Thank you for standing by, and welcome to the Telkom's First Quarter of 2016 Results Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, the 3rd of May 2016. I would now like to hand the conference over to your first speaker today, Mr. Andi Setiawan, Vice President of Investor Relations. Please go ahead, Mr. Setiawan.

Thank you for standing by. Ladies and gentlemen, welcome to PT Telkom Indonesia First Quarter 2016 Conference Call. We released our results on April 22, 2016, and the reports are available on our website, www.telkom.co.id. This presentation is available on the webcast. 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 today's 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 expectation voiced during today's call. This may involve risk and uncertainty and may cause actual results to differ substantially from what we 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's my pleasure to introduce you 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, Solution and Chief Technology Officer; Mr. Honesti Basyir, as Director of Wholesale & International Services; Mr. Dian Rachmawan, as Director of Consumer Services; Mr. Indra Utoyo, as Director of Innovation & Strategic Portfolio; Mr. Muhammad Awaluddin, as Director of Enterprise, Business Services; and Mr. Herdy Harman, as Director of Human Capital Management. Also present, Board of Director of Telkomsel: Mr. Ririek Ardiansyah, as President, Director; Mr. Heri Supriadi, as Director of Finance; and Mr. Edward Ying, as Director of Planning & Transformation. Before Alex delivers his remarks, I will take this 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 types: telecommunication, information, media and entertainment, directly or through its subsidiaries. We also deliver services to multi-customer portfolio in retail, enterprise and wholesale. As of March 31, the majority shareholders of Telkom was the Government of Indonesia, with 52.6% ownership; and the remaining 47.4% is, of course, under public ownership. I now hand over the call to our CEO, Mr. Alex J. Sinaga, for his overview. Alex, the time is yours.

Thank you, Andi. Good afternoon, ladies and gentlemen. Welcome to our conference call for first quarter 2016 results ended March 31, 2016. We sincerely appreciate your participation in this call. Ladies and gentlemen, Telkom recorded a remarkable achievement with triple double-digit growth in revenue, EBITDA and net income of 16.6%, 18.8% and 20.3% year-on-year, respectively. We also successfully maintained healthy level of profitability with EBITDA margin of 53.2%, improved from 52.2% in the first quarter last year. The income margin was reported at 16.7%, increased from 16.2% last year. Data, Internet and IT Service remained the biggest revenue contributor, with 37.4% of total consolidated revenue and increased 45.1% year-on-year. In the meantime, our expense increased by 11% year-on-year, lower than revenue growth, driven by operation and maintenance and personnel expenses. Operating and maintenance expense accounted for 43% of total expenses, grew by 22.3%, in line with the aggressive network deployment both in our cellular and fixed-line businesses, in particular, to support Digital Business growth. While personnel expense increased by 29.5% year-on-year as we simplify salary payment method by disclosing quarterly incentive and other benefits into monthly salary proportionally and bonus in line with the company's performance. Our strongly results in first quarter of 2016 was in line with the solid performance of our cellular business. Telkomsel gained 1 million net additional customers during first quarter of 2016; grew total customer base to 153.6 million, increased dramatically, highest SIM card penetration. Telkom continued expanding its network infrastructure by adding 7,223 new BTSs during the quarter, with around 90% consist of 3G and 4G BTSs. It is reflecting our focus on growing in Data business. Mobile data payload significantly increased by 89.6%, driven by strong growth in 3G- and 4G-capable device adoption, which increased 47.9% (sic) [ 47.5% ] year-on-year to 64.5…

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

[Operator Instructions] Your first question today comes from Miang Chuen Koh from Goldman Sachs. It appears the participant has removed themselves from the queue. We move on to our next question from Arthur Pineda of Citigroup.

Just 3 questions from me. Firstly, on the regulatory side, is there any update with the interconnection changes? What's the risk that you could actually see asymmetric regulations that's coming in for Indonesia? Second question I had is with regard to your pricing. You mentioned your cluster-based pricing a while ago. I was just wondering, how different was your pricing be in Java versus the non-Java areas? And third question I had again is on the mobile side. Your peers have talked about network sharing, especially outside of Java. How would this actually impact you? And have you provisioned against any increase in competition in this side?

Thank you. I want to answer your -- the first question regarding the interconnection regulation. Actually, until today, we still discuss with the government because the government, they didn't decide yet regarding the new formula about the interconnection. But the -- based on our discussion, actually, the government want to make the interconnection cost declines is around 10%, up to 20%, the cost. And I think although [indiscernible] discussed again regarding the impact into the industry. But we think maybe the regulation will be implemented is around start of June, I think, because we still discuss with government regarding the new formula. Thank you.

But is there any plans it will be asymmetric in terms of pricing?

The implication.

The -- I think they'll be symmetric, the formula, yes, based on the discussion -- the rough discussion with the team of government. And the impact, I think, because the contribution of interconnection, especially for Telkomsel, around 4% up to 5%, yes.

Yes, on the growth.

Yes, on the growth, look at that revenue. So I think it's -- and then that's around 1.5% to 2%, the impact. So I think if the -- if Telkomsel cost decline up to 10%, I think they still manage the industry, [indiscernible] to Telkomsel.

On the cluster-based pricing, the difference between Java and non-Java is around -- maximum is around 60% in outside Java, highest is 60% in Java. Okay? And then the next question on the network sharing impact, so basically, the network sharing, as I think stipulated by the government, it is supposed to be done by a B2B regime.

Non-mandatory.

Non-mandatory. And if this mean depend on the availability of the capacity and so on, and then also, mostly, what we consider because we -- they block our network based on our needs, not really data plan on the sharing side [indiscernible] block for the current networks. Mostly, the sharing is supposed to be considered for the new network that will be build. So this one, still some time but impact to us.

Will spectrum sharing be allowed as well?

Not, I guess.

No.

Can you say it again?

Sorry, does it include spectrum sharing?

I think it's no. For the time being, it's only the network sharing. Spectrum sharing is not yet.

We move on to our next question from Miang Chuen Koh from Goldman Sachs.

A couple of questions from me. One is on competition. Can you provide an update on the competitive landscape both for the mobile as well as the fixed broadband business? I think we have seen some of your competitors, for example, on the mobile side providing a lot more free data on their plans at this -- recently. And secondly is on margins. If you look at EBITDA margins for the first quarter, it's very strong. How sustainable is this for the remaining of the quarters because it's obviously tracking above your full year guidance? That's for me.

It's Edward. So first, on the mobile landscape of competition in Indonesia, so simply put, it's highly competitive, like you mentioned. Some of our competitors are offering free 4G data. You spend a certain amount of money, and then you go on 4G, you get a certain allocation for free. So I think that goes on because, as you know, 4G penetration handsets are still low compared with the total base that we have. So everyone is trying to capture that audience. And also, we've more or less blow up the network close to 3,000, 4,00,0, each of us, so that remains competitive. But having said that, as you can see, we continue to grow on the payload, continue to grow on advertising -- sorry, continue to grow on our Data revenue. So I see this is just a start to hook on more customers to the network. So that's on the 4G free data. On the 2G, 3G, I think, yes, this is too highly -- highly competitive. As you probably know, that our competitor, like XL, some of the areas where access is, they also lower their price. And this also, I think, that goes on, which has not changed like before. So in short, I think business as usual, win quite aggressively. Win -- it's win the trade and win the business. So I think all those do quite well in the first Q, and we hope to continue that.

Mr. Miang, on the second question on the EBITDA margin, if you see the EBITDA margin on mobile, the last quarter is very strong. Some reason for this is one-off of the revenue because in February, we have 1 day more compared to last year. It is attributable around IDR 229 billion additional revenue for that one. And in the cost side, actually, we have one time of ERP last year by IDR 169 billion. This also, I think, not happened in this first quarter. This bring us to very good margin that we experience. But moving forward, it's -- we also believe that the competition in data, as mentioned by the CEO, and also as you -- as we've done in the -- I think, in the competition landscape, we still need to see what is the trend of the competition. If the competition can be, let's say, benign, quite calm like last year, we expect we can maintain the EBITDA margin around the same like last year was 56%. So whilst may be the EBITDA margin will slightly decline about 1%. So the -- basically, in overall, what we expect, we still can continue to beat the market growth, slightly higher than market growth. That will bring us -- we expect another triple digits basically.

Sure. Can I just quickly, a couple of follow-up questions. One is on ERP, right? I mean, for this year, when will we expect -- how much and which quarter, if you could give some guidance on that?

Yes, we do have ERP program in 2016. It's going to be third quarter. And the budget maximum from -- at the max, similar with the same capital of previous years.

Plan to be executing in the same level.

Okay, third quarter.

Yes, I will.

[Operator Instructions] We take our next question today from Jack Tan Hang Ming [ph] from Sumi Trust.

I would just like to find out if -- what will be the changes that we can expect if the governments move to the spectrum auction compared to previously there was a beauty contest because there are some talks on it. Just would like to share -- to see if you can share some more -- the colors on that.

Well, we have been preparing the -- some of the terms of the auction, whether is it going to be the same as what we had a couple [indiscernible] or if it's going to be more on the new way of auction. We have prepared some scenarios on it, and we do believe that we can have more spectrum [indiscernible]. We don't know yet when the auction will be had, but we believe it will be sometime this year.

Okay. Can we just get some color on what the government thought process on this? Should we be worried because maybe for overseas investors, we have looked at us, and Thailand was a big concern for us, and continues to be until May. So how should we read the situation for Indonesia if you can shed some color for us?

We of course have to optimize the spectrum that we have for now and to maximize the throughput of our network. Yes, so we do need some spectrum at some point along the way, but we do believe we can survive until the end of this year before the additional spectrum [indiscernible].

If I may add this, but I think the auction process, we are not -- I know we talked clearly what the government intention is at the moment. It's actually -- this is an open or close option. We don't know, but it will come out sometime at the end of the year. So the question is asked, whether we are -- what would change the dynamic? Actually, I think the dynamic, I think there are few bidders who are going aggressively to bid, so we will also stay in the same way unless we are going in different frequency. We need the capacity, and I think we are in a good position due to our financial position and strength of our business. I think we should be able to give it a good fight to win the spectrum for the company. That's all.

[Operator Instructions] We take our next question from Foong Choong Chen from CIMB.

Three questions from me. Firstly, on your legacy SMS business, I noticed you mentioned in the info memo that your SMS banking and SMS advertising revenues were up almost 3x year-on-year. So I'm wondering whether this was significant enough to have driven your SMS revenues up or was it really the higher RP SMS that was actually driving up your SMS revenues in the quarter? Secondly, for Telkomsel, so I mean, very big base station addition in the first quarter, especially for 4G. Should we expect a much bigger increase in the O&M cost from the second quarter onwards on the back of this big base station additions in the first quarter? And then thirdly, my question on the personnel expenses. I just wanted to get some additional clarification on how you're going to be booking your personnel expenses across the quarter and the year? You said that you simplified the salary payment method, so does it mean that we should be expecting a more even booking of personnel expenses across the 4 quarters of the year?

So I would take the #1 question. This is Edward. I think you asked about digital advertising that whether it's incorporated into the legacy business. The simple answer is no. Digital revenue is booked under -- digital advertising revenue booked on additional revenue business, and there, we grow year-on-year 100%. So you could see there, that's why total revenue, digital revenue, including broadband to total revenue is 34% grown a year ago to about 27% before, something like that. So that number, I can verify, but 34%. So actually it's not. In short, advertising revenue grow because more and more people now want to use digital advertising. More contractual and more profile driven. So they know they are inside the customers, so we send them advertising. So our revenue actually has gone up. Is it a repeat? No, we are still developing, we are still very new to this business. It has true we grown year-on-year 100% for the last 3 years. So I think that's for all.

For the second question on the BTS addition, no for 4G, so they expect bigger in operational maintenance cost. It is not necessarily that way because most of the 4G BTS will be recognized in the same BTS, and the same size that we have right now, which is our 3G BTS, our 2G BTS. Basically, the only additional on space and also antenna that maybe contribute about compared to the original cost is about 60% additional for [indiscernible].

So I'm responding to question of personnel expenses. Actually, the idea of simplification is just to make sure our salary, our remuneration is competitive in the market, so we just try to simplify. However, in terms of the numbers, yearly, that is, it's relatively the same. So if we -- if you ask how we disburse on a quarterly basis, on this year, actually, under the new scheme, we just divide it into 2 elements, which is the fixed one in every quarterly basis and bonus on yearly basis, and the same amount in every quarter for the fixed one, and for the bonus, will depend on the achievement of the performance. Does that answer your question?

Yes, yes. Can I just put in a follow-up question, additional question on the dividend payout? For the AGM, I mean, the payout ratio has been maintained at 60%. And obviously, your balance sheet is in a very strong position. So I'm wondering, going forward, any thoughts on maybe perhaps you could progressively raise the dividend payout ratio going forward? Maybe from the Board of Directors, is that something that you could propose, and from the shareholders point of view as well, would that be something that would be deemed to be favorable?

It's Heri here, the new CFO. Thanks for the question. Obviously, the dividend decision is within the domain of the government, being our biggest shareholder. Yes, we could propose, but at the end of the day, the decision comes from their side. 60% is actually, as you may be aware, is rather on the high side. If you compare with the other state-owned companies, maybe it's one of the highest.

We now move on to our next question to Nathania Nurhalim from Macquarie.

I have one question on your voice operational results. So your voice minutes are still growing quite strongly year-on-year, although we saw one of your competitors volumes actually halved. So just wondering what you think is the main difference driving this contrast? Is there a difference in some strategy going on in the first quarter or is it just really because Telkomsel has a higher proportion of their subscribers outside of Java?

So firstly, I think we have a higher proportion of customers compared to the competition, and we're about -- we're still about 45%. Let's say, about 30%, 40% of our customer base are still mostly using voice, so that's one. And point number 2 is, also, we now try to bundle voice. You buy a package, and you can use the voice. So therefore, they also drive our MoU. Last, but not least, I couldn't tell you the client, but we have a very important customer that has a big number of base. They use a lot of voice call, so actually they are driven up as well. So in short, I think it's the package voice bundle that we sell, the customer that we acquire, and last but not least, we have a bigger customer base that drive up this [indiscernible] and on smartphone, and also, we have improve our network to provide for this as well.

Yes. I think I may have some additional information on this one. First, we have the biggest network coverage across Indonesia. They're difference are stronger. Just -- and the second also, the quality improvement that we see for the past couple of years, really, profile has room for improvement for any opportunity at that level. I think that [indiscernible] by the market.

[Operator Instructions] We now move on to Jimmy Chen from Bernstein.

Two questions. First, we've seen Indosat's mobile service revenue accelerating along with yours and also XL Axiata's revenue starting to climb back. Can you explain what is making possible for you and your competitors to grow revenues together? Are you taking revenue share from the small players or is there something else going on? And also, how do you see this trend? Is it -- would there be increasing competition? Do you see this positively or negatively? How do you see this kind of development? The other question is on the accounting side. I think, Q1, there's a big reversal in one of the nonoperational expenses items. The delta is around, I think, IDR 800 billion to IDR 900 billion. Can you explain what's causing that big reversal?

Jimmie, this is Edward. Let me take the first question, and if I hear you correctly, explain to me about the competition is it still aggressive? So I think I started the first answer to one of the investors or analysts that, actually, competition continued to be aggressive. That has not changed. So the fight continue at the ground, at the advertising above the line, targeted customers. I think that continues. Then I think if I'm not wrong, your second question is, how do you continue to compete and can you win revenue from each other or take away from the small guys? Now, I think, simply put, it's like what I think our CFO had just mentioned, we continue to improve our network -- we continue to improve our network performance. With that, actually, customer now tend to make more call, can make more call, and that increased our usage, and it can reassure in our first quarter more voice call, more voice revenue. That's what happened. So that to me no easy fix, but we managed to somehow. Now going forward, where do we take our revenue? I think voice and SMS, as we get more and more smartphone user, then I think that you will see there's some impact on it. Our growth is, actually, we are looking at data, of which we are working on data customer, broadband customers. You can see we grow 48% of it year-on-year. So we are working towards to get more and more people to broadband to connect to the Internet to make YouTube, call and so forth. So that's one area of growth. The other area of growth is we are looking into the digital business that we tried. Not easy, but some were successful, like the gentlemen answers now, our advertising growth year-on-year 100% on revenue. It's quite substantial, but not big enough, but still quite substantial. So the other one we're working on will be to put a new revenue stream is the cash. They look at the growth M2M, IoT, where we introduced T drive [ph]. And this also our new services in the future, big data. So these are the new revenue stream that we look to grow, other than just basic voice and SMS. So we are seeing that, in short, we need to extend our business into M2M, more B2B. This is where we think there's new avenue of growth. Now obviously, the smaller players who don't have frequency who doesn't invest in the CapEx, I think they will slowly find that the customers are changing their lifestyle. They want to connect to the Internet. They want high speeds. They want good network, good backbone transmission. So I think we will take advantage of that to win the business across. So I think those are my short answer to you. I hope I addressed your concern.

For the second questions on the expense, it was mainly due to the penalty that we have to pay for the early termination of our CDMA towers, the Flexi business that we decided to exit. The amount was around IDR 471 billion, so that's slightly more than 50% of the total. So the rest of the items include some tax expenses and other nonoperating expenses.

The penalty was paid this quarter or the quarter last year?

This quarter, first quarter this year. Yes.

[Operator Instructions] We now move on to question from Lucky Ariesandi from Yuanta.

I have 2 questions, basically. The first one is on Telkom's plan for Mitratel. I mean, after the cancellation of the deal with Tower Bersama, what's your plan for Mitratel, going forward? And also related to your tower asset, I noticed that you haven't exactly revalued your tower asset. I mean, I understand that back in fourth quarter 2015, there was like a mandatory restatement of tower assets based on the expected future cash flow, and I haven't seen it anywhere in your financial statement. My second question is on Telkom's marketplace, blanja.com. I mean, I noticed that Telkom has so far opted to go for low-key growth for this particular business, and the acceptance and awareness of Telkom's marketplace is lagging behind the peers. What's your plan going forward for blanja?

Thank you for the question. So regarding the plan for Mitratel, [indiscernible] is still expanding our tower business, as we believe tower is a productive business in the telco industry, in particular, for Mitratel to support Telkomsel. And we are still collecting all possible options to improve Mitratel performance, and also to unlock the tower value, but currently we're still in the evaluation.

I mean, [indiscernible] using to protect the towers.

Yes, and we are still using the project to protect our stock in Telkomsel. [Foreign Language]

I think our evaluation, most of the tower we discuss here is in Telkomsel. The government incentive on the tax benefit here will also give the consequences. If we do the evaluation of the tower asset, I'd say. Within 2 year, if we do kind of a corporate action such as we sell the tower, the incremental to the valuations subject to 25% of tax. So because we still keep that offset [indiscernible] above any corporate extent, we decide to not doing any asset evaluation on the tower end.

Okay, yes. Regarding the -- our blanja.com services, we are now in the process of reevaluating our position, not only on blanja.com, but on e-commerce as a whole. And we are trying to maximize our subscribers and our group's asset for the e-commerce business. While waiting for the reevaluation, we are now in the process of improving customer experience, maximizing synergy with the group and also other state-owned enterprises and also developing mobile commerce apps and also developing logistic for e-commerce. As a group, having an integrated digital strategy is important, and e-commerce is a key part of our digital portfolio.

We take a further question from Foong Choong Chen of CIMB.

Just 2 more questions from me. Firstly, do you expect more penalty payments for early termination of the Flexi towers in the future quarters? And secondly, can you also provide what was your fixed broadband revenues in 1Q 2016?

Yes, there could be some more penalty coming up later this year for the early termination.

Do we know how much is that?

We are still in the process of negotiating it with the tower [indiscernible]

Okay. And your fixed broadband revenue?

Yes, for IndiHome, the ARPU is around IDR 326,000, multiplied by 1.35 million customers.

Okay. And for your balance of broadband subscribers?

Yes, for the non-IndiHome premium customers, ARPU of IDR 110,000.

[Operator Instructions] As there are no further questions at this time, I'd like to hand the call back over to you -- apologies, we're just receiving one further question from Miang Chuen Koh from Goldman Sachs.

A couple of follow-up questions for me. One is on the pricing for your voice and SMS, and that you have been raising that over time. Is there still scope for more increases as you see it going forward? And secondly, on fixed broadband as well. From one of the conference calls from your competitors, it has been mentioned that the Telkom's IndiHome pricing is quite at a premium to theirs. Presumably, you're also considered higher than some of the other smaller competitors as well. How do you see that price, your pricing trends going forward? Will you be looking to potentially reduce prices even to be more competitive or not?

So let me try to answer the first question. Actually, if you follow the best 3 -- actually, Indonesia data, voice, SMS prices are probably one of the lowest in Southeast Asia or Asia. I think, at times, it will be lower in India. So it's then, obviously, for us to decrease prices. Then I think the answer is simply would be yes, but I think we need to watch the competition, be mindful that we are not alone. We compete in the market. So we're sensitive to that, but also, I think there's room for improvement, as we can increase if we want, to because we are the lowest in this region. I hope I answered your question.

Yes. And on fixed broadband, I guess, if you could also talk a little bit?

Let me address the question #2. In fact, it can be said that our service proposition is quite different to the other competitors. While they are offering not triple play, we are offering triple play services. So that's why we are able to offer higher price instead of competition. Thank you.

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

Thank you, everyone, for participating in today's call. We apologize for those questions that could not be addressed yet. If you have any further questions, please feel free to contact directly. Thank you, everyone.

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