Telkom Indonesia(US:TLK)2023-04-06 20:26PART I Key Information The company identifies numerous risks across operational, business, financial, legal, and regulatory domains - The company faces significant operational risks, including potential network failures, competition from new technologies like 5G and OTT services which diminish legacy revenue, and increasing physical and cybersecurity threats156173199 - Business risks are centered on intense competition in the Indonesian cellular market, which may affect margins and market share, and the substantial capital required for ongoing infrastructure investment in 4G/LTE and 5G networks161218233 - Financial risks include exposure to interest rate fluctuations on its bank borrowings and the potential inability to fund the large capital expenditures necessary to remain competitive158237241 - Regulatory and legal risks stem from potential changes in the legal environment, tariff regulations, and anti-competitive practice liabilities; the company's majority ownership by the Indonesian government presents a unique risk, as government interests may not always align with those of other shareholders159162236 - Broader risks related to Indonesia include political and social instability, macroeconomic fluctuations such as currency volatility and inflation, and vulnerability to natural disasters and climate change167168170 Information on the Company PT Telekomunikasi Indonesia Tbk is Indonesia's largest telecommunications firm, focusing on digital transformation History and Development of the Company This section traces Telkom's evolution from a state-owned entity to its IPO and key 4G/5G milestones - Key corporate milestones include the 1995 IPO on IDX and NYSE, the 2014 launch of 4G/LTE services, the 2021 launch of 5G services, and the 2021 IPO of its subsidiary Mitratel361364368 Consolidated Capital Expenditures (2020-2022) | Year | Amount (Rp billion) | Amount (US$ million) | | :--- | :--- | :--- | | 2020 | 29,279 | - | | 2021 | 30,329 | - | | 2022 | 34,146 | 2,194 | Business Overview Telkom's strategy centers on its 'five bold moves' initiative across five customer-facing business segments - The company's core strategy is the 'five bold moves' initiative, focused on Fixed-Mobile Convergence, InfraCo, DC Co, B2B Digital IT Services Co, and DigiCo378 - The business is structured into five customer-facing units (CFUs) or segments: Mobile, Consumer, Enterprise, Wholesale and International Business, and Other (Digital Services)384 - The Mobile segment, operated by Telkomsel, is the largest revenue contributor; in 2022, the total cellular subscriber base decreased by 10.9% to 156.8 million, while mobile broadband data users slightly increased to 120.9 million386388389 - The Consumer segment is driven by the IndiHome fixed broadband service, which grew its customer base to 9.2 million by the end of 2022, representing an estimated 75.2% market share in Indonesia396403 - The Wholesale and International segment manages a significant infrastructure portfolio, including approximately 40,588 telecommunications towers as of December 31, 2022414 - Telkom operates an extensive network including 265,194 Base Transceiver Stations (BTS), a domestic fiber optic backbone of 108,566 km, and 28 data centers globally; it also operates two satellites, Telkom-3S and Telkom-4446452454 - The company faces strong competition in the cellular market from Indosat Ooredoo Hutchison and XL Axiata, and in the fixed broadband market from providers like First Media and Biznet Home564567 Organizational Structure Telkom organizes its subsidiaries into five customer-facing units supported by corporate functional units - The company's structure is based on five customer-facing units (CFUs) that manage subsidiaries and business portfolios aligned with specific customer segments: Mobile, Consumer, Enterprise, Wholesale & International, and Digital Services612613615 Key Subsidiaries and Ownership (as of Dec 31, 2022) | Subsidiary | Segment | Ownership Interest (%) | Voting Power (%) | | :--- | :--- | :--- | :--- | | PT Telekomunikasi Selular (Telkomsel) | Mobile | 65 | 65 | | PT Dayamitra Telekomunikasi (Mitratel) | Wholesale and International | 72 | 72 | | PT Telekomunikasi Indonesia International (Telin) | Wholesale and International | 100 | 100 | | PT Sigma Cipta Caraka (Sigma) | Enterprise | 100 | 100 | Property, Equipment and Right of Use Assets The company's telecommunications assets had a net carrying amount of Rp172,112 billion as of year-end 2022 - As of December 31, 2022, property and equipment had a net carrying amount of Rp172,112 billion and were insured against various risks623 - Certain property and equipment with a gross carrying value of Rp18,370 billion as of year-end 2022 have been pledged as collateral for loan agreements622 Operating and Financial Review and Prospects Revenue grew 2.9% in 2022, but higher expenses and investment losses caused a 16.6% drop in net profit Operating Results Revenue growth from data services was offset by legacy declines and a significant unrealized loss on investments Consolidated Financial Highlights (2021 vs 2022) | Metric (Rp billion) | 2021 | 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | 143,210 | 147,306 | 2.9% | | Data, Internet & IT Services | 82,224 | 86,410 | 5.1% | | IndiHome Revenues | 26,325 | 28,020 | 6.4% | | Cellular Telephone Revenues | 14,737 | 12,052 | -18.2% | | Total Expenses | 95,635 | 107,677 | 12.6% | | Operating Profit | 47,653 | 39,716 | -16.7% | | Profit for the Year | 34,099 | 27,720 | -18.7% | | Profit Attributable to Owners | 24,877 | 20,736 | -16.6% | - The company recorded an unrealized loss on changes in fair value of investments of Rp6,438 billion in 2022, compared to a gain of Rp3,432 billion in 2021, primarily due to the valuation of its investment in GoTo676 - Depreciation and amortization expenses increased by 4.5% to Rp33,129 billion in 2022, in line with the development of network infrastructure for both mobile and fixed businesses672 Liquidity and Capital Resources The company funds operations and capital expenditures through operating cash flow and external borrowings Consolidated Cash Flow Summary (2021 vs 2022) | Cash Flow (Rp billion) | 2021 | 2022 | | :--- | :--- | :--- | | Net cash from operating activities | 68,353 | 73,354 | | Net cash used in investing activities | (37,914) | (39,122) | | Net cash used in financing activities | (12,775) | (40,965) | Capital Expenditures by Entity (2021 vs 2022) | Entity (Rp billion) | 2021 | 2022 | | :--- | :--- | :--- | | Telkom (parent company) | 15,347 | 15,650 | | Telkomsel | 10,540 | 12,343 | | Other Subsidiaries | 4,442 | 6,153 | | Total Telkom Group | 30,329 | 34,146 | Total Indebtedness by Currency (as of Dec 31) | Currency (Rp billion) | 2021 | 2022 | | :--- | :--- | :--- | | Indonesian Rupiah | 67,587 | 62,107 | | U.S. Dollar | 671 | 531 | | Japanese Yen | 285 | 181 | | Malaysian Ringgit | 36 | 34 | | Total | 68,579 | 62,853 | Research and Development, Patents and Licenses, etc. R&D focuses on network enhancement and innovation through internal programs and venture capital investments - R&D efforts are focused on key technologies such as fixed-mobile convergence, Wi-Fi 6, and 5G to maintain a leading position in digital connectivity747 - The company fosters innovation through multiple programs: ITDRI (research institute), Amoeba (intrapreneurship), and Indigo (startup incubation)752754755 - MDI Ventures, the corporate venture capital arm, manages and invests funds in digital startups to create synergies with Telkom Group's businesses, focusing on sectors like fintech, healthcare, and logistics756758 Directors, Senior Management and Employees The company is managed by a Board of Directors and supervised by a Board of Commissioners, with 23,793 employees 2022 Remuneration for Board of Commissioners | Commissioner | Position | Total Remuneration (Rp) | | :--- | :--- | :--- | | Bambang P. S. Brojonegoro | President Commissioner | 12,072,655,968 | | Ismail | Commissioner | 16,109,225,086 | | Marcelino Rumambo Pandin | Commissioner | 16,111,153,657 | | Rizal Mallarangeng | Commissioner | 15,781,008,571 | | Total for Board | | 119,259,284,770 | 2022 Remuneration for Board of Directors | Director | Position | Total Remuneration (Rp) | | :--- | :--- | :--- | | Ririek Adriansyah | President Director | 25,568,268,800 | | Heri Supriadi | Director of Finance & Risk | 21,516,000,000 | | FM Venusiana R. | Director of Consumer/Enterprise | 21,516,000,000 | | Total for Board | | 170,957,095,175 | - As of December 31, 2022, the Telkom Group had a total of 23,793 employees, with 87.7% being permanent employees828 Employee Profile by Position (as of Dec 31, 2022) | Position | Telkom Group Total | Percentage (%) | | :--- | :--- | :--- | | Senior Management | 322 | 1.3 | | Middle Management | 6,209 | 26.1 | | Supervisors | 12,632 | 53.1 | | Others | 4,630 | 19.5 | | Total | 23,793 | 100.0 | Major Shareholders and Related Party Transactions The Indonesian Government is the controlling shareholder with 52.09% ownership and special veto rights Shareholder Composition (as of March 31, 2023) | Shareholder | Common Stock | Ownership (%) | | :--- | :--- | :--- | | Government | 51,602,353,559 | 52.09 | | Public | 47,459,863,040 | 47.91 | | Total | 99,062,216,599 | 100.00 | - The Indonesian Government holds a single Series A Dwiwarna Share, which grants it special voting and veto rights over critical matters such as the appointment/removal of directors and commissioners, issuance of new shares, and amendments to the Articles of Association, ensuring effective control regardless of its common stock percentage848862 - The government's relationship with the company is multifaceted, acting as the majority shareholder, the primary industry regulator, a significant customer, and a lender through two-step loan facilities859864866868 Financial Information This section includes consolidated financial statements, legal proceedings, and the company's dividend policy Dividend History (2018-2021) | Dividend Year | Payout Ratio (%) | Total Dividend (Rp million) | Dividend per Share (Rp) | | :--- | :--- | :--- | :--- | | 2018 | 90.00 | 16,228,619 | 163.82 | | 2019 | 81.78 | 15,262,338 | 154.07 | | 2020 | 80.00 | 16,643,443 | 168.01 | | 2021 | 60.00 | 14,855,921 | 149.97 | - The company is subject to various legal proceedings incidental to its business but does not believe the final outcome will have a material adverse effect on its financial condition878 The Offer and Listing The company's common stock and ADSs are listed on the IDX (TLKM) and NYSE (TLK) respectively - The company's common stock is listed on the Indonesia Stock Exchange (IDX: TLKM) and its American Depositary Shares (ADSs) are listed on the New York Stock Exchange (NYSE: TLK)885888 - The ratio for the American Depositary Shares is one ADS representing 100 shares of common stock885 Additional Information This section details the Articles of Association, foreign exchange controls, and tax implications for shareholders - Dividends distributed to non-resident holders are subject to a 20% Indonesian withholding tax, which may be reduced under applicable double taxation treaties, provided a valid Certificate of Domicile is submitted973974 - The sale of common stock through the Indonesia Stock Exchange (IDX) is subject to a final withholding tax of 0.1% of the gross transaction value978 - For U.S. Holders, dividends are generally taxable as ordinary income; they may qualify for reduced tax rates as the company believes it is a "qualified foreign corporation" and does not anticipate being classified as a Passive Foreign Investment Company (PFIC)990991992 Quantitative and Qualitative Disclosure About Market Risk The company is primarily exposed to foreign exchange and interest rate risks, which it monitors via sensitivity analysis - The company is exposed to foreign exchange risk, primarily from U.S. Dollars and Japanese Yen; a sensitivity analysis as of Dec 31, 2022, indicates that a 1% appreciation of the USD against the Rupiah would result in a Rp92 billion profit10241026 - The company is exposed to interest rate risk, with 56.1% of its total bank borrowings being floating-rate loans as of year-end 2022; a sensitivity analysis shows that a 25 basis point decrease in interest rates would increase equity and profit by Rp88.2 billion10301032 - Credit risk arises mainly from trade receivables; due to the COVID-19 pandemic, the company increased monitoring of customer accounts and made arrangements for payment postponements with certain enterprise customers to mitigate counterparty risk1034 Description of Securities Other Than Equity Securities This section details the terms of the American Depositary Shares (ADSs) facility and associated holder rights - Bank of New York Mellon Corporation serves as the Depositary for the company's American Depositary Shares (ADSs)1041 ADS Holder Fees | Fee | Purpose | | :--- | :--- | | US$5.00 (or less) per 100 ADSs | Issuance or cancellation of ADSs | | US$0.02 (or less) per ADS | Cash distributions | | Up to US$0.05 per ADS | Receiving or distributing dividends | | US$0.02 (or less) per ADS per year | Depositary services | - If an ADS holder does not provide voting instructions by the specified date, the Depositary is deemed instructed to give a discretionary proxy to a person designated by the company, unless the matter materially and adversely affects shareholder rights1050 PART II Controls and Procedures Management concluded that disclosure controls, procedures, and internal control over financial reporting were effective - Management concluded that as of December 31, 2022, the company's disclosure controls and procedures were effective1081 - Based on an assessment using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 20221084 - The independent registered public accounting firm, KAP Purwantono, Sungkoro & Surja, audited the effectiveness of the internal control over financial reporting and issued an unqualified opinion1085 Corporate Governance and Other Matters This section covers the audit committee, code of ethics, accountant fees, and differences in governance practices - The Board of Commissioners has determined that Mr. Emmanuel Bambang Suyitno and Mr. Edy Sihotang, members of the Audit Committee, each qualify as an Audit Committee Financial Expert1089 - The company has adopted a code of ethics applicable to its directors, officers, and employees, in compliance with Section 406 of the Sarbanes-Oxley Act1092 Principal Accountant Fees (KAP Purwantono, Sungkoro & Surja) | Fee Type (Rp million) | 2021 | 2022 | | :--- | :--- | :--- | | Audit Fee | 59,050 | 59,700 | | All Other Fees | 11,540 | 5,440 | - The company avails itself of an exemption under NYSE listing standards (Rule 10A-3(c)(3)) regarding audit committee composition, as Indonesian regulations differ from U.S. requirements for director independence and the committee's direct responsibility for auditor appointment11011102 PART III Financial Statements This section contains the audited IFRS consolidated financial statements and the independent auditor's report - The consolidated financial statements were audited by KAP Purwantono, Sungkoro & Surja, who issued an unqualified opinion, stating the statements present fairly, in all material respects, the financial position of the Group in conformity with IFRS1134 - The auditor also issued an unqualified opinion on the effectiveness of the Group's internal control over financial reporting as of December 31, 2022, based on the COSO framework11351148 - A Critical Audit Matter was identified relating to the "Evaluation of property and equipment estimated useful lives," considered complex and requiring significant judgment due to factors like strategic business plans and future technological developments114011411142 - Subsequent to year-end, on April 6, 2023, the company signed a Conditional Spin-Off Agreement to transfer its IndiHome Business Segment to its subsidiary Telkomsel by July 1, 2023; the transaction is valued at Rp58,250 billion1625