fiberized. And then for the ARPU, of course, from the fiber, we expect more ARPU in the future, and we are preparing the aggressive promotion for additional STV [ph], means a second or third TV at home. And then also the content from our subsidiary, from MelOn, for example, and then we already have karaoke features there. And so by this fiber infrastructure, we can deliver more services that will be setting a new revenue -- new ARPU for us. Thank you.

If I may just have a follow-up question. Can you -- is it possible to disclose the current split of fiber versus non-fiber subscribers on IndiHome?

Okay. So from IndiHome subscriber, there are 68% from fiber. The rest are still in copper.

Our next question comes from Roshan Raj from Bank of America.

Three questions. First, on IndiHome, could you share some medium-term targets? For 2 to 3 years out, what sort of homes collection are you looking at? Second is on depreciation and amortization at the group level for Telkom. It dropped quarter-on-quarter. So what was the reason for that? And then what sort of trend should we expect for the full year? And third bit is on network sharing regulatory update. Has there been any sort of information from the ministry? And what aspect is this regulation likely to address?

So first of all, the number 3, on the network sharing, so far, the regulation -- the new regulation on network sharing is not finalized yet. But the main principle that we anticipate on this is actually, it will be based on B2B. It's not going to be kind of monetary sharing. So I think that's okay for Telkomsel, and we're not going to have any Peking duck on us.

[Foreign Language] Depreciation?

[Foreign Language]

Okay. So the question regarding the medium term of IndiHome. So we are planning to build 10 million more home passes, with expectation around 60% will be connected houses, means our subscriber, within 2, 3 years from now. And then it is more efficient because the infrastructure will be used not only for IndiHome. It is also used for Telkomsel and other licensed operators for the calling and also for mobile customers. Thank you.

Yes. For your questions regarding depreciation and amortization, we expect that this expense will grow by low single-digit for full year 2016 from what we had in 2015.

Okay. Just on IndiHome, I wanted to reconfirm. I heard, I guess, EBITDA positive. But is it positive at earnings level, net profit level? And some sort of color there will be helpful.

[Foreign Language]

Up until now, we still do not disclose down to the net income level for IndiHome.

Our next question comes from Prem Jearajasingam from Macquarie.

Two questions for me. First of all, could you remind me -- the asset revaluation exercise that took place last year, I believe there was some tax implications. Could you help us understand what the tax rate is likely to look like for the full year? That's one. And secondly, on the spectrum options, do we have any further update on that? And how do you -- if you own one part of -- one block in each of the 2100 and 2300 blocks, would that be sufficient for Telkomsel? Or do you think that you need more spectrum?

Okay. On the first question, in Q4 last year, we paid IDR 750 billion in -- as part of the asset revaluation for tax purposes. We hope -- or we plan to book the revaluation outcome by Q3 this year. The government would charge either 3% or 6% of capital gain as a result of this exercise.

So the tax charge was IDR 750 billion that was paid?

Yes.

On the spectrum auction, so far we have already submitted with the regulator. But the schedule -- the [indiscernible] schedule and the rules is not finalized yet. On the additional spectrum, yes, if you take a look at Telkomsel, it's probably -- we have the most dense spectrum use as compared to the others because we have biggest customer base and our spectrum is quite similar with the other operator. So the answer is yes. We will submit -- or we will get -- try to get additional spectrum. The most likely case is that on the 2100, there will be 2 [indiscernible] locked, and we do hope that we can get one of those [ph] at least or one block.

And as a follow-up, if I may. Do you think that the spectrum auction could be the impetus for greater competition, especially if someone like Hutch would secure further spectrum in both the 2100 and 2300 bands?

Well, the -- one way that -- this is what we -- the information from the ICT minister, that only the operator -- the actual operator will be entitled to the auctions. And if you take a look at the whole picture, then the need of spectrum is not at the same level. Some like us is sort of very, very -- we have probably the biggest need of spectrum -- additional spectrum. And then also, there are other operators who will need a little more spectrum because of the density of the [indiscernible]. But if you take a look on the nationwide, this is probably the [indiscernible] the most [indiscernible] spectrum. Some spectrum [ph] are dense in certain areas, but their spectrum is not really fully utilized on that area. Does that answer your question?

Yes. Thank you.

Our next question comes from Sachin Mittal from DBS.

I have 3 questions. Firstly, on the top line, we have seen that SMS and voice revenues have declined in countries like Thailand [indiscernible], but in Indonesia, seems still growing. So wondering, what kind of smartphone penetration do you expect that to happen, that the legacy revenue starts to decline? And where are we right now in terms of smartphone penetration for Telkomsel customers? That's question number one. Question number two is on the cost side. What is your current 4G penetration levels? I guess it was around 15% last quarter. So where are you now? And what's the target for the full year? And does it mean that your tower leasing [indiscernible] rate or no? Do you think this will progress at an even rate from what we have we seen so far? And lastly, in terms of competition, have you made some changes to your data pricing over the last 2 to 3 months? If you can share some of those changes to us.

So this is Edward. Let me try to answer the first question. I think you're right. I think, basically, around the region, you see people under pressure for voice. And actually, [indiscernible] in Indonesia, just some of the operators, they're actually losing points on SMS revenue already. So we are probably another operator that still have an increase in voice revenue year-on-year. There's still a huge voice usage. As you suggest, we've gone up on voice. But obviously, the pricing is under -- depressed, but overall, we still grow about 9% of revenue year-on-year on voice. On SMS, we marginally grow our revenue year-on-year. But actually, you see the usage as [indiscernible] decline. So the volume hit is true. It's coming, and when -- this will actually happen in a big way. So I wouldn't have a crystal ball, I can't tell you. But at this point in time, the smartphone penetration is about 4.5 million, 45% of our base. And we add about 1.5 million, on the monthly basis, new smartphone on to the network. So we anticipate SMS will slowly but surely come to decline. But voice, we still believe there's some way to run -- some runway to go. We count now on when they convert to smartphone, we want to see them increase their data usage. At the same time, we are rolling out, as you know, 4G. And now we have about 65% of our base stations on 3G. So actually, we want to capture that additional experience on the broadband, bundle with our video services and our fintech and our M2M. This is a new play -- additional play that we want to move into. Yes, on 4G, I think, today, we are approximately 5,000 base stations, close to 6 million subscriber. So how far can we run? I think 4G is picking up, but probably not as fast as 3G is. So we will still observe, but nevertheless, I will assure you that Telkomsel will be the leader in 4G to continue that momentum where we are leading today.

Okay. And lastly...

Your question on pricing -- sorry?

Any update on data and voice [ph] pricing?

Data or overall pricing?

I mean, if you can segregate into data pricing and voice pricing because I think your voice pricing [indiscernible] has also gone up quite a lot in this quarter. So trying to understand the dynamics on the voice pricing and data pricing.

So basically, I mentioned to you -- actually, in voice revenue we're up 9%, but usage grew by 16%. So technically, you can see it doesn't tally, so which means actually our price, on an average -- that usage is going up, but the price actually comes down. And so that's what it is. SMS prices has gone up, but usage declined as well. And as data is concerned, I think it's still very new. So today, it's highly competitive. If you look at the Indonesian market, both XL and Indosat offer tremendous discount bundle on the 4G network. We do likewise, but not [indiscernible] of data. We anticipate 4G huge run rate. We need to build up the usage and experience. So we will compete aggressively if need be with our competitor on that to build the business and experience. So I will see in the longer term, if you look at the way we're currently being measured on RPMB [ph], I think it will decline in the near term. Okay? Thank you.

Our next question comes from Hussaini Saifee from Citi.

Just 2 questions from me. First is on the wireless side. So I believe Telkomsel had increased data tariff by around 13% in June this year. So how do you see the subscriber reaction in terms of usage? Are you seeing any impact on your sales level because of the tariff increase. That's question 1. The other question is on the Mitratel. So I believe that you are consistently adding towers. So what's the strategy over there? And what is the tenancy or collocation on the Mitratel towers right now?

Okay. On the tariff increase, what is the impact on the subscriber, first, on the voice is you see the voice increase. We did increase the price during the festive of Lebaran. So basically, we know that there's demand and also some demand for the [indiscernible]. So basically, the traffic is still growing, along with [indiscernible]. On the -- similar to the data, we actually -- why the -- if you see rupiah [indiscernible] price slightly decrease because we tried to convert subscribers from the Pay As You Use becoming package user -- subscribe to the package. So we don't decrease the price, instead we tried to stabilize the price by offering the package. And then we do the same -- we did the same during the Lebaran festive, increase with regard to traffic and demand. So basically, the way we manage is different on the competition, different on the market dynamism and also the readiness of our network. So therefore, we try to, I think, minimize the impact on the payload [ph] growth and so on. So basically, you see from year-on-year, up to now, the traffic of the data still increase about -- more than 80%. I hope that answers your question.

So basically, there is no impact on the growth in terms of data usage because of that tariff increase. Is that -- is my understanding correct?

Yes, yes. I think if you see the -- I think not as fast as the previous year, the growth of the data payload [ph] more related to the growth of the smartphone itself. So if we can increase the smartphone, I think, adoption, we believe that the data payload [ph] also will increase. As we experience every time we replace 2G handset to becoming 3G or smartphone, there's about a 30% increase in the payload [ph]

About the tower business, yes, Mitratel still continues to expand the tower business actually to support Telkomsel and the rest [ph] of our business. We believe that the demand for new tower will be -- depend on how aggressive the operators expand their business. But up to the first semester this year, we see there's no other operator that are aggressive to build the tower, except Telkomsel. But also, with the rollout of the 4G networks, we believe that the demand for the tower still continue to increase. Now the financial ratio Mitratel is around 1.13. Thank you.

Our next question comes from Paula Ruth from Trimegah Securities.

I would like to ask question regarding the tax revaluation. I think previously in the call mentioning about the revaluation outcome will be booked in the third quarter, if I'm not mistaken. I just want to clarify, what is the revaluation outcome? Is it -- I mean, because I understand that you booked a prepaid tax last year. Is it -- does it mean that you're going to book the exact number of the IDR 750 billion as a tax expense in the third quarter? And then my second question, if you don't mind, could you elaborate more about the accounting treatment for this additional tax expense from the revaluation? I think because 2 alternatives that I have been thinking about is whether the tax expense is going to book as other expense before you count the tax. Or is it going to be booked as an additional tax expense, part of the normal tax rate for the company? That is all.

Yes. So the IDR 750 billion that we paid last year has not been accrued. So we will be accruing it by third quarter this year. And then with regards to the part of tax expense, it will be additional tax expense for this year.

We will now take our final question from Lucky Ariesandi from Yuanta Securities Indonesia.

I have 2 questions basically. First is a follow-up from previous analyst's question about the depreciation. I noticed you mentioned that you expect that depreciation will grow by low single digit this year. Does that mean that the second half depreciation expense will increase by a lot from the first half number? And also, will there be further exercise on accelerated depreciation on Telkomsel's equipment? Because I noticed that in fourth quarter last year, you've accelerated depreciation on some of Telkomsel's equipment. And using your guidance of a low single-digit growth in depreciation expense, I -- my back-of-the-envelope calculation is for around IDR 2 trillion of additional depreciation compared to first half number. And the second one is on the tax benefits from the previous year's asset revaluation. Do I understand correctly that -- I mean, I got the figure from -- that the total benefit will be around IDR 2 trillion for Telkom group for -- from the revaluation practice.

Okay. I think the biggest CapEx spending happened in Telkomsel. First, I'd like to mention to you there's no accounting treatment change in our group. So the policy is about the same. The second, the amount of CapEx we're about to invest is about the same compared to last year. So we do expect that while -- the number of depreciation amount is about the same or slightly increased compared to last year. Second, regarding the accelerated depreciation, we already planned about IDR 500 billion of accelerated depreciation. It is about the same that we booked last year. It is for modernization of our network and so on. In the end, the amount is about the same or slightly increased compared to last year. I hope that answers your question properly.

How about the tax? Can I confirm the IDR 2 trillion total benefit for -- from the revaluation practice you did last year?

The IDR 2 trillion numbers is actually [indiscernible] the NPV of the excess tax as opposed to amount of IDR 750 billion. So IDR 2 trillion is NPV.

There are no further questions at this time. Mr. Setiawan, please continue.

Thank you -- so thank you, everyone, for participating in today's call. We apologize for those questions that weren't addressed yet. Should you have any further questions, please don't hesitate to contact us directly. Thank you, everyone.

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.