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Telkom Indonesia (TLK)

Filed: 26 Mar 17, 8:00pm

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

________________

Form 20-F

  

 

*

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

R

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

*

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

*

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

 

Commission file number 1-14406

________________

Perusahaan Perseroan (Persero)

PT Telekomunikasi Indonesia Tbk

(Exact name of Registrant as specified in its charter)

 

Telecommunications Indonesia

(a state-owned public limited liability company)

(Translation of Registrant’s name into English)

________________

Republic of Indonesia

(Jurisdiction of incorporation or organization)

 

Jl. Japati No. 1, Bandung 40133, Indonesia 

 (Address of principal executive offices)

 

Investor Relations Unit

GrahaMerah Putih, Jl. Gatot Subroto No. 52, 5th Floor, Jakarta 12710, Indonesia

(62) (22) 452-7101

(62) (21) 521-5109

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person) 

________________

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of

Each class

 

Name of each exchange

on which registered

American Depositary Shares representing Series B Shares, par value 50 Rupiah per share

 

New York Stock Exchange

Series B Shares, par value 50 Rupiah per share

 

New York Stock Exchange*

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual Report:

 

Series A Dwiwarna Share, par value 50 Rupiah per share

1

Series B Shares, par value 50 Rupiah per share

100,799,996,399

    

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YesR No¨

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes¨ NoR

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

YesR  No¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes¨ NoR

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filerR

Accelerated filer¨

Non-accelerated filer¨

 

Indicate by checkmark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP¨ International Financial Reporting Standards as issued by the International Accounting Standards BoardROther¨

 

If “Other” has been checked in response to the previous question, indicate by checkmark which financial statement item the registrant has elected to follow.

Item 17¨ Item 18¨

 

If this is an Annual Report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes¨ NoR

 

 

*

The Series B Shares were registered in connection with the registration of American Depositary Shares (“ADSs”). The Series B Shares are not listed for trading on the New York Stock Exchange.

 

 

    

 

 


 

 

TABLE OF CONTENTS

PART I

PART II

PART III

  
 
 

 


 

 

Table of Content

DEFINITIONS

3G

The generic term for third generation mobile telecommunications technology. 3G offers high speed connections to cellular phones and other mobile devices, enabling video conference and other applications requiring broadband connectivity to the internet.

3.5G

A grouping of disparate mobile telephony and data technologies designed to provide better performance than 3G systems, as an interim step towards deployment of full 4G/LTE capability.

4G/LTE

A fourth generation super fast internet network technology based on IP that makes the process of data transfer much faster andmorestable.

Adjusted EBITDA

We calculate AdjustedEBITDA by calculating operating profit before interest, tax, depreciation and amortization, loss on foreign exchange, other income and other expenses. Adjusted EBITDA and other related ratios in this Annual Report serve as additional indicators on our performance and liquidity, which is a non-GAAP financial measure.

ADS

American Depositary Share (also known as an American Depositary Receipt, or an “ADR”), a certificate traded on a U.S. securities market (such as the New York Stock Exchange) representing a number of foreign shares. Each of our ADS represents 100 shares of common stock.

ADSL

Asymmetric Digital Subscriber Line, a type of digital subscriber line technology, a data communications technology that enables faster data transmission over copper telephone lines than a conventional voice band modem can provide.

APMK

Alat Pembayaran Menggunakan Kartu or card-based payment instruments, a payment instrument in the form of credit cards, Automated Teller Machine (“ATM”) and/or debit cards.

ARPU

Average Revenue per User, a measure used primarily by telecommunications and networking companies which states how much money we make from the average user. It is defined as the total revenue from specified services divided by the number of consumers for those services.

Backbone

The main telecommunications network consisting of transmission and switching facilities connecting several network access nodes. The transmission links between nodes and switching facilities include microwave, submarine cable, satellite, fiber optic and other transmission technology.

Bandwidth

The capacity of a communication link.


 

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Table of Content

Bapepam-LK

Badan Pengawas Pasar Modal dan Lembaga Keuangan, or the Indonesian Capital Market and Financial Institution Supervisory Agency, the predecessor to the OJK.

Broadband

A signaling method that includes or handles a relatively wide range (or band) of frequencies.

BTS

Base Transceiver Station, equipment that transmits and receives radio telephony signals to and from other telecommunication systems.

BWA

Broadband Wireless Access, a technology that provides high speed wireless internet access or computer networking access over a wide area.

CDMA

Code Division Multiple Access, a transmission technology where each transmission is sent over multiple frequencies and a unique code is assigned to each data or voice transmission, allowing multiple users to share the same frequency spectrum.

Common stock

Our Series B shares having a par value of Rp50 per share.

CPE

Customer Premises Equipment, any handset, receiver, set-top box or other equipment used by the consumer of wireless, fixed line or broadband services, which is the property of the network operator and located on the customer premises.

DCS

Digital Communication System, a cellular system using GSM technology operating in the 1.8 GHz frequency.

Defined Benefit Pension Planor DBPP

A type of pension plan in which an employer promises a specified monthly benefit on retirement that is predetermined by a formula based on the employee’s earnings history, tenure of service and age, rather than depending on investment returns. It is considered ‘defined’ in the sense that the formula for computing the employer’s contribution is known in advance.

Defined Contribution Pension Planor DCPP

A type of retirement plan in which the amount of the employer’s annual contribution is specified. Individual accounts are set up for participants and benefits are based on the amounts credited to these accounts (through employer contributions and, if applicable, employee contributions) plus any investment earnings on the money in the account. Only employer contributions to the account are guaranteed, not the future benefits. In defined contribution plans, future benefits fluctuate on the basis of investment earnings.

DLD

Domestic Long Distance, a long distance call service designed for customers who live in different areas but still within one country. These areas normally have different area codes.


 

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Table of Content

DTH

Direct-to-Home satellite broadcasting, the distribution of television signals from high-powered geostationary satellites to small dish antennas and satellite receivers in homes across the country.

Dwiwarna Share

The Series A Dwiwarna Share having a par value of Rp50 per share. The Dwiwarna Share is held by the Government and provides for special voting rights and veto rights over certain matters related to our corporate governance. For more information, see Item 7 "Major Shareholders and Related Party Transactions — Major Shareholders — Relationship with the Government and Government Agencies".

e-Commerce

Electronic Commerce, the buying and selling of products or services over electronic systems such as the internet and other computer networks.

e-Money

Electronic Money, money or script that is only exchanged electronically.

Earth Station

The antenna and associated equipment used to receive or transmit telecommunication signals via satellite.

EDGE

Enhanced Data rates for GSM Evolution, a digital mobile phone technology that allows improved data transmission rates as a backward-compatible extension of GSM.

Edutainment

Education and entertainment.

Fiber Optic

Cables using optical fiber and laser technology through which modulating light beams representing data are transmitted through thin filaments of glass.

Fixed Line

Fixed wireline and fixed wireless.

Fixed Wireless

The local wireless transmission link using a cellular, microwave, or radio technology to connect customers at a fixed location to the local telephone exchange.

Fixed Wireline

A fixed wire or cable path linking a subscriber at a fixed location to a local exchange, usually with an individual phone number.

FTTH

FiberToTheHome, the implementation of fiber optic network that reaches up to customer point or known as customer premise.


 

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Table of Content

Gateway

Aperipheral that bridges a packet based network (IP) and a circuit based network (PSTN).

Gb

Gigabyte, a unit of information used, for example, to quantify computer memory or storage capacity.

Gbps

Gigabyte per second, the average number of bits, characters, or blocks per unit time passing between equipment in a data transmission system. This is typically measured in multiples of the unit bit per second or byte per second.

GHz

Gigahertz. The hertz (symbol Hz), is the international standard unit of frequency defined as the number of cycles per second of a periodic phenomenon.

GMS

General Meeting of Shareholders, which may be an annual general meeting of shareholders (“AGMS”) or an extraordinary general meeting of shareholders (“EGMS”).

GPON

Gigabyte-Passive Optical Network, the most widely deployed type of passive optical network system that brings fiber optic cabling and signals all or most of the way to end users.

GPRS

General Packet Radio Service, a data packet switching technology that allows information to be sent and received across a mobile network and only utilizes the network when there is data to be sent.

GSM

Global System for Mobile Telecommunication, a European standard for digital cellular telephone.

Homepass

A connection with access to fixed line voice, IPTV and broadband services.

 

IDD

International Direct Dialing, a service that allows a subscriber to make an international call without the assistance or intervention of an operator from any telephone terminal.

IMT-2000

International Mobile Telecommunications-2000, a body of specifications provided by the International Telecommunication Union. Application services include wide area wireless voice telephone, mobile internet access, video calls and mobile TV, all in a mobile environment.

IMS

IP multimedia subsystem, a service which combines wireless and fixed line technologies for voice and data communications.


 

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Table of Content

Installed Lines

Complete lines fully built-out to the distribution point and ready to be connected to subscribers.

Interconnection

The physical linking of a carrier’s network with equipment or facilities not belonging to that network.

Internet of Things

Infrastructure which interconnects physical and virtual things using interoperable information and communication technologies.

IP

Internet Protocol, the method or protocol by which data is sent from one computer to another on the internet.

IP Core

A block of logic data that is used in making a field programmable gate arrayor application-specific integrated circuitfor a product.

IPTV

Internet Protocol Television, a system through which television services are delivered using the Internet Protocol suite over a packet-switched network such as the internet, instead of being delivered through traditional terrestrial, satellite signal, and cable television formats.

ISP

Internet Services Provider, an organization that provides access to the internet.

KSO

Kerjasama Operasi,a form of joint operation agreement that includes build, operate and transfer, which arrangement was previously used by Telkom, in which the consortium partners invest and operate facilities owned by Telkom in regional divisions. The consortium partners are owned by international operators and national private companies or Telkom.

KPPU

Komisi Pengawasan Persaingan Usaha, or Commission for the Supervision of Business Competition.

Leased Line

A dedicated telecommunications transmissions line linking one fixed point to another, rented from an operator for exclusive uses.

Mbps

Megabytes per second, a measure of speed for digital signal transmission expressed in millions of bits per second.

Metro Ethernet

Bridge or relationship between locations that are apart geographically, this network connects LAN customers at several different locations.


 

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Table of Content

MHz

Megahertz, a unit of measure of frequency equal to one million cycles per second.

Mobile Broadband

The marketing term for wireless internet access through a portable modem, mobile phone, USB Wireless Modem or other mobile devices.

MoCI

The Ministry of Communication and Informatics of the Republic of Indonesia, to which regulatory responsibility over telecommunications was transferred from the Ministry of Communication and Information (“MoC”) in February 2005.

MSOE

Kementerian Badan Usaha Milik Negara, or the Ministry of State-Owned Enterprises of the Republic of Indonesia.

Network Access Point

A public network exchange facility where ISPs connected with one another in peering arrangements.

Next Generation Network

A general term that refers to a packet-based network able to provide services, including telecommunication services, and to make use of multiple broadband and quality of service enabled transport technologies, in which service-related functions are independent from underlying transport related technologies. A  Next Generation Network is intended to be able to, with one network, transport various services (voice, data, and various media such as video) by encapsulating these into packets, similar to how such packets are transmitted on the internet.  Next Generation Networks are commonly built around the Internet Protocol.

OJK

Otoritas Jasa Keuangan, or the Indonesian Financial Services Authority, the successor of Bapepam-LK, an independent institution with authority to regulate and supervise financial services activities in the banking sector, capital market sector as well as non-bank financial industry sector.

Over The Top

A generic term commonly used to refer to the delivery of audio, video and other media over the internet without the involvement of a multiple-system operator in the control or distribution of the content.

Pay TV

Pay Television, premium television, or premium channels, subscription-based television services, usually provided by both analog and digital cable and satellite, but also increasingly via digital terrestrial and internet television.

PKLN

Tim Pinjaman Komersial Luar Negeri, or Foreign Commercial Loan Coordinating Team, an inter-agency team of the Government charged with, among others, considering requests of Indonesian SOEs such as us for consent to obtain foreign commercial loans.


 

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Point of presence

An access point, location or facility that connects to and helps other devices establish a connection with the internet, which may consist of a router, switches, servers and other data communication devices. We operate two layers of points of presence, namely main and primary points of presence. A “main point of presence” is the transport backbone that aggregates national traffic. A “primary point of presence” is the aggregate regional transport backbone which has the capability of creating services.

Premium SMS

PremiumShort Message Service, a text messaging service component of phone, web, or mobile communication systems, using standardized communications protocols that allow the exchange of short text messages between fixed line or mobile phone devices.

PSTN

Public Switched Telephone Network, a telephone network operated and maintained by us and the KSO units for us and on our behalf.

Pulse

The unit in the calculation of telephone charge.

Radio Frequency Spectrum

The part of the electromagnetic spectrum corresponding to radio frequencies, i.e. frequencies lower than around 300 GHz (or, equivalently, wavelengths longer than about 1 mm).

RIO

Reference Interconnection Offer, a regulatory term covering all facilities, including interconnection tariffs, technical facilities and administrative issues offered by one telecommunications operator to other telecommunications operator for interconnection access.

RMJ

Regional Metro Junction, an inter-city cable network installation service in one regional (region/province).

Roaming

A general term referring to the extension of connectivity service in a location that is different from the home location where the service was registered.

Satellite Transponder

Radio relay equipment embedded in a satellite that receives signals from earth and amplifies and transmits the signal back to the earth.

SCCS

Submarine Communications Cable System, a cable laid on the sea bed between land-based stations to carry telecommunication signals across stretches of ocean.

SME

Small and Medium Enterprise.


 

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Table of Content

SMS

Short Messaging Service, a technology allowing the exchange of text messages between mobile phones and between fixed wireless phones.

SOE

State-Owned Enterprise, a Government-owned corporation, state-owned company, state-owned entity, state enterprise, publicly owned corporation, Government business enterprise, or parastatal, a legal entity created by a Government to undertake commercial activities on behalf of an owner Government.

Softswitch

A central device in a telephone network that connects calls from one phone line to another, entirely by means of software running on a computer system. This work was formerly carried out by hardware, with physical switchboards to route the calls.

Switch

A mechanical, electrical or electronic device that opens or closes circuits, completes or breaks an electrical path, or selects paths or circuits, used to route traffic in a telecommunications network.

TIMES

Telecommunication, Information, Media, Edutainment and Service.

TPE

A normalized way to refer to transponder bandwidth, which means how many transponders would be used if the same total bandwidths used only 36 MHz  transponder (1 TPE = 36 MHz).

UMTS

Universal Mobile Telephone System, one of the 3G mobile systems being developed within the International Telecommunication Union’s IMT-2000 framework.

USO

Universal Service Obligation, the service obligation imposed by the Government on all telecommunications services providers for the purpose of providing public services in Indonesia.

VoIP

Voice over Internet Protocol, a means of sending voice information using the IP.

VPN

Virtual Private Network, a secure private network connection, built on top of publicly-accessible infrastructure, such as the internet or the public telephone network. VPNs typically employ some combination of encryption, digital certificates, strong user authentication and access control to secure the traffic they carry. These provide connectivity to many machines behind a gateway or firewall.

VSAT

Very Small Aperture Terminal, a relatively small antenna, typically 1.5 to 3.0 meters in diameter, placed in the user’s premises and used for two-way communications by satellite.

 

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Table of Content

CERTAIN DEFINITIONS, CONVENTIONS AND GENERAL INFORMATION

Unless the context otherwise requires, references in this Form 20-F to the “Company”, “Telkom”, “we”, “us”, and “our” are to Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk and its consolidated subsidiaries. All references to “Indonesia” are references to the Republic of Indonesia. All references to the “Government” herein are references to the Government of the Republic of Indonesia. References to the “United States” or “US” are to the United States of America. References to the “United Kingdom” or the “UK” are to the United Kingdom of Great Britain and Northern Ireland. References to "Rupiah", “Indonesian Rupiah” or “Rp” are to the lawful currency of Indonesia. References to “U.S. Dollar” or “US$” are to the lawful currency of the United States. Certain figures (including percentages) have been rounded for convenience, and therefore indicated and actual sums, quotients, percentages and ratios may differ.

Our consolidated financial statements as of December 31, 2015 and 2016 and for the years ended December 31, 2014, 2015 and 2016 included in this Form 20-F (the “Consolidated Financial Statements”) have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

The financial statements of 12 of our subsidiaries have been consolidated into the Consolidated Financial Statements. The 12 companies are PT Telekomunikasi Selular (“Telkomsel”, in which we own a 65% stake), PT Dayamitra Telekomunikasi (“Mitratel”, in which we own a 100%), PT Multimedia Nusantara (“TelkomMetra”, in which we own a 100%), PT Telekomunikasi Indonesia International (“Telin”, in which we own a 100%), PT PINS Indonesia (“PINS”, previously named PT Pramindo Ikat Nusantara, in which we own a 100%), PT Graha Sarana Duta (“Telkom Property”, in which we own a 99.99% stake), PT Telkom Akses (“Telkom Akses”, in which we own a 100%), PT Patra Telekomunikasi Indonesia (“Patrakom”, in which we own a 100%), PT Infrastruktur Telekomunikasi Indonesia (“Telkominfra”, in which we own a 100%),PT Napsindo Primatel Internasional (“Napsindo”, in which we own a 60% stake), PT Metranet (“Metranet” in which we own a100%), and PT Jalin Pembayaran Nusantara (“Jalin”, in which we own a100%).

Solely for the convenience of the reader, certain Indonesian Rupiah amounts have been converted into U.S. Dollars at specified rates. Unless otherwise indicated, the U.S. Dollars equivalent information for amounts in Indonesian Rupiah are converted at the Reuters Rate for December30, 2016 at 04.00 PM Jakarta time, which was Rp13,473to US$1.00. The exchange rate of Indonesian Rupiah for U.S. Dollars on December30, 2016 was Rp13,436to US$1.00 based on the middle exchange which is calculated based on the Bank Indonesia buying and selling rate. The Federal Reserve Bank of New York does not certify for customs purposes a noon buying rate for cable transfers in Indonesian Rupiah. No representation is made that the Indonesian Rupiah or U.S. Dollar amounts shown herein could have been or could be converted into U.S. Dollar or Indonesian Rupiah, as the case may be, at any particular rate or at all. See Item 3 “Key Information — Selected Financial Data — Exchange Controls” for further information regarding rates of exchange between the Indonesian Rupiah and the U.S. Dollar.

FORWARD-LOOKING STATEMENTS

This Form 20-F contains “forward-looking statements” as defined in Section 27A of the U.S. Securities Act of 1933, as amended (“Securities Act”) and Section 21E of the U.S. Securities Exchange Act of 1934, as amended (“Exchange Act”), within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our expectations and projections for our future operating performance and business prospects. The words “believe”, “expect”, “anticipate”, “estimate”, “project” and similar words identify forward-looking statements. In addition, all statements other than statements of historical facts included in this Form 20-F are forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements herein are reasonable, we can give no assurance that such expectations will prove to be correct. These forward-looking statements are subject to a number of risks and uncertainties, including changes in the economic, social and political environments in Indonesia. This Form 20-F discloses, under Item 3 “Key Information — Risk Factors” and elsewhere, important factors that could cause actual results to differ materially from our expectations.


 

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Table of Content

PART I

ITEM 1.                IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

Not applicable.

ITEM 2.                OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

ITEM 3.              KEY INFORMATION

A.                            SELECTED FINANCIAL DATA

The following tables present our selected consolidated financial information and operating statistics as of the dates and for each of the periods indicated. The selected financial information as of and for the years ended December 31, 2012, 2013, 2014, 2015 and 2016 presented below is based upon our audited consolidated financial statements prepared in conformity with IFRS as issued by the IASB. The selected financial information as of and for the years ended December 31, 2012, 2013, 2014, 2015 and 2016 should be read in conjunction with, and is qualified in its entirety by reference to, our audited Consolidated Financial Statements, including the notes thereto, and the other information include elsewhere in this Form 20-F and in our previous Form 20-F filed with the SEC on April1,2016.

The Public Accountant Firm (“KAP”) Purwantono, Sungkoro & Surja (formerly Purwantono, Suherman & Surja) (a member firm of Ernst & Young Global Limited) ("Purwantono, Sungkoro & Surja") audited our Consolidated Financial Statements prepared as of and for the years ended December 31, 2012, 2013, 2014, 2015 and 2016.

KEY CONSOLIDATED STATEMENTS OFPROFIT OR LOSS AND OTHERCOMPREHENSIVE INCOME DATA

 

IFRS

 

 

 

 

 

 

Years Ended December 31,

 

2012 

 

2013 

 

2014 

 

2015 

 

2016 

 

(Rp billion)

 

(Rp billion)

 

(Rp billion)

 

(Rp billion)

 

(Rp billion)

 

(US$ million)

 

except for per share and per ADS amount

 

Revenues

77,127 

 

82,967 

 

89,696 

 

102,470 

 

116,333 

 

8,635 

 

Expenses(1)

54,200 

 

57,850 

 

61,617 

 

71,603 

 

77,824 

 

5,776 

 

Adjusted EBITDA

39,574 

 

41,680 

 

45,684 

 

51,404 

 

59,498 

 

4,416 

 

Operating Profit

25,497 

 

27,727 

 

29,172 

 

32,369 

 

39,172 

 

2,908 

 

Profit before Income Tax

24,027 

 

27,030 

 

28,579 

 

31,293 

 

38,166 

 

2,833 

 

Net Income Tax Expense

(5,886

)

(6,900

)

(7,341

)

(8,023

)

(9,017

)

(669

)

Profit for the Year

18,141 

 

20,130 

 

21,238 

 

23,270 

 

29,149 

 

2,164 

 

Attributable to owners of the parent company

12,621 

 

14,046 

 

14,437 

 

15,451 

 

19,333 

 

1,435 

 

Attributable to non-controlling interests

5,520 

 

6,084 

 

6,801 

 

7,819 

 

9,816 

 

729 

 

Other Comprehensive Income (Expenses) - Net

(2,540

)

5,115 

 

810 

 

493 

 

(2,099

)

(156

)

Net Comprehensive Income for the Year

15,601 

 

25,245 

 

22,048 

 

23,763 

 

27,050 

 

2,008 

 

Attributable to owners of the parent company

10,056 

 

19,018 

 

15,291 

 

16,003 

 

17,312 

 

1,285 

 

Attributable to non-controlling interests

5,545 

 

6,227 

 

6,757 

 

7,760 

 

9,738 

 

723 

 

Weighted average number of shares outstanding (in millions after stock split)

96,011 

 

96,359 

 

97,696 

 

98,177 

 

98,638

 

-

 

 

Table of Content

Years Ended December 31,

 

2012 

 

2013 

 

2014 

 

2015 

 

2016 

 

(Rp billion)

 

(Rp billion)

 

(Rp billion)

 

(Rp billion)

 

(Rp billion)

 

(US$ million)

 

except for per share and per ADS amount

 

Basic and Diluted Earnings per Share (in full amount)

 

 

 

 

 

 

 

 

 

 

 

 

Profit per share(2)

131.45 

 

145.77 

 

147.78 

 

157.38 

 

195.99 

 

0.01 

 

Profit per ADS (100 shares of common stock per ADS)

13,145.40 

 

14,576.79 

 

14,778.00 

 

15,738.00 

 

19,599.85 

 

1.45 

 

Dividend relating to the period (accrual basis, in full amount)

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

87.24 

 

102.40 

 

89.46 

 

94.63 

 

19.38 

 

0.00

 

Dividends declared per ADS

8,724 

 

10,240 

 

8,946 

 

9,463 

 

1,938 

 

0.14

 

Dividend paid in the period (cash basis, in full amount)(3)

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

74.29 

 

87.24 

 

102.40 

 

89.46 

 

94.63 

 

0.01

 

Dividends declared per ADS

7,429 

 

8,724 

 

10,240 

 

8,946 

 

9,463 

 

0.70

 

(1) Expenses are calculated as the sum of the following expenses: operations, maintenance and telecommunication service, depreciation and amortization, personnel, interconnection, general and administrative, marketing, loss on foreign exchange - net, share of profit (loss) of associated companies and other expenses.

 

(2) Using IFAS results, our profit for the year attributable to owners of the parent company would be Rp12,850 billion, Rp14,205 billion, Rp14,471 billion, Rp15,489 billion and Rp19,352 billion for 2012, 2013, 2014, 2015 and 2016, and our net income per share would be Rp133.84, Rp147.42, Rp148.13, Rp157.77 and Rp196.19 for 2012, 2013, 2014, 2015 and 2016. We distribute dividends based on profit attributable to owners of the parent company and net income per share determined in reliance on IFAS.

 

(3) In 2012, we paid a cash dividend for 2011 of Rp74.29 per share. In 2013, we paid a cash dividend for 2012 of Rp87.24 per share. In 2014, we paid a cash dividend for 2013 of Rp102.40 per share, in 2015, we paid a cash dividend for 2014 of Rp89.46 per share and in 2016, we paid a cash dividend for 2015 of Rp94.63 per share.

 

 

RECONCILIATION OF OPERATING PROFIT TO ADJUSTED EBITDA

 

Years Ended December 31,

 

2012 

 

2013 

 

2014 

 

2015 

 

2016 

 

(Rp billion)

 

(Rp billion)

 

(Rp billion)

 

(Rp billion)

 

(Rp billion)

 

(US$ million)

 

Operating Profit

25,497 

 

27,727 

 

29,172 

 

32,369 

 

39,172 

 

2,908 

 

Add:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

14,474 

 

15,805 

 

17,178 

 

18,572 

 

18,556 

 

1,377 

 

Loss on foreign exchange - net

189 

 

249 

 

14 

 

46 

 

52 

 

 

Other income

(2,559

)

(2,581

)

(1,076

)

(1,500

)

(751

)

(56

)

Other expenses

1,973 

 

480 

 

396 

 

1,917 

 

2,469 

 

183 

 

Adjusted EBITDA(1)

39,574 

 

41,680 

 

45,684 

 

51,404 

 

59,498 

 

4,416 

 

(1) We calculate adjusted EBITDA by calculating operating profit before interest, tax, depreciation and amortization, loss on foreign exchange - net, other income and other expenses. Adjusted EBITDA and other related ratios in this Annual Report serve as additional indicators on our performance and liquidity, which is a non-GAAP financial measure. Adjusted EBITDA is presented because our management believes that it is widely used by investors in their analysis of our performance and can assist them in their comparison of our performance with those of other companies in the telecommunications, information and media sector. We also present adjusted EBITDA because it is used by some investors as a way to measure a company’s ability to incur and service debt, make capital expenditures and meet working capital requirements. Companies in the telecommunications, information and media sector have historically reported adjusted EBITDA as a supplement to financial measures in accordance with IFRS or U.S. GAAP. Adjusted EBITDA should not be considered as an alternative to net income as an indicator of our performance, nor should adjusted EBITDA be considered an alternative to cash flows from operating activities as a measure of liquidity or as an alternative to any other measure determined in accordance with IFRS. Unlike net income, adjusted EBITDA does not include depreciation and amortization or financing costs and, therefore, does not reflect current or future capital expenditures or the cost of capital. We compensate for these limitations by using adjusted EBITDA as only one of several comparative tools, together with IFRS-based measurements, to assist in the evaluation of operating performance. Such IFRS-based measurements include profit before income tax, profit for the year, cash flows from operations and cash flow data. We have significant uses of cash flows, including capital expenditures, interest payments, debt principal repayments, taxes and other non-recurring charges, which are not reflected in adjusted EBITDA. Our calculation of adjusted EBITDA may be different from the calculation methods used by other companies and, therefore, comparability may be limited.

 

 

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KEY CONSOLIDATED STATEMENTS OF FINANCIAL POSITION DATA

 

IFRS

 

 

 

 

 

 

As of December 31,

 

2012 

 

2013 

 

2014 

 

2015 

 

2016 

 

(Rp billion)

 

(Rp billion)

 

(Rp billion)

 

(Rp billion)

 

(Rp billion)

 

(US$ million)

 

except for per share

 

Cash and cash equivalents

13,118 

 

14,696 

 

17,672 

 

28,117 

 

29,767 

 

2,210 

 

Trade and other receivables

5,409 

 

7,018 

 

7,380 

 

7,872 

 

7,900 

 

586 

 

Advances and prepaid expenses

3,721 

 

3,937 

 

4,733 

 

5,839 

 

5,246 

 

390 

 

Total Current Assets

27,973 

 

33,672 

 

34,294 

 

47,912 

 

47,701 

 

3,541 

 

Property and equipment

76,908 

 

86,599 

 

94,602 

 

103,455 

 

114,230 

 

8,479 

 

Intangible assets

1,443 

 

1,508 

 

2,463 

 

3,056 

 

3,089 

 

229 

 

Total Non-Current Assets

82,238 

 

94,721 

 

107,321 

 

118,016 

 

131,642 

 

9,771 

 

Total Assets

110,211 

 

128,393 

 

141,615 

 

165,928 

 

179,343 

 

13,312 

 

Trade and other payables

7,457 

 

12,585 

 

12,476 

 

14,284 

 

13,690 

 

1,016 

 

Current income tax liabilities

1,280 

 

942 

 

1,501 

 

1,802 

 

1,236 

 

92 

 

Accrued expenses

6,163 

 

5,264 

 

5,211 

 

8,247 

 

11,283 

 

837 

 

Unearned income

2,729 

 

3,490 

 

3,963 

 

4,360 

 

5,563 

 

413 

 

Short-term loans and current maturities of long-term borrowings

5,658 

 

5,525 

 

7,709 

 

4,444 

 

5,432 

 

403 

 

Total Current Liabilities

24,108 

 

29,034 

 

32,318 

 

35,413 

 

39,762 

 

2,951 

 

Deferred tax liabilities

2,252 

 

2,908 

 

2,703 

 

2,110 

 

745 

 

55 

 

Pension benefit and other post-employment benefit obligations

8,184 

 

4,258 

 

4,115 

 

4,171 

 

6,126 

 

455 

 

Long-term loans and other borrowings

13,617 

 

14,731 

 

15,743 

 

30,168 

 

26,367 

 

1,957 

 

Total Non-current Liabilities

24,734 

 

22,705 

 

23,365 

 

37,332 

 

34,305 

 

2,547 

 

Total Liabilities

48,842 

 

51,739 

 

55,683 

 

72,745 

 

74,067 

 

5,498 

 

Capital stock(1)

5,040 

 

5,040 

 

5,040 

 

5,040 

 

5,040 

 

374 

 

Net Equity Attributable to Owners of the Parent Company

46,055 

 

59,753 

 

67,646 

 

74,934 

 

84,163 

 

6,247 

 

Non-controlling interests

15,314 

 

16,901 

 

18,286 

 

18,249 

 

21,113 

 

1,567 

 

Total Equity (Net Assets)

61,369 

 

76,654 

 

85,932 

 

93,183 

 

105,276 

 

7,814 

 

Net Debt

6,157 

 

5,560 

 

5,780 

 

6,495 

 

2,032 

 

150 

 

Net Working Capital

3,865 

 

4,638 

 

1,976 

 

12,499 

 

7,939 

 

590 

 

Issued and fully paid shares (in shares)

100,799,996,400 

 

100,799,996,400 

 

100,799,996,400 

 

100,799,996,400 

 

100,799,996,400 

 

 

(1) As of December 31, 2016, our issued and paid-up capital consists of one Dwiwarna Shareand 100,799,996,399 shares of common stock each from an authorized capital stock comprising one Dwiwarna Share and 399,999,999,999 shares of common stock.

 

 

 

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Exchange Controls

 

Exchange Rate Information

 

The following table shows the exchange rate of Indonesian Rupiah to U.S. Dollar based on the middle exchange rate which is calculated based on the Bank Indonesia buying and selling rates for the periods indicated.

 

Calendar Year

at Period End(1)

 

Average(2)

 

Low(2)

 

High(2)

 

(Rp Per US$1)

 

2012 

9,670 

 

9,380 

 

9,707 

 

8,892 

 

2013 

12,189 

 

10,451 

 

12,270 

 

9,634 

 

2014 

12,440 

 

11,878 

 

12,900 

 

11,271 

 

2015 

13,795 

 

13,392 

 

14,728 

 

12,444 

 

2016 

13,436 

 

13,307 

 

13,946 

 

12,926 

 

September

12,998 

 

13,118 

 

13,269 

 

12,926 

 

October

13,051 

 

13,017 

 

13,054 

 

12,969 

 

November

13,563 

 

13,311 

 

13,570 

 

13,036 

 

December

13,436 

 

13,418 

 

13,582 

 

13,285 

 

2017

13,335 

 

13,350 

 

13,485 

 

13,280 

 

January

13,343 

 

13,359 

 

13,485 

 

13,288 

 

February

13,280 

 

13,337 

 

13,374 

 

13,280 

 

March(throughMarch 22)

13,335 

 

13,354 

 

13,393 

 

13,308 

 

Source: Bank Indonesia

 

 

 

 

 

 

 

 

(1) Determined based upon the middle exchange rate announced by Bank Indonesia applicable on the last day for the period.

 

(2) Determined based upon the daily middle exchange rate announced by Bank Indonesia during the applicable period.

 

 

Under the current exchange rate system, the exchange rate of the Indonesian Rupiah is determined by the market, reflecting the interaction of supply and demand in the market. However, Bank Indonesia may take measures to maintain a stable exchange rate. For 2016, the average rate of the Rupiah to U.S. Dollar was Rp13,307, with the lowest and highest rates being Rp13,946 and Rp12,926, respectively.

 

The exchange rates used for conversion of monetary assets and liabilities denominated in foreign currencies are the bid and offer rates published by Reuters in 2014, 2015 and 2016. The Reuters bid and offer rates, applied respectively to monetary assets and liabilities, were Rp12,380 and Rp12,390 toUS$1.00 as of December 31, 2014, Rp13,780 and Rp13,790 to US$1.00 as of December 31, 2015 and Rp13,470 and Rp13,475 to US$1.00 as of December 31, 2016.

 

The Consolidated Financial Statements are stated in Rupiah. The conversion of Rupiah amounts into U.S. Dollars are included solely for the convenience of the readers and have been made using the average of the market bid and offer rates of Rp13,473 to US$1.00 published by Reuters on December30,2016.

 

OnMarch 22, 2017, the Reuters bid and offer rates were Rp13,330 and Rp13,333 to US$1.00.

 

Foreign Exchange Controls

 

Indonesia operates a liberal foreign exchange system that permits the free flow of foreign exchange. Capital transactions, including remittances of capital, profits, dividends and interest, are free of exchange controls. A number of regulations, however, have an impact on the exchange system. For example, only banks are authorized to deal in foreign exchange and execute exchange transactions related to the import and export of goods. In addition, Indonesian banks (including branches of foreign banks in Indonesia) are required to report to Bank Indonesia any fund transfers exceeding US$10,000. Based on the decree of the Head of the PKLN, we are required to obtain an approval from the PKLN prior to acquiring foreign commercial loans. We are also required to submit periodical reports to PKLN during the term of the loans.


 

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B.                                        CAPITALIZATION ANDINDEBTEDNESS

Not applicable.

 

C.                                        REASON FOR THE OFFER AND USE OF PROCEEDS

 

Not applicable.

 

D.                                         RISK FACTORS

Risks Relatedto Indonesia

Politicaland Social Risks

Current political and social events in Indonesia may adversely affect our business          

Since 1998, Indonesia has experienced a process of democratic change, resulting in political and social events that have highlighted the unpredictable nature of Indonesia’s changing political landscape. In 1999, Indonesia conducted its first free elections for representatives in parliament. In 2004, 2009 and 2014, elections were held in Indonesia to elect the President, Vice-President and representatives in parliament.Indonesia also has many political parties, without any one party holding a clear majority. Due to these factors, Indonesia has, from time to time, experienced political instability, as well as general social and civil unrest. For example, since 2000, thousands of Indonesians have participated in demonstrations in Jakarta and other Indonesian cities both for and against former presidents Abdurrahman Wahid, Megawati Soekarnoputri and Susilo Bambang Yudhoyono and current President Joko Widodo as well as in response to specific issues, including fuel subsidy reductions, privatization of state assets, anti-corruption measures, decentralization and provincial autonomy, and the American-led military campaigns in Afghanistan and Iraq. Although these demonstrations were generally peaceful, some turned violent.

President Joko Widodo won the Indonesian presidential elections which took place in 2014, and was sworn in as President on October 20, 2014. Although the 2014 elections were conducted in a peaceful manner, President Joko Widodo's governing coalition doesnothold a majority of seats in parliament. Between November 2016 and February 2017, significant demonstrations took place in central Jakarta against the governor of Jakarta. These demonstrations occurred during the closely fought Jakarta gubernatorial elections which took place in February 2017 and will be re-contested in April 2017. Each of the foregoing events, as well as political campaigns in Indonesia generally, may be indicative of the degree of political and social division in Indonesia.

Indonesia announced in November 2014, and implemented with effect from January 1, 2015, a fixed diesel subsidy of Rp1,000 per liter and scrapped the gasoline subsidy. Although the implementation did not result in any significant violence or political instability, the announcement and implementation also coincided with a period where crude oil prices had dropped very significantlyfrom 2014. Currently, the Government reviews and adjusts the price for fuel on monthly basis and implements the adjusted fuel price in the following month. There can be no assurance that future increases in crude oil and fuel prices will not result in political and social instability.

Separatist movements and clashes between religious and ethnic groups have also resulted in social and civil unrest in parts of Indonesia, such as Aceh in the past and in Papua currently, where there have been clashes between supporters of those separatist movements and the Indonesian military, including continued activity in Papua, by separatist rebels that has led to violent incidents. There have also been inter-ethnic conflicts, for example in Kalimantan, as well as inter-religious conflict such as in Maluku and Poso.

Labor issues have also come to the fore in Indonesia. In 2003, the Government enacted a new labor law that gave employees greater protections. Occasional efforts to reduce these protections have prompted an upsurge in public protests as workers responded to policies that they deemed unfavorable.

There can be no assurance that social and civil disturbances will not occur in the future and on a wider scale, or that any such disturbances will not, directly or indirectly, materially and adversely affect our business, financial condition, results of operations and prospects.


 

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Terrorist activities in Indonesia could destabilize Indonesia, which would adversely affect our business, financial condition and results of operations, and the market price of our securities

There have been a number of terrorist incidents in Indonesia, including the May 2005 bombing in Central Sulawesi, the Bali bombings in October 2002 and October 2005 and the bombings at the JW Marriot and Ritz Carlton hotels in Jakarta in July 2009,which resulted in deaths and injuries.On January 14, 2016, several coordinated bombings and gun shootings occurred in Jalan Thamrin, a main thoroughfare in Jakarta, resulting in a number of deaths and injuries.

Although the Government has successfully countered some terrorist activities in recent years and arrested several of those suspected of being involved in these incidents, terrorist incidents may continue and, if serious or widespread, might have a material adverse effect on investment and confidence in, and the performance of, the Indonesian economy and may also have a material adverse effect on our business, financial condition, results of operations and prospects and the market price of our securities.

Macro Economic Risks

Negative changes in global, regional or Indonesian economic activity could adversely affect our business

Changes in the Indonesian, regional and global economies can affect our performance. Two significant events in the past that impacted Indonesia’s economy were the Asian economic crisis of 1997 and the global economic crisis which started in 2008. The 1997 crisis was characterized in Indonesia by, among others, currency depreciation, a significant decline in real gross domestic product, high interest rates, social unrest and extraordinary political developments. While the global economic crisis that arose from the subprime mortgage crisis in theUnited Statesdid not affect Indonesia's economy as severely as in 1997, it still put Indonesia’s economy under pressure. The global financial markets have also experienced volatility as a result of expectations relating to monetary and interest rate policies of the United States, concerns over the debt crisis in the Eurozone,and concerns over China's economic health. Uncertainty over the outcome of the Eurozone governments’ financial support programs and worries about sovereign finances generally are ongoing. If the crisis becomes protracted, we can provide no assurance that it will not have a material and adverse effect on Indonesia’s economic growth and consequently on our business.

Adverse economic conditions could result in less business activity, less disposable income available for consumers to spend and reduced consumer purchasing power, which may reduce demand for communication services, including our services, which in turn would have an adverse effect on our business, financial condition, results of operations and prospects. There is no assurance that there will not be a recurrence of economic instability in future, or that, should it occur, it will not have an impact on the performance of our business.

Fluctuations in the value of theIndonesian Rupiah may materially and adversely affect us

Our functional currency is theIndonesianRupiah. One of the most importantimpactsthe Asian economic crisishad on Indonesia was the depreciation and volatility in the value of the Indonesian Rupiah as measured against other currencies, such as the U.S. Dollar.The Indonesian Rupiahcontinues to experience significant volatility.From 2012 to 2016, the Indonesian Rupiah per U.S. Dollar exchange rate ranged from ahigh of Rp8,892 per U.S. Dollar to alow of Rp14,728per U.S. Dollar. As a result, we recordedforeign exchangelosses of Rp14 billionin 2014, Rp46 billionin 2015, and Rp52 billion in 2016. As of December 31, 2016, the Indonesian Rupiah per U.S. Dollar exchange rate stood at Rp13,436 per U.S. Dollar, compared toRp13,795 per U.S. Dollar as of December 31, 2015.

To the extent that the Indonesian Rupiah depreciates further from the exchange rate as of December 2016, our U.S. Dollar-denominated obligations under our accounts payable and procurements payable, as well as payments for foreign currency-denominated loans payable and bonds payable, would increase in Indonesian Rupiah terms. A depreciation of the Rupiah would also increase the Rupiah cost of our capital expenditures as most of our capital expenditures are priced in or with reference to foreign currencies, mainly U.S. Dollars and Euros, while a substantialmajority of our revenues are in Rupiah. Such depreciation of the Indonesian Rupiah would result in losses on foreign exchange translation, significantly affect our total expenses and net income, and reduce the U.S. Dollar amounts of dividends received by holders of our ADSs. We can give no assurance that we will be able to control or manage our exchange rate risk successfully in the future or that we will not be adversely affected by our exposure to exchange rate risk.

 

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In addition, while the Indonesian Rupiah has generally been freely convertible and transferable, from timeto time, Bank Indonesia has intervened in the currency exchange markets in furtherance of its policies, either by selling Indonesian Rupiah or by using its foreign currency reserves to purchase Indonesian Rupiah. We can give no assurance that the current floating exchange rate policy of Bank Indonesia will not be modified or that the Government will take additional action to stabilize, maintain or increase the Indonesian Rupiah’s value, or that any of these actions, if taken, will be successful. Modification of the current floating exchange rate policy could result in significantly higher domestic interest rates, liquidity shortages, capital or exchange controls, or the withholding of additional financial assistance by multinational lenders. This could result in a reduction of economic activity, an economic recession, loan defaults or declining subscriber usage of our services, and as a result, we may also face difficulties in funding our capital expenditures and in implementing our business strategy. Any of the foregoing consequences could have a material adverse effect on our business, financial condition, results of operations and prospects.

Downgrades of credit ratings of theGovernment or Indonesian companies could adversely affect our business

As of the date of this Annual Report, Indonesia’s sovereign foreign currency long-term debt was rated “Baa3” by Moody’s, “BB+” by Standard & Poor’s and “BBB-” by Fitch Ratings. Indonesia's short-term foreign currency debt is rated “B” by Standard & Poor’s and “F3” by Fitch Ratings.

We can give no assurance that Moody’s, Standard & Poor’s or Fitch Ratings will not change or downgrade the credit ratings of Indonesia. Any such downgrade could have an adverse impact on liquidity in the Indonesian financial markets, the ability of the Government and Indonesian companies, including us, to raise additional financing, and the interest rates and other commercial terms at which such additional financing is available. Interest rates on our floating rate Rupiah-denominated debt would also likely increase. Such events could have material adverse effects on our business, financial condition, results of operations, prospects and/or the market price of our securities.

Disaster Risks

Indonesia is vulnerable to natural disasters and events beyond our control, which could adversely affect our business and operating results

Many parts of Indonesia, including areas where we operate, are prone to natural disasters such as floods, lightning strikes, typhoons, earthquakes, tsunamis, volcanic eruptions, fires, droughts, power outages and other events beyond our control. The Indonesian archipelago is one of the most volcanically active regions in the world as it is located in the convergence zone of three major lithospheric plates. It is subject to significant seismic activity that can lead to destructive earthquakes, tsunamis or tidal waves. Flash floods and more widespread flooding also occur regularly during the rainy season from November to April. Cities, especially Jakarta, are frequently subject to severe localized flooding which can result in major disruption and, occasionally, fatalities.  Landslides regularly occur in rural areas during the wet season. From time to time, natural disasters have killed, affected or displaced large numbers of people and damaged our equipment. These events in the past, and may in the future, disrupt our business activities, cause damage to equipment, and adversely affect our financial performance and profit.

For example, on September 2, 2009, an earthquake in West Java caused damage to our assets. On September 30, 2009, an earthquake in West Sumatra disrupted the provision of telecommunications services in several locations and caused severe damage to our assets.

Although we have implemented abusinesscontinuityplan and adisasterrecoveryplan,which we test regularly, and we have insured certain of our assets to protect from any losses attributable to natural disasters or other phenomena beyond our control, there is no assurance that the insurance coverage will be sufficient to cover the potential losses, that the premium payable for these insurance policies upon renewal will not increase substantially in the future, or that natural disasters would not significantly disrupt our operations.

We cannot assure you that future natural disasters will not have a significant impact on us, or Indonesia or its economy. A significant earthquake, other geological disturbance or weather-related natural disaster in any of Indonesia’s more populated cities and financial centers could severely disrupt the Indonesian economy and undermine investor confidence, thereby materially and adversely affecting our business, financial condition, results of operations and prospects.

 

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Our operations may be adversely affected by an outbreak of an infectious disease, such as avian influenza,InfluenzaA(H1N1) virus or other epidemics

An outbreak of an infectious disease such as avian influenza, Influenza A (H1N1) or a similar epidemic, or the measures taken by the governments of affected countries, including Indonesia, against such an outbreak, could severely disrupt the Indonesian economy and undermine investor confidence, thereby materially and adversely affecting our financial condition or results of operations and the market value of our securities. Moreover, our operations could be materially disrupted if our employees remained at home and away from our principal places of business for extended period of time, which would have a material and adverse effect on our financial condition or results of operations and the market value of our securities.

Other Risks

Our financial results are reported to the OJK in conformity with IFAS, which differs in certain significant respects from IFRS, and we distribute dividends based on profit for the year attributable to owners of the parent company and net income per share determined in reliance on IFAS

In accordance with the regulations of the OJK and theIndonesia Stock Exchange ("IDX"), we are required to report our financial results totheOJK in conformity with IFAS. We have provided to the OJK our financials result for the year ended December 31, 2016, onMarch 6, 2017, which we furnished to the SEC on a Form 6-K datedMarch 8, 2017, which contains our audited Consolidated Financial Statements as of and for the year ended December 31, 2016 and prepared in conformity with IFAS. IFAS differs in certain significant respects from IFRS and, as a result, there are differences between our financial results as reported under IFAS and IFRS, including profit for the year attributable to owners of the parent company and net income per share. We distribute dividends based on profit for the year attributable to owners of the parent company and net income per share determined in reliance on IFAS.

Based onIFAS financial statements, our profit for the year attributable to owners of the parent company would be Rp15,489 billion for2015and Rp19,352 billion for 2016 and our net income per share would be Rp157.77for2015 and Rp196.19 for 2016. Dividends declared per share were Rp94.63for 2015. The dividend for 2016will be decided at the 2017 AGMS, scheduled forApril 21, 2017.

We were established in Indonesia and it may not be possible for investors to effect service of process or enforce judgments, on us within the United States or to enforce judgments of a foreign court against us in Indonesia

We are a state-owned limited liability companyestablished in Indonesia, operating within the framework of Indonesian lawsgoverning companies with limited liability, and all of our significant assets are located in Indonesia. In addition,all ofour Commissioners and Directors reside in Indonesia and a substantial portion of the assets of such persons are located outside the United States. As a result, it may be difficult for investors to effect service of process, or enforce judgments on us or such persons within the United States, or to enforce against us or such persons in the United States, judgments obtained in United States courts.

We have been advised by Hadiputranto, Hadinoto & Partners, our Indonesian legal advisor, that judgments ofUnited States courts, including judgments predicated upon the civil liability provisions of theUnited States federal securities laws or the securities laws of any state within theUnited States, are not enforceable in Indonesian courts, although such judgments could be admissible as non-conclusive evidence in a proceeding on the underlying claim in an Indonesian court. They have also advised that there is doubt as to whether Indonesian courts will enter judgments in original actions brought in Indonesian courts predicated solely upon the civil liability provisions of theUnited States federal securities laws or the securities laws of any state within theUnited States. As a result, the claimant would be required to pursue claims against us or such persons in Indonesian courts.

Our controlling shareholder’s interest may differ from those of our other shareholders

The Government has a controlling stake of 52.09% of our issued and outstanding shares of common stock and the ability to determine the outcome of all actions requiring the approval ofourshareholders. The Government also holds our one DwiwarnaShare, which has special voting rights and veto rights over certain matters, including the election and removal of our Directors and Commissioners.The Government may also use its powers asamajority shareholder or under the Dwiwarna Share to cause us to issue new shares, amend our Articles of Association or bring about actions to merge or dissolve us, increase or decrease our authorized capital or reduce our issued capital, or veto any of these actions. One or more of these may result in the delisting of our securities from certain exchanges.In addition, the Governmentregulates the Indonesian telecommunications industry through the MoCI.

 

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As of December 31, 2016, the Government had a 14.29% equity stake in PT Indosat Tbk ("Indosat"), which competes with us in cellular services and fixed IDD telecommunications services. The Government's stake in Indosat alsoincludesa dwiwarnashare which has special voting rights and veto rights over certain strategic matters under Indosat'sarticles ofassociation, including decisions on dissolution, liquidation and bankruptcy, and also permits the Government to nominate onedirector to itsboard ofdirectors and onecommissioner to itsboard ofcommissioners.As a result, there may be instances where the Government’s interests will conflict with ours. There is no assurance that the Government will not direct opportunities to Indosat or favor Indosat or any other telecommunication operator when exercising regulatory powers over the Indonesian telecommunications industry. If the Government were to give priority tothe businessof Indosat or any other telecommunication operatorover ours, or to expand its stake in Indosat or acquire a stake in any other telecommunication operator, our business, financial condition, and results of operations and prospects could be materially and adversely affected.

Forward-looking statements may not be accurate

This Annual Report incorporates forward-looking statements that include announcements regarding our current goals and projections of our operational performance and future business prospects. The words “believe”, “expect”, “anticipate”, “estimate”, “project” and similar words identify forward-looking statements. In addition, all statements, other than statements that contain historical facts, are forward-looking statements. While we believe that the expectations contained in these statements are reasonable, we cannot give an assurance that they will be realized. These forward-looking statements are subjected to a number of risks and uncertainties, including changes in the economic, social and political situation in Indonesia and other risks described inthis section "Risk Factors". All forward-looking statements, written or verbal, made by us or by persons on behalf of us are deemed to be subject to those risks.

Risks Relatedto Our Business

Operational Risks

A material failure in the continuing operations of our network, certain key systems, gateways to our network or the networks of other network operators could adversely affect our business, financial condition, results of operations and prospects

We depend to a significant degree on the uninterrupted operation of our network to provide our services. For example, we depend on access to our fixed wireline network for the operation of our fixed line network and the termination and origination of cellular telephone calls to and from fixed line telephones, and a significant portion of our cellular and international long distance call traffic is routed through the PSTN. We also depend on access to an internet and broadband network and a cellular network. Our integrated network includes a copper access network, fiber optic access network, BTSs, switching equipment, optical and radio transmission equipment, an IP core network, satellites and application servers.

In addition, we also rely on interconnection to the networks of other telecommunications operators to carry calls and data from our subscribers to the subscribers of operators both within Indonesia and overseas. We also depend on certain technologically sophisticated management information systems and other systems, such as our customer billing system, to enable us to conduct our operations. Our network, including our information systems, IT and infrastructure and the networks of other operators with whom our subscribers are interconnected, are vulnerable to damage or interruptions in operation from a variety of sources including earthquake, fire, flood, power loss, equipment failure, network software flaws, transmission cable disruption or similar events.

Although we have implemented abusinesscontinuityplan and adisasterrecoveryplan,which we test regularly, we cannot guarantee that the implementation of such plans will be completely or partially successful should any portion ofournetwork be severely damaged or interrupted. Any failure that results in an interruption of our operations or of the provision of any service, whether from operational disruption, natural disaster or otherwise, could adversely affect our business, financial condition, results of operations and prospects.

 

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We may, in the future, be required to share our network infrastructure and capacity with our competitors

In November 2016, the Government announced its intention to amend certain regulations, as a result of which we may, in the future, be required to share our network infrastructure and capacity with our competitors. In particular, the draft revision to Government Regulation No.52/2000 on Telecommunications ("Draft Revision to GR No.52/2000") contemplates providing the Government with the authority to require telecommunication operators such as our Company to share network capacity with other telecommunication operators in Indonesia if there is available capacity. Draft Revision to GRNo.52/2000 may also require telecommunication operators such as our Company to share proprietary network transmission equipment when the Government deems this to be necessary in order to maintain market competition and network efficiency and sustainability.

In addition, the draft revision to Government Regulation No.53/2000 on the Utilization of Radio Frequency Spectrum and Satellite Orbit ("Draft Revision to GR No.53/2000") may be interpreted to require telecommunication operators such as our Company to share network with other telecommunication operators and service providers.

If these draft regulations are enacted by the Government in their current form, we would be required to share our network infrastructure and capacity with our competitors. This may allow our competitors to expand without significant capital expenditure outlay in areas where we currently operate. In addition, we cannot assure you that we will have sufficient network capacity to maintain our current business, product offerings and quality of service due to the additional traffic that we would need to service as a result of our competitors' access to our network. Our ability to service any increase in traffic within our network may consequently be limited, which may adversely affect our ability to increase our revenues through the expansion of our services.

Neither the Draft Revision to GR No.52/2000 nor the Draft Revision to GR No.53/2000 provide the details of the terms under which we may be required to share our network infrastructure and capacity with our competitors. We cannot assure you that the Government will adopt terms which we consider to be commercially reasonable. For example, we cannot assure you that any subsequent implementing regulations will allow us to charge competitors who lease our network capacity with fees at rates which we consider to be commercially acceptable.

If the Draft Revision to GR No.52/2000 and the Draft Revision to GR No.53/2000 are adopted, and the terms under which such proposed regulations are implemented are not commercially reasonable, it could have a material adverse effect on our business, financial condition, results of operations and prospects.

Our networks face both potential physical and cyber security threats, such as theft, vandalism and acts intended to disrupt our operations, which could adversely affect our operating results

Our networks and equipment, particularly our wireline access network, face both potential physical and cyber security threats. Physical threats include theft and vandalism of our equipment and organized attacks against key infrastructure intended to disrupt operations. In addition, telecommunications companies worldwide face increasing cyber security threats as businesses become increasingly dependent on telecommunications and computer networks and adopt cloud technologies. Cyber security threats include gaining unauthorized access to our systems or inserting computer viruses or malicious software in our systems to misappropriate consumer data and other sensitive information, corrupt our data or disrupt our operations. Unauthorized access may also be gained through traditional means such as the theft of computers, portable data devicesormobile phones and intelligence gathering on employees with access to our systems.

Although we have not experienced any material successful cyber attacks to date that have affected our operations, our network and website are frequently targeted by cyber attacks. A successful cyber attack may lead us to incur substantial costs to repair damaged or restore data, implement substantial organizational changes and training to prevent future similar attacks and lost revenues and litigation costs due to misused sensitive information, and cause substantial reputational damage. We take preventive and remedial measures with respect to our systems, including enhanced cooperation with the police, particularly in areas prone to criminal activity and regular upgrades of our data security measures. However, there is no assurance that our physical and cyber security measures will be successful. Damage to our network, equipment or data and the need to repair such damage resulting from a physical or cyber attack may materially and adversely affect our business, financial condition and operating results. Our networks face potential security threats, such as theft or vandalism, which could adversely affect our operating results.

 

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We face a number of risks relating to our internet-related services

In addition to cyber security threats, because we provide connections to the internet and host websites for customers and develop internet content and applications, we may be perceived as being associated with the content carried over our network or displayed on websites that we host. In addition, the content carried over our network or the websites that we host may contain materials or information which may be illegal, defamatory or infringe on third party copyrights. We cannot and do not screen all of this content and may face litigation claims due to a perceived association with such content. These types of claims can be costly to defend, divert management resources and attention, and may damage our reputation.

A revenue leakage might occur due to internal weaknesses or external factors and if this risk were to materialize, it could have an adverse effect on our operating results

We may face revenue leakage or problems with collecting all the revenues to which we may be entitled, due to the possibility of weaknesses at the transactional level,delay in transaction processing, dishonest customers or other factors.

We have takencertainpreventive measuresto mitigatethe possibility of revenue leakage by increasing control functions in all of our existing business processes, implementing revenue assurance methods, employing adequate policies and procedures as well as implementing information systems applications to minimize revenue leakages. Nonetheless, there is no assurance that in the future there will be no significant revenue leakages or that any such leakages will not have a material adverse affect on our operating results.

New technologies may adversely affect our ability to remain competitive

The telecommunications industry is characterized by rapid and significant changes in technology. We may face increasing competition due to technologies currently under development or which may be developed in the future. Future development or application of new or alternative technologies, services or standards could require significant changes to our business model, the development of new products, the provision of additional services and substantial new investments by us. New products and services may be expensive to develop and may result in the introduction of additional competitors into the marketplace. We cannot accurately predict how emerging and future technological changes will affect our operations or the competitiveness of our services. Furthermore, we cannot guarantee that we will be able to effectively integrate new technologies into our existing business model.

In particular, the rapid development of new technologies, new services and products, and new business models has resulted in distinctions between local, long distance, wireless, cable and internet communication services being lessened and has brought new competitors into the telecommunications market.One of the main challenges faced by the telecommunications industry in Indonesia is the increasing use of Over The Top services that has become a substitute for voice and SMS services, in line with the growing number of smartphone users. This has happened not only in Indonesia, but also in developed countries where smartphone penetration is high.

We cannot assure you that our technologies will not become obsolete, or be subjected to competition from new technologies in the future, or that we will be able to acquire new technologies necessary to compete in changed circumstances on commercially acceptable terms. Our failure to react to rapid technological changes could adversely affect our business, financial condition, results of operations and prospects.

Our satellites have limited operational life they may be damaged or destroyed during in-orbit operation or suffer launch delays or failures. The loss or reduced performance of our satellites, whether caused by equipment failure or its license being revoked, may adversely affect our financial condition, results of operations and ability to provide certain services

We operate three satellites, namely Telkom-1, Telkom-2 and Telkom-3S. All of the satellites that we operate have limited operational lives, with their estimated operational life ending approximately in 2021, 2020 and 2033, respectively.A number of factors affect the operational lives of satellites, including the quality of their construction, the durability of their systems, subsystems and component parts, on-board fuel reserves, accuracy of their launch into orbit, exposure to micrometeorite storms, or other natural events in space, collision with orbital debris, or the manner in which the satellite is monitored and operated. We currently use satellite transponder capacity on our satellites in connection with many aspects of our business, including direct leasing of such capacity and routing for our international long distance and cellular services.

 

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Moreover, International Telecommunication Union regulations specify that a designated satelliteorbitalslot has been allocated for Indonesia and the Government has the right to determine which party is licensed to use such slot. While we currently hold a license to use the designated satelliteorbitalslot, in the eventany of our satellites experience technical problems or failure, the Government may determine that we have failed to optimize the existing slot under our license, which may result in the Government withdrawing our license. We cannot assure you that we will be able to maintain use of the designated satelliteorbitalslot in a manner deemed satisfactory by the Government.

In anticipation of the growth in demand for satellite services and to support our business strategy with regard to providing TIMES services, we signed a contract in 2009 for the procurement of the Telkom-3satellite. However, due to a launch failure in August 2012, the Telkom-3 satellite ended up in an unusable orbit, which led us to develop the Telkom-3S satellite which was launched in February 2017 and is currently undergoing in-orbit performance tests.We have entered into a contract for the procurement oftheTelkom-4 satellite, which is currently planned for launchin the third quarter of 2018 as a replacement fortheTelkom-1 satellite.Although the Telkom-1 satellite may still be operational for several years after the end of its estimated operational life in 2021, if there is any delay in the development and launch ofthe Telkom-4 satellite, or if the operational life of the Telkom-1 satellite ends before theTelkom-4 satellite issuccessfully launched, or damage or failure renders our existing satellites unfit for use, we would need to lease additional transponder capacity from a third party, which would likely increase our costs of operations. Failure to lease adequate satellite capacity from a third party provider may also result in service interruptions and/or a cessation of our satellite operations. The termination of our satellite business could increase expenses associated with our provision of other telecommunications services, particularly in the eastern parts of Indonesia which currently rely largely on satellite coverage for telecommunications services and could adversely affect our business, financial condition and results of operations.

Financial Risks

We are exposed to interest rate risk

Our debt includes bank borrowingsusedto finance our operations. Where appropriate, we seek to minimize our interest rate risk exposure by entering into interest rate swap contracts to swap floating interest rates for fixed interest rates over the duration of certain borrowings. However, our hedging policy may not adequately cover our exposure to interest rate fluctuations and this may result in a large interest expense and an adverse effect on our business, financial condition and results of operations. 

Changes in the economic situation in the United States, including improvement or expectations of improvement in theUnited Stateseconomy, may also have an impact on Southeast Asia and Indonesia. Expectations of the United States Federal Reserve tapering its bond buying program on an improving economy resulted in, among other things, the weakening of equity and bond markets around the world and a number of Asian currencies, including the Rupiah, since May 2013. In part, in an effort to support the Rupiah, in June 2013, Bank Indonesia began raising its benchmark reference rate from a record low of 5.75% which was set in February 2012. The benchmark reference rate rosesix times between June 2013 and November 2014 to 7.75% before decreasing to 7.50% in February 2015, 7.25% in January 2016, 7.00% in February 2016,6.75% in March 2016 and 6.50% in June 2016.The increases oftheBank Indonesia benchmark reference rate in 2013 and 2014 were followed by increases in the Jakarta Interbank Offered Rate (“JIBOR”) andtheBank Indonesia Certificate (“SBI”) interest rates, and in 2016, decreases oftheBank Indonesia benchmark reference rate were followed by the JIBOR andtheSBI interestrate. There can be no assurance that any of the Bank Indonesia benchmark reference rate,theJIBOR ortheSBIinterestrates will not rise again in the future.

We may not be able to successfully manage our foreign currency exchange risk

Changes in exchange rates have affected and may continue to affect our financial condition and results of operations. Most of our debt obligations are denominated in Indonesian Rupiah and a majority of our capital expenditures are denominated in U.S. Dollars. Most of our revenues are denominated in Indonesian Rupiah and a portion is denominated in U.S. Dollars (for example, from international services). We may also incur additional long-term indebtedness in currencies other than the Indonesian Rupiah, including the U.S. Dollars, to finance further capital expenditures.

The exchange rate of Indonesian Rupiah to the U.S. Dollar has been highly volatile in the past. Although we have a financial risk management program and a written policy for foreign currency risk management which mainly uses time deposits placements and hedging to cover foreign currency risk exposure for periods ranging from 3 to 12 months, we can give no assurance that we will be able to manage our exchange rate risk successfully or that our business, financial condition or results of operations will not be adversely affected by our exposure to exchange rate risk.

 

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We may be unable to fund the capital expenditures needed for us to remain competitive in the telecommunications industry in Indonesia

The delivery of telecommunications services is capital intensive. In order to be competitive, we must continually expand, modernize and update our telecommunications infrastructure technology, which involves substantial capital investment. For the years ended December 31, 2014, 2015 and 2016, our consolidated capital expenditures totaled Rp24,661 billion, Rp26,401 billion and Rp29,199 billion (US$2,167 million), respectively. Our ability to fund capital expenditures in the future will depend on our future operating performance, which is subject to prevailing economic conditions, levels of interest rates and financial, business and other factors, many of which are beyond our control, and upon our ability to obtain additional external financing. We cannot assure you that additional financing will be available to us on commercially acceptable terms, or at all. In addition, we can only incur additional financing in compliance with the terms of our debt agreements. Accordingly, we cannot assure you that we will have sufficient capital resources to improve or expand our telecommunications infrastructure technology or update our other technologies to the extent necessary to remain competitive in the Indonesian telecommunications market. Our failure to do so could have a material adverse effect on our business, financial condition, results of operations and prospects.

Legal and Compliance Risks

If we are found liable foranti-competitive practices, we may be subjected to substantial liability which could have an adverse effect on our reputation, business, financial condition, results of operations and prospects

We are subject to laws and regulations relating to anti-competitive practices and anti-monopoly.Law No.5 of 1999 on Prohibition of Monopolistic Practice and Unfair Business Competition (the “Competition Law”) prohibits agreements and activities which amount to unfair business competition and an abuse of a dominant market position. Pursuant to the Competition Law, the KPPU was established as Indonesia’s antitrust regulator with the authority to enforce the provisions of the Competition Law.

In 2016, our Company, Telkomsel and five other local operators were found to have violated the Competition Law forprice-fixing practices related to SMS services. We and Telkomsel were ordered to pay fines in the amount of Rp18 billion and Rp25 billion, respectively.We cannot assure you that any new or existing governmental regulators will not, in the future, find our business practices to have an anti-competitive effect, nor can we assure you that we will not be found to have violated the relevant laws and regulations relating to anti-competition and anti-monopoly in the future.If we are found to have violated anylaws and regulations relating to anti-competition and anti-monopoly,we may be subjected to substantial liability such as payments of fines, the amount of which will be subject to the discretion of the courts, which could have a material adverse effect on our reputation,business, financial condition, results of operations and prospects.

Regulation Risks

We operate in a legal and regulatory environment that is undergoing significant change. These changes may result in increased competition, which may result in reduced margins and operating revenue, among other things. These changes may also directly reduce our margins or reduce the costs of our competitors. These adverse changes resulting from regulation may have a material adverse effect on us.

Reform ofIndonesian telecommunications regulations initiated by the Government in 1999 have, to a certain extent, resulted in the industry’s liberalization, including removal of barriers to entry and the promotion of competition. However, in recent years, the volume and complexity of regulatory changes has created an environment of considerable regulatory uncertainty. In addition, as the legal and regulatory environment of the Indonesian telecommunications sector continue to change, competitors, potentially with greater resources than us, may enter the Indonesian telecommunications sector and compete with us in providing telecommunications services. Furthermore, it is impossible to anticipate the regulatory policies that will be applied to new technologies.

We derive substantial revenue from interconnection services because we have the largest network in Indonesia and our competitors must pay tariffs to connect to our network. As regulated by the MoCI,although SMSinterconnection rates as a result of ITRB No.60/BRTI/III/2014 and No.125/BRTI/IV/2014 increasedfrom Rp23 to Rp24, effective April 2014, through December 31, 2015, SMS interconnection rates have been decreasing in recent years and may decrease again in the future. As a result, ourrevenue from interconnection servicesmay decrease in the future if SMS interconnection rates, as regulated by the MoCI, continue to decrease.

 

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In the future, the Government may announce or implement other regulatory changes which may adversely affect our business or our existing licenses. We cannot assure you that we will be able to compete successfully with other domestic or foreign telecommunications operators, that regulatory changes will not disproportionately reduce our competitors’ costs or disproportionately reduce our revenues, or that regulatory changes, amendments or interpretations of current or future laws and regulations will not have a material adverse effect on our business and operating results.

Regulations for the configuration of BTS towers may delay the set up of new BTS towers or changes in the placement of existing towers, and may erode our leadership position by requiring us to share our towers with our competitors

In 2008 and 2009, the Government issued regulations relating to the construction, utilization and sharing of BTS towers. Pursuant to the regulations, the construction of BTS towers requires permits from the local government. The local government has a right to determine the location of the towers  and the license fees to build tower infrastructure.

These regulations may adversely affect us in the allocation, development or expansion plan of our new BTS towers as setting up of our new towers will become more complicated. They may also adversely affect our existing BTS towers if local governments require any changes in the placement of the existing towers.

In addition, these regulations require us to allow other telecommunication operators to lease space on and utilize our telecommunications towers in a manner that provides equal opportunity to and without any discrimination among such other telecommunication operators. This allows our competitors to expand their networks by leasing space on and utilizing our telecommunications towers without having to expend capital expenditures to build their own telecommunications towers. As a result, our competitors may be able to expand their network quickly and grow their business quickly, particularly in urban areas where new space for additional towers may be difficult to obtain.

In order to operate our telecommunications towers, Indonesian regulations allow local governments to impose fees which are determined on a cost basis subject to a formula provided by the Ministry of Finance and the location of the telecommunications towers. Most local governments have yet to begin to impose such fees and we cannot assure you that such fees will not be material in the future. In addition, we cannot assure you that there will be no material difference in the amount of fees that we would be liable to pay to the relevant local governments. If these risks were to materialize, it could have an adverse effect on our operating results.

Risks Related to our Fixed and Cellular Telecommunication Business

We may further lose wireline telephone subscribers and revenues derived from our wireline voice services may continue to decline, which may materially adversely affect our results of operations, financial condition and prospects

Revenues derived from our wireline voice services have declined during the past several years mainly due to the increasing popularity of mobile voice services and other alternative means of communication. Tariffs for mobile services have declined in recent years which has further accelerated substitution of mobile for wireline voice services. While the number of our fixed wireline subscribers increased by 6.0%in2015 and 3.8% in 2016, revenues from our wireline voice services decreased by 3.2% in 2015and2.2% in 2016. The percentage of revenues derived from our wireline voice services out of our total revenueswas7.5% in 2015and 6.5% in 2016.

Since the beginning of 2015, we have taken various steps to stabilize our revenues from wireline voice services byseeking tomigrate subscribers to IndiHome,a service which bundlesbroadband internet, fixed wireline phone and interactive TV services. However, we cannot assure you that we will be successful in mitigating the adverse impact of the substitution of mobile voice services and other alternative means of communication for wireline voice services or in reducing the rate of decline in our revenues generated from wireline voice services. Migration from wireline voice services to mobile services and other alternative means of communication may further intensify in the future, which may affect the financial performance of our wireline voice services and thus materially and adversely affect our results of operations, financial condition and prospects as a whole.

Our data and internet services are facing increasing competition, and we may experience declining margins and/or market share from such services as such competition intensifies

Our data and internet services are facing increased competition from other data and internet operatorsincludingas mobile operators. The number of mobile broadband subscribers have increased with theincreasing popularity of smart phones in Indonesia, which adversely affects our market share and revenues from our fixed line data and internet services.

 

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In addition,with theincreasing popularity of smart phones in Indonesia, we expect that 4G LTE services will increasingly become an intense area of competition for data and internet services, as well as cellular services.In 2014, the Government issued licenses for 4G/LTE services on the900 MHz frequency for cellular operators and in 2015 issued a policyto refarmthe 1800 MHzfrequencyfor4G/LTE services. Our4G/LTE services covered 169 citiesin Indonesiaas of December 31,2016. However,as of such date,anumberof our cellular competitorsprovide4G/LTE coverage in more cities than us.Furthermore,in 2013, the regulator permitted Wi-Max operators to deploy4G/LTE technologywhich have further intensified competition in the broadband internet space. Currently,PTFirst Media Tbk (“First Media”), which is part of the Lippo Group, provides Wi-Max 4G/LTE services in the Greater Jakarta area.

We have been taking various measures in order to mitigate the impact of intense competition in our data and internet businesses. However, we cannot assure you that we will be successful in mitigating such adverse impact. Competition may further intensify in the future, which may affect the financial performance of our data and internet services and thus materially and adversely affect our results of operations, financial condition and prospects as a whole.

Competition from existing cellular service providers and new market entrants may adversely affect our cellular services business

The Indonesian cellular services business is highly competitive. Competition among cellular services providers in Indonesia is based on various factors, including pricing, network quality and coverage, the range of services, features offered and customer service.With theincreasing popularity of smart phones in Indonesia, we believe that data network quality and coverage, including 4G/LTE coverage, will increasingly become an intense area of competition.Our cellular services business, operated through our majority-owned subsidiary, Telkomsel, competes primarilywith Indosat and XL Axiata. Several other smaller GSM and CDMA operators also provide cellular services in Indonesia, including PT Hutchison3 Indonesia (“Hutchison”), which is part of the Hutchison Asia Telecom Group and operates under the "3" or "Tri" brand, and PT Smartfren Telecom Tbk ("Smartfren Telecom"), which is part of the Sinar Mas Group. In addition to current cellular service providers, the MoCI may license additional cellular service providers in the future, and such new entrants may compete with us.        

XLAxiatacompleted the acquisition of a majority interest inand merged withPT Axis Telekom in 2014, which resulted in XL Axiata acquiring additional frequency allocations toprovide4G/LTEservices as well as acquiring the customers of PT Axis Telekom.

Additional consolidation among cellular services providersmay occur which may be driven by competitive factors as well as efforts to reduce operating costs and obtainwiderspectrum allocation.In addition, we believe that it is the policy of the MoCI to support industry consolidation by not issuing additional or new licenses forcellular services providers.

If Telkomsel's competitors are able to acquire wider spectrum allocation, this may allow them to improve the quality of their cellular services as well as to expand the amount of traffic that they can service through their network, which may allow them to expand their services and increase revenues. In addition, the consolidation of Telkomsel's competitors may allow them to expand the geographic coverage of their integrated network infrastructure. As a result, consolidation among cellular services providers may present challenges for Telkomsel in maintaining its market position and could adversely affect our results of operations, financial condition andprospects.

Cellular network congestion and limited spectrum availability could limit our cellular subscriber growth and cause reductions in our cellular service quality

We expect to continue to offer promotional plans to attract subscribers and increase usage of our network by our cellular subscribers. We also expect to continue to promote our data services and fixed broadband services. While we believe that we currently have sufficient spectrum allocation to support our current business, we will need to acquire additional spectrum allocation to accommodate future growth in subscribers and traffic. As a result, we may experience increased network congestion, which may affect our network performance and damage our reputation with our subscribers. The Government occasionally conducts auctions for unused spectrum allocation. Recently, the MoCI has announced plans to hold a limited auction of unused radio frequency spectrum in the 2100 MHz and 2300 MHz frequencies by the middle of 2017. We cannot assure you that we will be succesful in acquiring any additional spectrum allocation whether in current or future auctions.

 

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Moreover, the recent increase of smartphone applications that rely on data services has resulted in the significant amount of data traffic and cellular network congestion. To support such additional demands on our network, we may be required to make significant capital expenditures to improve our network coverage.Such additional capital expenditures, together with the possible degradation of our cellular services, couldmaterially andadversely affect our competitive position, results of operations, financial condition andprospects.

Risks Related to Development of New Businesses

We may not succeed in our efforts to develop new businesses

We believe that efforts to develop new businesses other than the telecommunication businesssuch as consumer digital and enterprise digital businesses, as well as international expansion are necessary to ensure continuing business growth. Risks related to new business development include competition from established players, suitability of business model,competition from disruptive new technologies or business models,the need to acquire new expertisein the new areas of operation, and  risks related to online media which include intellectual property, consumer protection and confidentiality of customer data.

Focusing on international expansionis one of our strategic business initiatives. In particular,we have started expansion into a number of jurisdictions in telecommunications or data related areas, namely Singapore, Hong Kong,Macau, Timor Leste, Australia, Myanmar, Malaysia, Taiwan, United States and Saudi Arabia. Expanding our operations internationally exposes us to a number of risks associated with operating in new jurisdictions,for example, our international operations could be adversely affected by political or social instability and unrest, regulatory changes, such as an increase in taxes applicable to ouroperations, macroeconomic instability, limitations on or controls on the foreign exchange trade, competition from local operators, difference in consumer preference and a lack of expertise in the local markets in which we will operate. Any of these factors could cause our expected returns from our expansion to be limited and could have a material and adverse effect on our business, results of operations and financial condition.

ITEM 4.                INFORMATION ON THE COMPANY

A.                            HISTORY AND DEVELOPMENT OF THE COMPANY

Profile of Telkom Indonesia

We continue to seek to innovate and develop synergies among all of our products, services and solutions. Our long-term vision, which was revised inSeptember 2016to reflect our aspirations to be a more significant player in the digital space, is to “Be the King of Digital in the Region”. Our mission is to “Lead Indonesian Digital Innovation and Globalization”.

In order to achieve such vision and mission, we are currently undergoing a comprehensive transformation in five aspects of our business: human resources transformation, business transformation, structural transformation, cultural transformation, and infrastructure and system transformation.

Company Name

:

Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk

 

Abbreviated Name

:

PT Telkom Indonesia (Persero) Tbk

 

Commercial Name

:

Telkom

 

Line of Business

:

Telecommunications and network services

 

Tax Identification Number

:

01.000.013.1-093.000

 

Certificate of Company Registration

:

101116407740

 

Business License

:

510/3-0689/2013/7985-BPPT

 

Domicile

:

Bandung, West Java

 

Address

:

Jl. Japati No. 1, Bandung 40133, Indonesia

 

Telephone

:

+62-22-4521404

 

Facsimile

:

+62-22-7206757

 

Call Center

:

+62-21-147

 

Website

:

www.telkom.co.id

The information found on our website does not form part of this Form 20-F and is not incorporated by reference herein

 

E-mail

:

corporate_comm@telkom.co.id; investor@telkom.co.id

 

Rating

:

“idAAA” by Pefindo for 2013, 2014,2015 and 2016

 

Date of Legal Establishment

:

November 19, 1991

 

 


 

 

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Legal Basis of Establishment

:

Based on Government Regulation No. 25 of 1991, the status of our Company was converted into a state-owned limited liability corporation ("Persero"), based on the Notarial Deed of Imas Fatimah, S.H. No.128 dated September 24, 1991, as approved by the Ministry of Justice of the Republic of Indonesia by virtue of Decision Letter No. C2-6870.HT.01.01.Th.1991 dated November 19, 1991 and as announced in the State Gazette of the Republic of Indonesia No. 5 dated January 17, 1992, Supplement to the State Gazette No.210

 

Ownership

:

-    Government of the Republic of Indonesia52.09%

-    Public 47.91%

-     

Listing on Stock Exchanges

:

Our shares of common stock were listed on the IDX and the New York Stock Exchange ("NYSE") on November 14, 1995

 

Stock Codes

:

-   “TLKM” on the “IDX”

-   “TLK” on the “NYSE”

-    

Authorized Capital

:

1 Dwiwarna Share and 399,999,999,999 shares of common stock

 

Issued and Fully Paid Capital

:

1 Dwiwarna Share and 100,799,996,399 shares of common stock

 

Offices

:

- 1 Head Office

- 7 Telkom Regional Offices and59 Telecommunication Areas

-  

Service Centers

:

- 566 Plasa Telkom outlets

- 7 International GraPARI centers across Saudi Arabia, Singapore,Hong Kong, Macau, Taiwan andMalaysia

- 416 GraPARI centers (including those managed by third parties)

- 487 GraPARI mobile Units

-  

Other Information

:

- Public Accountant

KAP Purwantono, Sungkoro & Surja (a member firm of Ernst & Young

Global Limited)

Indonesia Stock Exchange Building, Tower 2, 7th Floor,Jl. Jend. Sudirman Kav. 52-53,Jakarta 12190, Indonesia

- Securities Administration Bureau

PT Datindo Entrycom

Wisma Sudirman,Jl. Jend. Sudirman Kav. 34-35,Jakarta 10220, Indonesia

- Trustee

PT Bank CIMB Niaga Tbk

Graha Niaga,20th Floor,Jl. Jend. Sudirman Kav. 58, Jakarta 12190, Indonesia

PT Bank Permata Tbk

Gedung WTC II, 28th Floor,Jl. Jend Sudirman Kav. 29-31, Jakarta 12920, Indonesia

- Custodian

PT Kustodian Sentral Efek Indonesia

Indonesia Stock Exchange Building, Tower 1, 5th Floor,Jl. Jend. Sudirman Kav. 52-53,Jakarta 12190, Indonesia

- Rating Agency

PT Pemeringkat Efek Indonesia

Panin Tower Senayan City, 17th Floor,Jl. Asia Afrika Lot. 19, Jakarta 10270

- ADR Depositary

The Bank of New York Mellon Corporation

101 Barclay Street,NY, USA– 10286

- Authorized Agent for Service of Process in the United States

Puglisi and Associates

850 Library Ave # 204, Newark, DE 19711,USA

-  

Employee Union

:

The Telkom Employees Union (Serikat Karyawan Telkom or "SEKAR")

 

 

                    Information about the legislation under which we operate and a description, including the amount invested, of our principal capital expenditures and divestitures (including interests in other companies), since the beginning of our last three financial years, is contained elsewhere in this Form 20-F.

 

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Telkom Indonesia Milestones

1856-1884

On October 23, 1856, the DutchColonialGovernment deployed the first electromagnetic telegraph service operation in Indonesia, which connected Jakarta (Batavia) and Bogor (Buitenzorg). We consider this event to be part of the beginning of Telkom’s history and have thus adopted October 23 as the anniversary of our “founding”.

In 1884, the DutchColonialGovernment established a private entity, "Post en Telegraafdienst" to provide postal and telegraph services.

1906-1965

In 1906, the Dutch Colonial Government established a government agency named Jawatan Pos, Telegrap dan Telepon (Post, Telegraph en Telephone Dienst) to assume control over postal services and telecommunications in Indonesia. In 1961, its status was changed to newly-established state-owned company, Perusahaan Negara Pos dan Telekomunikasi ("PN Postel"). In 1965, the Government separated postal and telecommunications services by dividing PN Postel into Perusahaan Negara Pos dan Giro and Perusahaan Negara Telekomunikasi ("PN Telekomunikasi").

1974

PN Telekomunikasi was turned into Perusahaan Umum Telekomunikasi Indonesia ("Perumtel"), which provided domestic and international telecommunications services, and subsequently spun-off PT Industri Telekomunikasi Indonesia, which manufactured telecommunications equipment, into an independent company.

1991

Perumtel was transformed into a state-owned limited liability company and renamed Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia under Government Regulation No.25 of 1991. Our business operations were then divided into 12 telecommunication regions, which were later reorganized in 1995 into seven Regional Divisions, namely Regional Division I Sumatra, Regional Division II Jakarta and the surrounding areas, Regional Division III West Java, Regional Division IV Central Java and Yogyakarta, Regional Division V East Java, Regional Division VI Kalimantan, and Regional Division VII Eastern Indonesia.

1995

On May 26, 1995, we and Indosat established Telkomsel. Wethenconductedour initial public offering on November 14, 1995, with our shares listed on the Jakarta Stock Exchange and the Surabaya Stock Exchange (which have since merged to become the IDX). Our shares were also listed on the NYSE and the LSE in the form of ADSs, and were publicly offered without listing on the Tokyo Stock Exchange.

1999

Law No.36 of 1999 on Telecommunications (the "Telecommunications Law"), which became effective in September 2000, was enacted to allow the entry of new market participants in order to foster competition in the telecommunications industry.

We launched the Telkom-1 satellite.

2001

We and Indosat eliminated joint ownership and cross-ownership in certain companies as part of the restructuring of the telecommunications industry in Indonesia. We acquired Indosat's 35.0% shareholding in Telkomsel, increasing our shareholding to 77.7%. We divested our 22.5% shareholding in PT Satelit Palapa Indonesia, or Satelindo, and 37.7% shareholding in PT Lintasarta Aplikanusa. At the same time, we lost our exclusive rights as the sole operator of fixed line services in Indonesia.

 

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2002

We divested a 12.72% shareholding in Telkomsel toSingapore Telecom Mobile Pte Ltd (“SingTel Mobile”), and decreasing our shareholding in Telkomsel to 65.0%.

2004

We launched an international direct dialing service for fixed lines with the access codeof007.

2005

We launched the Telkom-2 satellite.

2009

We underwent a transformation from an information telecommunication company tobecome a Telecommunication, Information, Media and Edutainment ("TIME") company. Our new image was introduced to the public with a new corporate logo and the slogan of "the world in your hand".

2010

We completed the JaKaLaDeMa submarine fiber optic cable project in April 2010 which connected Java, Kalimantan, Sulawesi, Denpasar and Mataram.

2011

We commenced the reformation of our telecommunications infrastructure through the completion ofthe Telkom Nusantara Super Highway project, which unites the Indonesian archipelago from Sumatra to Papua, as well as the True Broadband Access project to provide internet access with a capacity of 20 Mbps to 100 Mbps to customers throughout Indonesia.

2012

We increased broadband penetration through the development of Indonesia Wi-Fi as part of our “Indonesia Digital Network” (IDN) program. We reconfigured our business portfolio from TIME to TIMES (Telecommunication, Information, Media, Edutainment and Services) to increase business value creation.

2014

We becamethe first operator in Indonesia to commercially launch 4G/LTEservices in December 2014.

2015

We launchedIndiHome,which bundles in all-in-one packages services consisting primarily of broadband internet, fixed wireline phone and interactive TV services.

2016

We completed the construction of our new headquarters in Jakarta which we designed as a “smart office” with open office layout and smart building features in order to provide an inspiring working environment for our employees.

2017

We launched the Telkom-3S satellite, which is currently undergoing in-orbit performance tests, to replace the Telkom-2 satellite.

 

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B.                            BUSINESSOVERVIEW

VISION AND MISSION              

Our vision and mission is stated in our long-term plans,which were approved by the Board of Commissioners onSeptember 23, 2016.

Vision:                   Be the King of Digital in the Region

Mission:                Lead Indonesian Digital Innovation and Globalization

Pursuant to the long-term plans established by our Board of Commissioners, we arecurrently transforming our Company to become a digital telecommunications company to meet our vision of becoming the "King of Digital in the Region", with a view to becoming one of the ten largest telecommunications companies by market capitalization acrossSoutheast Asia, East Asia, South Asia, Australia and New Zealand. Through such development, we aimto lead digital innovation in Indonesia and to lead Indonesia towards globalization.

In order to realize such vision, we aim to continue to digitize every part of our business by implementing a digital culture across our business processes. Implementation of a digital culture involves the elimination of manual processes in order to adapt to developments in digital business and the creation of a strong digital platform for our products and services. We also aim to improve customer experienceand to implement business processes which facilitate faster product development, delivery and time-to-market, as well as efficient allocation of resources.

Corporate Strategy

Our corporate strategy comprises the following:

1.                  Directional Strategy

Our Directional Strategy is a competitive growth strategy to support and increase the market capitalization of our shares. In a dynamic industrial environment, we seek to realize competitive growth by delivering added value in the products and services that we offer to our customers, leveraging the scale of our businesses in order to realize synergies and focusing on creating digital ecosystems for our products and services.

2.                  Portfolio Strategy

Our Portfolio Strategy is our strategy for the development of our digital TIMES portfolio in order to synergistically provide seamless services focused on providing value to our customers.

3.                  Parenting Strategy

In order to generate effective business growth, we aim to continue to exercise strategic control over our subsidiaries, which we organize into customer facing units and functional units,in order to streamline processes across our business units.For more information about our parenting strategy, see “— C. Organizational Structure”.

 

Business Portfolios

We organize our business under our digital TIMES portfolio in order to focus on creating customer value. Beginning January 1, 2016, we reorganized our 15 previous portfolios (consisting of nine product portfolios and six customer portfolios), into six product portfolios, each of which is discussed in detail below. Our six revised product portfolios are categorized under three lines of business, namely "Telecommunications Business", "Information Business" and "Media and Edutainment Business".

 

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Our "Telecommunications Business” operates four product portfolios, namely:

·                    mobile portfolio, which comprises mobile broadband services as well as mobile legacy services including mobile voice and SMS;

·                    fixedportfolio, which comprises fixedvoice and fixedbroadbandservices;

·                    wholesale and internationalportfolio, which comprises wholesale telecommunication services, which include our interconnection business, and ourinternationalbusiness; and

·                    networkinfrastructureportfolio, which comprises ournetwork services, satellite operations, infrastructure and tower operations.

Our “Information Business” operates our enterprise digital portfolio. Our enterprise digital portfolio comprises information and communications technology platform services and smart enabler platform services.

Our “Media and Edutainment Business” operates our consumer digital portfolio. Our consumer digital portfolio primarily comprises media and edutainment services that we offer to consumers such as mobile-based digital life services, e-Commerce services and IPTV services.

Historically, the largest share of our revenue has been derived from services related to our telecommunications businesses. Our business has not experienced significant seasonality.

The following is a brief overview of our six product portfolios.

A. Telecommunications Business

1.MobilePortfolio

Our mobile portfolio comprises mobile voice, SMS and value-added services, as well as mobile broadband. Weprovide mobile andcellularcommunications services with GSM technology throughoursubsidiary, Telkomsel.Mobile services(including mobile data services) remained the largest contributor to our consolidated revenues in 2016.

Our postpaid mobile services, which comprised 2.4% of our cellular subscribers as of December 31, 2016, are marketed underthebrand kartuHalo. Our prepaid services, which comprised 97.6% of ourcellular subscribers as of December 31, 2016, are marketed under the brandssimPATI, Kartu As and Loop.

·                    kartuHalois a postpaid mobile telecommunications service targeted at the premium, professional and corporate market segments. kartuHalo offersseveral package options for our customers,  including the HaloFit My Plan and HaloFit Hybrid package options. Package offers vary based on price and data allowance, among other factors.

·                    simPATIis a prepaidservice that targets the needs of the middle class market segment to provide a high quality telecommunication service, through the purchase of starter packs and top-up vouchers.Telkomsel offerssimPATI Discovery,simPATIEntertainmentandsimPATIGigamax which provide various mobile package options from time to time. Telkomsel provides traffic generated bysimPATI subscribers priority of access to its network over traffic generated by Kartu As subscribers.

·                    Kartu Asis a prepaid service targeting thelower middle class market segment,andoffers a more affordable price compared tosimPATI

·                    Loop is a prepaid service targeting the youth segment through the provision of attractive data package options.

Our total cellular subscriber base increased13.9%, or21.3 million subscribers, from 152.6 million subscribers (comprising 3.5 million postpaid subscribers and 149.1 million prepaid subscribers) as of December 31, 2015 to173.9 million subscribers (comprising4.2 million postpaid subscribers and169.7 million prepaid subscribers), as of December 31, 2016. The increase in our total cellular subscriber base was primarily driven by an increase in Loop subscribers a result of our promotion of mobile package options which target the youth segment.

 

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Our mobile broadband services for all of our customers are marketed under the Telkomsel Flash brand name and are supported by LTE/HSDPA/3G/EDGE/GPRS technology. As of December 31, 2016, wehad 60.0 million Telkomsel Flash subscribers, comparedto43.8 million subscribers as of December 31, 2015, an increase of37.1%, or16.2 million subscribers. This increase in subscribers was primarily a result of our successful promotion of mobile package options which offered lower tariffs that incentivized our customers to migrate from the pay-as-you-use usage model.

We continued to expand our 4G/LTE network in 2016. We continually analyze the market for potential expansion of our 4G/LTE network. We only commit to expand or add capacity to our network in geographies where our analysis indicates there is sufficient demand to support the service. In 2016, we continued to deploy 4G/LTE services in more cities and had 19.0 million 4G/LTE subscribers and 4G/LTE services covering 169 cities in Indonesia with 6,362 units of BTS as of December 31, 2016.

2. FixedPortfolio

Our fixed portfolio comprises fixed voice and fixed broadband services.

In 2016, we continued to actively promote our “more for less” program, which aims to provide customers with more relevant benefits at a lower price through bundling services. Our bundling program is marketed under the commercial name IndiHome, which bundles in all-in-one packages consisting primarily of broadband internet, fixed wireline phone and interactive TV services at a competitive price.

In addition, we continued to add value-added services and features to our IndiHome product in 2016 in order to increase its attractiveness to potential customers. For instance, we began to offer customers increased internet speed and unlimited calls to cellular telephones at a fixed price. We also offer wifi.id services to our IndiHome customers, an add-on service which allows such customers to enjoy unlimited internet access at all Indonesia Wi-Fi access points in Indonesia. We also provide an application to manage accounts and bundle discounts with other add-on services.

As of December 31, 2016, we had 10.7 million subscribers on our fixed wireline network and 4.3 million fixed broadband subscribers.

3. Wholesale and International Portfolio

Our wholesale and international portfolio (which we previously referred to as interconnection and international portfolio) includes wholesale telecommunications services and our international business which is conducted through our subsidiary Telin.

Wholesale telecommunications services compriseprimarilyinterconnection services, as well as network services, Wi-Fi, value-added services, hubbing, data center and content platform, data and internet, and solutions.Weearn revenue from interconnection services from other telecommunications operatorsthat utilize ournetwork infrastructure in Indonesia, both for calls thatterminate at or transit viaournetwork.Similarly,we also pay interconnection fees to other telecommunications operators whenwe usetheir networks to connect a call fromourcustomers. Interconnection services that we provide to other telecommunications operators comprise domestic and international interconnection services.

We also have limited operations and/or interests in a number of jurisdictions outside Indonesia in telecommunications and data related areas. Our international operations comprise operations in the following jurisdictions:

·                    Singapore,through Telekomunikasi Indonesia International Pte. Ltd.("TelinSingapore"), where we operate as a facility-based operatorandasa telecommunication provider;

·                    Hong Kong,through Telekomunikasi Indonesia International Ltd.("TelinHong Kong"), where we provide mobile virtual network operator ("MVNO") services, operate a GraPARI center and provide wholesale voice, wholesale data and retail mobile services;

·                    Timor Leste,through Telekomunikasi Indonesia International S.A. ("Telin Timor Leste"), where we provide fixed telephone connection, cellular voice and broadband internet services, corporate solutions, and wholesale voice and data services;

·                    Australia,through Telekomunikasi Indonesia International Pty. Ltd. ("TelkomAustralia"), where we provide business process outsourcing, information technology outsourcing and IT services;

 

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·                    Macau,through TelkomMacau Limited, where we provide MVNO services and retail mobile services;

·                    Taiwan,through TelkomTaiwan Limited, where we provide MVNO services andretail mobileservices;

·                    Malaysia,through Telekomunikasi Indonesia International Sdn. Bhd. ("TelinMalaysia"), where we have a minority interest in a joint venture that provides MVNO services;

·                    United States,through Telekomunikasi Indonesia International Inc. ("Telkom USA"), where we undertake businesses relating to telecommunications products, telecommunication services, information technology, information technology products and information technology services and maintain points of presence;

·                    Myanmar,throughabranch office, where we provide IP transit services;and

·                    Saudi Arabia, through a branch office, where we provide MVNO services (under theSimPATI Saudi brand name, which is a co-branded productthat we offer with a local operator)and operate aGraPARI center in Mecca to cater to Indonesian pilgrims.

4. NetworkInfrastructure Portfolio

Our network infrastructure portfolio includesnetwork services,satellite operations, infrastructure and tower operations.

Satellite

Our satellite operations consist primarily of leasing satellite transponder capacity to broadcasters and operators of VSAT, cellular and IDD services and ISPs, as well as providing earth station satellite up-link and down-link services for domestic and international users.We manage our satellite business through our subsidiaries,TelkomMetra and Patrakom. For more information see“— Network Infrastructure and Development —National Network— Transmission Network — Satellite”.

Tower

We lease out space to other operators to place their telecommunications equipment on these towers, for which we receive a fee. As of December 31, 2016, we had approximately 25,700 towers, comprised of approximately 8,700 towers owned by Mitratel and approximately 17,000towers owned by Telkomsel, which was larger than the number of towers that were owned by each of PT Tower Bersama Infrastructure Tbk (“Tower Bersama”), PT Sarana Menara Nusantara Tbk (“Protelindo”) and PT Solusi Tunas Pratama Tbk, which are our principal competitors in the towers business.Weaim toconsistently expand our tower business, as we believethisis a strategic business inthe telecommunicationsindustry and intend to increase our tower rental revenues from third party telecommunications providers.

B.Information Business

5.Enterprise Digital Portfolio

Ourenterprise digital portfolio comprises information and communications technology platform services and smart enabler platform services.

Information and Communications Technology Platform Services

We provide information and communications technology platform services, which comprise the following services:

·                    enterprise connectivity, including fixed voice, fixed broadband and data communication services (comprising IP VPN, leased channel, ethernet services and managed network services);

·                    IT services, including system integration, IT outsourcing, premises integration and professional services;

 

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·                    data centerand cloudservices, which includeenterprise data center, collocation, hosting,disaster recovery centerand content distribution networks, and cloud services, which include infrastructure-as-a-service, software-as-a-service and unified communications-as-a-service;

·                    business process outsourcing services; and

·                    devices and hardware sales and services, under which we sell CPE hardware and provide certain services including support services and IT security services.

Smart Enabler Platform Services

We also provide smart enabler platform services,in order to promote innovation, integrate industry ecosystems and foster change in consumer behavior in Indonesia. Our smart enabler platform services comprise services relating to:

·                    tourism, such as theIndonesia Tourism Exchangeplatform whichprovides digital solutions forandfacilitates theconnectionof various businesses in the tourism industry;

·                    payment, which offers bill payment, online payment gateway, e-Money and direct carrier billing;

·                    digital advertising, including digital out-of-home, mobile advertising, digital agency, media hub and analytics solutions;

·                    big data and data analytics, which offers a platform service to generate insights for targeted digital advertising and better understand the customer; and

·                    other smart enablers, including Internet of Things platform and network connectivity services.

As of December 31, 2016, we provided a totalbandwidth of 1,750,617 Mbps to our broadband customers and  764,397 Mbps to our data communication services customers.

 

C. Media and Edutainment Business

6. ConsumerDigital Portfolio

Our consumer digital portfolio primarily comprises media and edutainment services that we offer to consumers such as mobile-based digital life services, e-Commerce services and IPTV services. We also operate a venture capital fund through our subsidiary, PT Metra Digital Investama, which is also known as MDI Ventures.

We offer IPTV services includingTV-on-demand and video-on-demand that we provide as part of our IndiHome services. Our e-Commerce services comprise blanja.com, an online marketplace that facilitates consumer-to-consumer and business-to-consumer sales.

Our mobile-based digitallifeservices representa group of digital businesses, aimed to provide consumers with digital services. Our mobile-based digital life services consist of:

·                    digitallifestyle, which focuses on providing a mobile entertainment experience for customers by targeting different segments and leveraging Telkomsel’s trusted billing system to facilitate transactions. It offers applications for music (LangitMusik, MusicMax and Ring Back Tone), video (VideoMax) and games;

·                    digital payment (mobile financial services), which is focused on creating a digital financial ecosystem by offering digital payment solutions. TCASH is an electronic money service provided by Telkomsel, which provides a digital solutionthat enables Telkomsel consumers to perform banking activities in a safe, easy and simple manner. Activities such as paying bills, transferring funds, and making online and offline retail payments, can be done easily on our customers’ smartphones and/or feature phones;

 

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·                    digital advertising and analytics are part of Telkomsel’s digital business offering, and consist of digital advertising business and mobile banking solutions. The digital advertising business provides digital advertising media solutions for marketers. Mobile banking solutions provides mobile functions for the banking industry, such as banking SMS anduser menu browserservices; and

·                    enterprise digital services (previously named machine-to-machine business),which are focused on providing Internet of Things solutions to customers.

Network Infrastructure and Development

The vision of our network infrastructure and development program is to “Be the Driver” of our overarching corporate vision, which is to “Be the King of Digital in the Region”. 

The mission of our network infrastructure and development program is to develop and maintain an agile and resilient network and IT infrastructure in order to support our digital services innovation.

In line with our vision and mission, we classify our network infrastructure into two categories, namely: (i) our national network infrastructure, to support our Indonesia Digital Network program, which we discuss in greater detail below and (ii) our international network infrastructure, to support our international expansion program.

 National Network

We believe infrastructure development and the provision of connectivity are crucial aspects in our vision to become the “King of Digital”. We continue to pursue development of our network infrastructure to offer a more efficient and cost-competitive services, in line with the Government’s Indonesia Broadband Plan which lays out its aspirations to accelerate and expand broadband penetration in Indonesia.In addition, we aim to continue to develop and improve our network infrastructure with a view to developing a high-quality, efficient and competitive infrastructure in terms of costs for delivery of services.

As a result, we plan tocontinue toactualize digitization in Indonesia through our Indonesia Digital Network programwhich comprises three components, namely id-Convergence ("id-Con"), id-Access and id-Ring.

OurIndonesia Digital Networkprogram involves thefollowing three program developments:

1.                  id-Con: represents our aim to realize the convergence of various elements of our network infrastructure into an integrated multi-service and multi-device Next Generation Network. id-Con is a strategic initiative that focuses on providing a platform for the design, development and delivery of TIMES services and solutions. In order to develop such platform and ensure the reliability and scalability of our TIMES services and solutions, we intend to continue utilizing our data center facilities, and our cloud management platform. In addition, we are focused on securing the integrity of our platforms. We aim to continue designing and developing industry-specific smart enabler platforms for certain industries in Indonesia, such as the transportation, healthcare and public sectors.

2.                  id-Access: is our strategy to increase nationwide fixed and mobile broadband access penetration. We are focused on expanding our fiber optic network and modernizing our current access network infrastructure in order to realize cost efficiencies. Under this program, we intend to continue replacing copper cable network with fiber optic cables and terminating legacy node service networks. We intend to continue laying out fiber optic cables which can be integrated with the BTS network of Telkomsel as well as the network infrastructure of other operators, which could provide us with opportunities to expand our sources of revenue. In addition, we intend to continue improving the cross-operability of our and Telkomsel's broadband networks.

3.                  id-Ring: represents our aim to develop a resilient nationwide fiber optic backbone and establishing our domestic network infrastructure as a hub for international broadband traffic. In order to implement this strategy, we are developing the Indonesia Global Gateway cable system, which we intend to complete in 2018, in order to leverage Indonesia's strategic geographic location and provide an alternative direct broadband connection between Europe, Asia and America. In addition, we are actively developing a nationwide infrastructure network with a fiber optic backbone.

 

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Fixed Wireline Network

As of December 31, 2016, we managed 10.7 million fixed wireline (fixed voice) connections. The following table sets forth data related to our fixed wireline network as of the dates indicated.

Operating Statistics

As of December 31,

 

2012

 

2013

 

2014

 

2015

 

2016

 

Exchange capacity(1)

13,908,003

 

13,918,369

 

13,946,801

 

14,946,076

 

15,738,803

 

Installed lines(1)

11,109,156

 

10,650,652

 

10,341,807

 

14,946,076

 

15,738,803

 

Lines in service(2)

9,034,010

 

9,350,806

 

9,698,255

 

10,276,887

 

10,663,000

 

(1)Exchange capacity and installed linessince December 31, 2015 includes capacity and lines from TDM-based, softswitch and IMS technologies.

 

(2)Lines in service are subscriber lines and public telephone lines, including the lines in service that we operate under revenue-sharing arrangements.

 

 

Fixed Wireless Network

We terminated our fixed wireless business in May 2015 however, our previous subscribers were able to use their old telephone numbers until December 2015. We migrated over 1.3 million fixed wireless subscribers to Telkomsel under our migration program.

Cellular Network

Our cellular services, which are operated by our subsidiary, Telkomsel, have the most extensive network coverage of any cellular operator in Indonesia. Telkomsel currently operates on the GSM/DCS, GPRS, EDGE, 3.5G and 4G/LTE networks. The GSM/DCS network consists of15 MHz of spectrum allocation on the800/900 MHz frequency (which includes 7.5 Mhz of spectrum allocation that was reallocated to Telkomsel in connection with the termination of our fixed wireless business)and 22.5 MHz of contiguous spectrum allocation on the 1.8 GHz frequency. Telkomsel’s 3G network uses 15 MHz of contiguous spectrum allocation on the 2.1 GHz frequency. The range of cellular services on the GSM network provided by Telkomsel extends to all cities and districts in Indonesia. In December 2014, Telkomsel became the first operator in Indonesia to commercially launch 4G/LTE services.  In 2016, Telkomsel added 25,744 units of BTS (including 4,601 units of 4G/LTE BTS), and as of December 31, 2016, Telkomsel’s digital network was supported by129,033 units of BTS (including 6,362 units of 4G/LTE BTS). In 2016,Telkomseladded an additional 19,193 units of 3G BTS, bringing the total to 72,327 units of 3G BTS as of December 31, 2016.

Data and Internet Network

In 2016, we continued to improve the quality of our data network by installing additional capacity and coverage. As of December 31, 2016, we provided broadband accessusing fiber optics to  16.4 million home pass. As of December 31, 2016, our metro ethernet network expanded to 126,284 Gbps, which is able to provide broadband services throughout Indonesia. The metro ethernet is also used as the main link for IndiHome broadband services, softswitches and IT multimedia subsystems related to voice services, video services, enterprise VPN services and GPON broadband services related to mobile backhaul and corporate business solutions.

As of December 31, 2016, we have extended the capacity of our internet gateway to reach an installed capacity of1,100 Gbps. This ensures the adequacy of the internet gateway capacity in anticipation of the expected growth for both fixed and mobile broadband traffic. In 2016, we also operated content distribution networks with an aggregate capacity of1,590 Gbps in collaboration with Akamai, Google, Yahoo, Conversant and Edgecast.

As of December 31, 2016, we maintained six main points of presence in Batam (at Batam Center and Bukit Dangas), Jakarta (at Jatinegara andCikupa)and Surabaya (at Rungkut and Kebalen). We are currently developing two main points of presence in Manado (at Manado Centrum and Manado Paniki) which we expect to be completed by the end of 2019. In addition, we maintained 40 primary points of presence in31 cities in Indonesia as of December 31, 2016 and expect to complete the development of four primary points of presence in four additional cities in 2017.

Throughout 2016, we continued to expand the scope of Indonesia’s Wi-Fi services by deploying additionalNetworkAccessPoints either through internal development programs and various forms of cooperation with third parties. As of December 31, 2016, a total of 362,200 Network Access Points had been installed.

 

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Data Center

As of December 31, 2016, we operated data centers with an aggregate capacity of approximately 25,700 square meter at facilities located in Singapore and various sites in Indonesia. With the capabilities of this network, we are able to provide integrated data storage solutions to companies in Indonesia and Singapore.

Transmission Network

In 2016,we focused on the development of our broadband network, which serves as the backbone for our entire network infrastructure. Our backbone telecommunication network consists of transmission networks, switching facilities and core routers, which connect multiple access nodes. The transmission links between nodes and switching facilities comprisea terrestrial transmission network,in particularfiber optic, microwave and submarine cable systems, as well as satellite transmission networks and other transmissiontechnologies.

Communications Cable System

Our transmission network had19 backbone rings withan aggregate capacity of74,240 Gbpsas of December 31, 2016. As of December 31, 2016, we operate a fiber optic backbone totaling 85,770 km, which covers provinces from Aceh to Papua, including the Sulawesi-Maluku-Papua Cable System that we completed in 2017.

To increaseourtraffic capacity and broadband services in 34 cities in eastern Indonesia, wecompleted the construction of a backbonering,known as the Sulawesi-Maluku-Papua Cable System that connects these cities thathave previouslybeen served by satellite transmission.TheSulawesi-Maluku-Papua Cable System was developed in two segments, with the first segment being 4,300 km long, serving 21 district capitals and connecting Kendari, Manado, Ternate, Ambon, Sorong,Fakfak, Makasar and Maumere, and the second segment being 3,155 km long, serving 13 district capitals and connecting Jayapura,Sarmi, Biak, Manokwari,Sorong,Fakfak,Timika and Merauke. We completed the first segment in 2015 and the second segment in the first quarter of 2017.

In addition, we intend to leverage Indonesia's strategic geographic location and provide an alternative direct broadband connection between Europe, Asia and America by developing the Indonesia Global Gateway cable system. The Indonesia Global Gateway cable system is intended to connect two major submarine cable systems, namely the South East Asia-Middle East-Western Europe 5 (SEA-ME-WE 5) and, when completed, the Southeast Asia-United States (SEA-US) submarine cable systems. In addition, the Indonesia Global Gateway cable system is planned to connect 12 major cities within Indonesia, including Batam, Jakarta, Surabaya and Manado, spanning a length of 5,700 km. We expect this cable system to increase our domestic traffic capacity and broadband services. In 2016, we completed the construction of all landing stations and support facilities related to this project. We expect to complete the construction of this cable system in the middle of 2018.

Satellites

We operatethreesatellites, namely Telkom-1, Telkom-2 and Telkom-3S.

The Telkom-1 satellite operates at orbital slot 108 E. Ithas a capacity of 36 transponders(which is equivalent to an aggregate of 36.00 TPE)consisting of : (i) 24standard C-band transponders;and(ii)12 extended C-band transponders, with coverage over Indonesia. We obtained an assessment from Lockheed Martin Corporationthat estimated that the operational lifespan of the Telkom-1 satellite would be through 2021.

The Telkom-2 satellite currently operates at orbital slot 118 E but we plan to relocate it to orbital slot 157 E when the Telkom-3S satellite completes its in-orbit performance tests. We expect to operate the Telkom-2 satellite at such orbital slot for its remaining estimated operational life which we expect to end approximately in 2020.TheTelkom-2 satellite has a capacity of 24standard C-band transponders (which is equivalent to an aggregate of 24.00 TPE) with coverage over Indonesia and South Asia.We plan to continue operating the Telkom-2 satellite with coverage over Indonesia and South Asia after we complete relocating its orbital slot.

 

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The Telkom-3S satellite was launched in February 2017 and is currently undergoing in-orbit performance tests which we expect to be completed by April 2017. At the completion of such in-orbit performance tests, we plan to locate to the Telkom-3S satellite at orbital slot 118 E to replace the Telkom-2 satellite and transfer all of the Telkom-2 satellite's transmission services to the Telkom-3S satellite. The Telkom-3S satellite has a capacity of 42 transponders (which is equivalent to an aggregate of 49.00 TPE) consisting of: (i) 24 standard C-band transponders; (ii)8 extended C-band transponders; and (iii) 10 Ku-band transponders, which would have coverage over Indonesia.

In addition, we have entered into a contract for the procurement oftheTelkom-4 satellite, which is currently planned for launchin the third quarter of 2018 as a replacement fortheTelkom-1 satellite.The Telkom-4 satellite is planned to operate at orbital slot 108 E with coverage over Indonesia andSouth Asia. It is currently being constructed and designed to have a capacity of 60 transponders (which is equivalent to an aggregate of 60.00 TPE) which would consist of: (i) 24 standard C-band transponders which would have coverage over Indonesia; (ii) 24 standard C-band transponders which would have coverage over South Asia; and (iii) 12 extended C-band transponders, which would have coverage over Indonesia.

All of oursatellites are controlled fromamain control station in Cibinong, Bogor inWest Java. To ensure the continuity of services, weoperate abackup control station in Banjarmasin, South Kalimantan.

We also leased a25.79TPE (transponder equivalent to 36 MHz) from the following satellites: JSAT-5A (132 E) in the amount of 6.28 TPE, Eutelsat 172 A (172E) in the amount of6.39 TPE, Chinasat-10 (110E) in the amount of2.12 TPE, Intelsat-8 (169E) in the amount of3.86 TPE, KTSAT (75E) in the amount of2.00 TPE, ABS-2 (75E) in the amount of 1.14 TPE,Chinasat-11 (98 E) in the amount of0.36 TPE and APSTAR-6 (134 E) in the amount of 3.64 TPE. We expect that our requirement to lease transponders from third party satellites to decrease after we complete the transfer of the Telkom-2 satellite's transmission services to the Telkom-3S satellite.

We are also currently exploring various alternatives to cooperate with other operators to provide capacity for us, including cooperation through long-term leases, joint development of a satellite in an orbital slot covering Indonesia and acquisition of satellites in the orbit.

International Networks

We plan to continue with the development of our international network infrastructure to support our international expansion strategy and vision to be the “King of Digital in the Region".We operate international gateways in Batam, Jakarta and Surabaya to route outgoing and incoming calls on our IDD service (“007”).

We currently own or have interests in global submarine cable infrastructure that connects the continents of Europe, Asia and America through submarine cable system consortiums for the Batam-Singapore Cable System (BSCS), Dumai-Malacca Cable System (DMCS), Asia-America Gateway (AAG), Singapore-Japan Cable System (SJC), theSouth East Asia-Middle East-Western Europe 5 (SEA-ME-WE 5) submarine cablesystem, which wascompletedin December2016, and the Southeast Asia-United States (SEA-US)submarine cablesystem which we expect to be completed in the fourth quarter of 2017.

To support our international services for both voice and data, Telin operates 29 points of presence in various parts of the world, including in Asia (four points of presence in Jakarta, three points of presence in Singapore, two points of presence in each of Batam and Hong Kong, one point of presence in each of Dili, Dubai, Dumai, Kuala Lumpur, Seoul, Surabaya, Tokyo and Yangon), Europe (one point of presence in each of Amsterdam, Frankfurt, London and Marseilles) and the United States (two points of presence in Los Angeles, CA and one point of presence in each of Ashburn,VA,New York, Palo Alto, CA and San Jose, CA).

Geographic Distribution of Revenues

International expansion has become a necessity for us to be able to maintain a high and sustainable growth rate. We are developing and expanding our business outside of Indonesia to broaden and diversify our market. The following table sets forth the distribution of our revenues by geographic markets for the periods indicated.

 

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Years Ended December 31,

 

 

 

2014

 

2015

 

2016

 

 

 

(Rp billion)

 

(Rp billion)

 

(Rp billion)

 

(US$ million)

 

 

External Revenues

 

 

 

 

 

 

 

 

 

Indonesia

87,896

 

100,456

 

114,093

 

8,469

 

 

Foreign Countries

1,800

 

2,014

 

2,240

 

166

 

 

Total

89,696

 

102,470

 

116,333

 

8,635

 

 

 

Overview of Telecommunication Services Rates

Under Law No.36of1999 and Government Regulation No.52of2000, tariffs for operating telecommunications network and/or services are determined by providers based on the tariff type, structure and with respect to the price cap formula set by the Government.

a.             Fixed line telephone tariffs

Under MoCI Regulation No.15/PER/M.KOMINFO/4/2008, the tariff structure for basic telephony services connected through fixed line network is comprised of the following:

·                    activation fee;

·                    monthly subscription charges;

·                    usage charges; and

·                    additional facilities fee.

b.             Mobile cellular telephone tariffs

On April 7, 2008, the MoCI issued Regulation No.09/PER/M.KOMINFO/04/2008, (on mechanism to determine tariffs of telecommunication services connected through mobile cellular network) ("MoCI Regulation No.9/2008") which provides guidelines to determine cellular tariffs with a formula consisting of network element cost and retail services activity cost. Under MoCI Regulation No.9/2008, cellular tariffs for the operation of telecommunication services connected through mobile cellular network consist of the following:

·                    basic telephony services tariff;

·                    roaming tariff; and

·                    multimedia servicestariff,

with the following traffic structure:

·                    activation fee;

·                    monthly subscription charges;

·                    usage charges; and

·                    additional facilities fee.

 

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c.             Interconnection tariffs

Based on letter No.118/KOMINFO/DJPPI/PI.02.04/01/2014 of the Director General of Post and Informatics of the MoCI ("DGPI"), the DGPI required our Company and Telkomsel to submit Reference Interconnection Offer (“RIO”) proposals to the Indonesian Telecommunication Regulatory Body (“ITRB”) for evaluation on an annual basis.Subsequently,theITRB in its letters No.60/BRTI/III/2014 and No.125/BRTI/IV/2014 approvedour Company’s and Telkomsel's RIO revisions and approved an SMS interconnection tariff at Rp24 per SMS.

d.            Network lease tariffs

Through MoCI Regulation No.03/PER/M.KOMINFO/1/2007 (on network lease) ("MoCI Regulation No.03/2007"), the Government regulated the form, type, tariff structure and tariff formula for services related to network leases. Pursuant to  MoCI Regulation No.03/2007, the Director General of Post and Telecommunication issued Decree No.115 of 2008 in conformity with the Company’s proposal.

e.            Tariffs for other services

The tariffs for satellite lease, telephony services, and other multimedia are determined by the service provider by taking into account the expenditures and market price. The Government only determines the tariff formula for basic telephony services. There is no stipulation for the tariff of other services.

Marketing, Sales and Distribution

We have implemented a comprehensive marketing and promotional strategy to bolster our brand and to boost sales, including through marketing communication activities and product and service distribution channel development. To increase sales, we also use above and below the line marketing channels to promote our services to certain parties and communities. We also continue to place advertisement in printed and electronic media and implement marketing methods such as point of sales broadcasting as well as promotion and sponsorship events.

We adjust our marketing and promotional strategy and customer service in accordance with the characteristics of our businesses, products and services aswell as customer preferences. The following provides a description of our marketing and promotional strategies by each customer facing unit.

Mobile Customer Facing Unit

For our mobile customer facing unit, which is responsible for our mobile portfolio, we focus our marketing efforts to encourage customers who currently only utilize mobile voice and SMS services to commence utilizing mobile broadband services. For instance, in 2016, we continued to offer device bundling programs under which we sell 3G-capable and 4G/LTE-capable devices which we bundle with data package options. We also continued our promotion of mobile package options in order to encourage existing mobile broadband services customers to increase their use of such services. In addition, we continued to focus on promoting data package options which target the youth segment which we market under our Loop brand. Our efforts to increase our subscribers and ARPU include providing digital lifestyle and digital payment services which we provide as mobile-based digital life services.

In 2016, we continued to introduce new products and mobile package options to appeal to our various groups of customers. For example, we introducedsimPATI Gigamax, a mobile package option which offers large internet quota and bonuses for accessing high definition streamed videos. In 2016, we also introducedKartu As Puas Internetan, a mobile package option which offers weekly and monthly data package options and a data package for accessing Facebook and Over The Top instant messaging applications.

Consumer Customer Facing Unit

For our consumer customer facing unit, which is responsible for our fixed portfolio, we market our IndiHome services based on the “more for less” framework, whereby customers get more benefits with less cost compared to the cost of the individual services. In addition, we continued to add value-added services and features to our IndiHome products in 2016 in order to increase its attractiveness to potential customers. For instance, we began to offer customers increased internet speed and unlimited calls to cellular telephones at a fixed price. We also offer wifi.id services to our IndiHome customers, an add-on service which allows such customers to enjoy unlimited internet access at all Indonesia Wi-Fi access points in Indonesia.

 

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Enterprise Customer Facing Unit

For ourenterprise customer facing unit, whichis responsible for our enterprise digital portfolio, we implement a "go to market" strategy under the Smart Connected Society program, which comprises: (i) a smart government initiative, under which we aim to become the Government's strategic information and communications technology ("ICT") partner by tailoring solutions that support the Government's ICT programs; (ii) an enterprise connected ecosystem initiative, under which we market end-to-end digital ICT solutions to our enterprise customers which address their specific as well as industry-wide needs and (iii) the SME digital society initiative, under which we market basic ICT solutions in bundled packages to SMEs in Indonesia.

Wholesale and International Customer Facing Unit

 For our wholesale and international customer facing unit, which is responsible for our wholesale and international portfolio as well as our network infrastructure portfolio, we focused on implementing: (i) smart pricing, which is our strategy to tailor prices to particular types of customers and with the aim ofmaintaining interconnection traffic; and (ii) improving customer services in order to maintain strong relationships with our customers.

Digital Service Customer Facing Unit

For our digital service customer facing unit, which is responsible for our consumer digital portfolio,we implement a"Go To Market"strategywhich focuses on strengthening and improving digital innovation,including by:

·                    creating digital services withuniquefeatures, such asdigital music, video, gaming, e-commerce and travel;

·                    designingdigital business models which we specifically tailor for each of our corporate customers;

·                    providing customer experience innovation throughadigital theme park, experience center and digital experiences atouroutlets;

·                    leveraging ourassets and inventory toobtainincreasinginsight intodigitalservices and customer experience; and

·                    growingthe portfolio ofourdigital business through investment in digital startups in order to be a part ofIndonesia'sdigital ecosystem.

Distribution Channels

The following are our primary distribution channels for our products and services:

§    Plasa Telkom Outlets and GraPARICentersare outletsthatfunction as walk-in customer service points, wherecustomers have access to the full range ofTelkom andTelkomsel’s respectiveproducts and services, including billing, payment, subscription cancellation,promotionandcomplaint handling. As of December 31, 2016, wemanaged 566 Plasa Telkom outletsand 84 GraPARI centers in Indonesia and seven internationalGraPARI centers (in Saudi Arabia, Singapore, Hong Kong, Macau, Taiwan and Malaysia), and had an additional332GraPARIcentersin Indonesia which were managed by third party business partners.Several of our GraPARI centers operate on a 24-hour basis. As of December 31, 2016, we also operated487GraPARI mobileunitswhich are sales points located in vehicles which can travel to reach customers across the country.

·                    Authorized dealers and retail outlets are distribution outlets for Telkomsel products such as starter packs, prepaid SIM cards and top-up vouchers. We operate an extensive network of authorized dealers and retail outlets across Indonesia. These dealers are non-exclusive, and they receive a discount on all of the products they receive.

·                    Partnership Stores are extensions of our distribution channels, in cooperation with a variety of third party marketing outlets such as computer or electronic stores, banks through their ATM networks and others.

·                    Contact centersare call centers that support our customers’ ability to access certain of our products and services, including making billing enquiries, submitting complaints and accessing certain promotions and service features. We operate 24-hour contact center facilities in Jakarta,Bogor, Surabaya and Semarang.

 

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·                    Account Management Teams are teams that manage relationships and account portfolios of large enterprises, Government agencies and medium-scale businesses.

·                    SalesSpecialists is a team with a deep productand technicalknowledge in order to provide appropriate and effective recommendations of solutions to corporate customerswho worktogether withourAccountManagers.

·                    Tele Account Management is a teamthat supports our SME customers and prospective business customers through inbound and outbound calls for pre-sales, sales and other customer service requirements.

·                    Channel Partners serve as resellers that conducts sales and marketing activities to our enterprise customers to seek their specific requirements.

·                    Digital Touch Points are web and mobile application-based services which we  provide to our IndiHome subscribers and corporate customers.We operateMy IndiHome,a self-care mobile application-based service for IndiHome customers, that allows customers to register new subscriptions, manage payments and billing, report and monitor network problems, access video-on-demand services and manage customer reward programs. In addition,we operatewww.telkomsolution.com to promote the products and services that we offer under ourenterprise digital portfolio, andwww.smartbisnis.co.id to promote ourproducts and services to SME customers.

·                    Websites,we operatewww.telkom.co.id and www.telkomsel.com, which enable our customers to access certain of our products and services. Available services include e-Billing, registration, collective billing registration and submission of complaints.

·                    Social Media,we use social media, primarily Facebook, Instagram and Twitter, to enable customers to interact with us regarding our products and services.

Licensing

To provide national telecommunications services, we have a number of product and service licenses that are consistent with applicable laws, regulations or decrees.

Our license to provide IPTV services is in the process of undergoing periodic evaluation by the Government. We have secured new licenses that have been adjusted as required, which are as follows:

Cellular

Telkomsel holds licenses to operate a nationwide mobile cellular telephone network using 15 MHz of spectrum allocation in the800/900 MHzfrequency (which includes 7.5 Mhzofspectrum allocationwhich was reallocated to Telkomsel in connection with the termination of our fixed wireless business), 22.5 MHz ofspectrum allocationin the 1.8GHz frequency and 15 MHz ofspectrum allocationin the 2.1GHz frequency. The licenses do not have a set expiry date, but will be evaluated every five years. In addition, Telkomsel holds permits and licenses from and registrations with certain regional governments and/or governmental agencies, primarily in connection with its operations in such regions, the properties it owns and/or the construction and use ofits BTSs.

In connection with the termination of our fixed wireless business and transfer of such business to Telkomsel, in September 2014, the MoCI, through Decision Letter No.934 of 2014, approved the reallocation of the 800 MHz frequency previously used for our fixed wireless business to Telkomsel. Telkomsel completed the takeover in October 2016.

The MoCI has announced plans to hold a limited auction of unused radio frequency spectrum in the 2100 MHz and 2300 MHz frequencies by the middle of 2017.

Fixed Network and Basic Telephony Services

We have the following licenses to operate local fixed network, fixed domestic long distance network, fixed international call and fixed closed network:

·        MoCI Decree No.839of2016(onlicense to operate fixed domestic long distance network);

 

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·        MoCI Decree No.844of2016(on license to operate fixed closed network)("MoCI Decree  No.844/2016");

·        MoCI Decree No.846of2016(on license to operate fixed international network) ("MoCI Decree No.846/2016"); and

·        MoCI Decree No.948of2016(on license to operate circuit switched based local fixed line network).

These licenses do not have a set expiry date, but will be evaluated every five years.

International Calls

We have a license to operate a fixed network to provide international call services pursuant toMoCI Decree No.846/2016.

We have a license to operate a fixed closed network pursuant toMoCI Decree  No.844/2016. This license allows us to lease installed fixed closed network to, among others, telecommunication network and service operators, and to provide an international telecommunication transmission facility through a SCCS directly to Indonesia for overseas telecommunication operators.

 According to MoCI Regulation No.16/PER/M.KOMINFO/9/2005 (on the provision of international telecommunications transmission facilities through SCCS) ("MoCI Regulation No.16/2005"), overseas telecommunications operators wishing to provide international telecommunications facilities through the SCCS directly to Indonesia are required to set up a partnership with a fixed network of international call services or closed fixed network provider. In line with MoCI Regulation No.16/2005, the international telecommunication transmission facilities provided through SCCS are served by us on the basis of landing rights attached to our license to operate fixed network of international call services. We have also secured landing rights based on the landing right Letter No.006-OS/DJPT.6/HLS/3/2010 from the MoCI.

Directorate General of Post and Telecommunication of the MoCI (“DGPT”) Decree No.93 of 2016 (on limited fixed network license) granted our subsidiary, Telin, a license to operate a fixed closed line network which enables Telin to provide international infrastructure services. Separately, Telin secured landing rights in Indonesia from the DGPT to provide international telecommunications transmission facilities through SCCS.

The foregoing licenses do not have a set expiry date, but they will be evaluated every five years.

VoIP

We are licensed to provide internet telephony services for public utilization for commercial use as provided under  DGPI  Decree No.127 of 2016 (on internet telephony services for public utilization). Telkomsel is also licensed to provide public VoIP services based on DGPT Decree No.65 of 2015 (internet telephony services for public utilization). These licenses do not have a set expiry date, but they will be evaluated every five years.

ISP

We are licensed as an ISP under MoCI Decree No.2176 of 2016 (on internet access services).  Telkomsel is also licensed to provide multimedia internet access services with nation-wide coverage under DGPI Decree No.19 of 2016 (on internet access services). These licenses do not have a set expiry date, but tthey will be evaluated every five years.

Internet Interconnection Service

We hold a license to provide internet interconnection services pursuant to DGPI Decree No.331/KEP/M.KOMINFO/09/2013 (on internet interconnection service (network access point)). This license does not have a set expiry date, but it will be evaluated every five years.

Data Communication System (“SISKOMDAT”)

We have a license to provide data communication system services pursuant to DGPI Decree No.191 of 2016 (on data communication system services). This license does not have a set expiry date, but it will be evaluated every five years.

 

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Payment Method Using e-Money

Following the implementation of Bank Indonesia Regulation No.11/11/PBI/2009, as amended by PBI No.14/2/PBI/2012, and Circular Letter of Bank Indonesia No.11/10/DASP, which was last amended by Circular Letter of Bank Indonesia No.18/33/DKSP (on the usage of card-based payment instruments (“APMK”)) and Bank Indonesia Regulation No.11/12/PBI/2009, as amended by Bank Indonesia Regulation No.18/17/PBI/2016 on e-Money, Bank Indonesia has redefined the meaning of “principal” and “acquirer” in operating APMK and e-Money business. In light of these regulations, Bank Indonesia confirmed our status as an issuer of e-Money based on letter of Directorate of Accounting and Payment System of Bank Indonesia No.11/13/DASP. We operate our e-Money business under the brand names “T-cash”. With the issuance of Bank Indonesia Circular Letter No.9/9/DASP, Telkomsel is also permitted to conduct APMK activities, with the launch of TelkomselTunai prepaid card.

These permits do not havea set expiry date or a period of adjustment as long as: (i)we and Telkomsel continue to conduct the relevant businesses andwe do not violate any applicable regulation; and(ii) the Government does not amend or revoke such permits.

Remittance Service

We and Telkomsel have licenses to operate as money transfer services providers pursuant to Bank Indonesia letters No.11/23/Bd/8 of 2009 and No.12/48/DASP/13 of 2009.These permits do not havea set expiry date or a period of adjustment as long: (i) aswe and Telkomsel continue to conduct the relevant businesses, (ii)  we do not violate any applicable regulation and (iii) the Government does not amend or revoke such permits.

IPTV

On April 27, 2011, we and PT Indonusa Telemedia, formerly known as TelkomVision (“Indonusa”) as a consortium obtained a license to operate IPTV services through MoCI Decree No.MCIT.160/KEP/M.KOMINFO/04/2011 of 2011.  Our license to provide IPTV services is undergoing periodic evaluation by the Government.

Construction Services Business License (“IUJK”)

In 2015, we renewed our Level 5 IUJK which permits us to conduct disaster recovery system construction services, which is currently valid until June 2018.

Content Provider Services

Wehaveapplied fora contentproviderservices license which is expected tocomplete in 2017.

Trademarks, Copyrights, Industrial Designs and Patents

We constantly seek to develop product and service innovations in line with a dynamic business portfolio. To provide both protection for and recognition of creativity and innovation, we have registered a number of intellectual property rights, including trademarks, copyrights, and patents with the Directorate General of Intellectual Property Rights at the Ministry of Law and Human Rights.

The intellectual property rights we have registered include: (i) trademarks for our products and services, corporate logo and name; (ii) copyrights on our corporate name and logo, product and service logos, computer programs, research and songs; and (iii) patents on technological inventions in the form of telecommunications products, systems and methods.

Telecommunications Industry in Indonesia

The Indonesian economy recorded a healthy growth of 5.0% in 2016 according to theIndonesian CentralBureau ofStatistics.The telecommunications and information industry in Indonesia also recorded a healthy growth of 8.9% in 2016 according to theIndonesian CentralBureau ofStatistics. This demonstrates that the need for telecommunication and access to information is increasing and has become a basic need of Indonesian society and that people are continuing to increase telecommunication spending driven by an increase in purchasing power.

 

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The telecommunications industry, especially the mobile segment, is generally characterized by a relatively healthy competitive situation with a rational pricing strategy. It is a combination of industry players who are more focused on service and network quality and the positive result of industry consolidation that occurred in the past.

The penetration of SIM cards in the cellular industry in Indonesia is quite high, at well over 100%, making continued growth in penetration increasingly limited. By subscriber numbers, the three largest cellular operators in Indonesia are Telkomsel, Indosat and XL Axiata, which collectively accounted for more than 80% of the market share based on the estimated number of total subscribers as of December 31, 2016. As of December 31, 2016, Telkomsel remained the largest cellular provider in Indonesia, with approximately 173.9 million cellular subscribers and a market share of approximately 48% based on the estimated number of total subscribers.

The shifting trend from legacy services (such as voice and SMS) to data services continues to advance, driven by cheaper prices of smartphones as well as the rapidly growing youth segment. Data traffic has grown significantly, while SMS service traffic has decreased. We expect that this trend will continue, given that smartphone penetration in Indonesia is still relatively low with relatively low data consumption by smartphone users, and that the growth of the telecommunications industry will be driven by the growth of data services.

One of the main challenges faced by the industry is the increasing use of Over The Top services that has become a substitute for voice and SMS services, in line with the growing number of smartphone users. This has happened not only in Indonesia, but also in developed countries where smartphone penetration is high.

The demand for fixed broadband services in Indonesia continued to increase in 2016, especially in the large cities, marked by an increase in total broadband subscribers. The Indonesian public appreciates the importance of high-quality internet connectivity to houses as evidenced by the level of investment made by the Government and private enterprises for the development of fiber optic networks. Currently, the penetration of fixed broadband services in Indonesia is relatively lower than in some neighboring countries such as Singapore and Malaysia. Therefore, we expect that the fixed broadband segment will continue to grow in the future, in line with the expected growth of the middle class in Indonesia.

Data consumption in the mobile segment continued to increase, and it is expected that the consumption level per user will continue to grow from the current average data consumption per user. Such growth in data consumption will require significant capital expenditure in order to provide the necessary increase in capacity and coverage to accommodate such growth. The level of ARPU in Indonesia is also relatively low compared to the global or Asia Pacific average.

The increasing penetration of smartphones and data consumption has fueled the growth of digital content and applications. With better mobile data connectivity, people have begun consuming a variety of digital content and application services beyond social media, such as e-Commerce, digital payment, digital advertising, games and video streaming, and it has also led to a variety of innovative applications such as ridesharing, delivery and marketplace applications. We expect for this trend to continue in the future.

For the fixed broadband segment, we and PT Link Net Tbk, which is affiliated with the Lippo Group and operates under the "LinkNet" brand, have a significant market share. Within the telecommunication tower business, we had approximately 25,700 towers, comprising approximately 8,700 towers owned by Mitratel and approximately 17,000towers owned by Telkomsel as of December 31, 2016, which was larger than the number of towers that were owned by each of Tower Bersama, Protelindo and PT Solusi Tunas Pratama Tbk. 

Under the Indonesia Broadband Plan 2014-2019, which was implemented through Presidential Decree No.96 of 2014, the Government intends to facilitate an increase in access to fixed broadband infrastructure in Indonesia. Access to fixed broadband infrastructure in urban areas (with capacity of at least 20 Mbps) is targeted to reach 71% of households and 30% of the urban population, while access to mobile broadband infrastructure (with capacity of at least 1 Mbps) is targeted to reach the entireurbanpopulation by 2019. For rural areas, access to fixed broadband infrastructure (with capacity of at least 10 Mbps) is targeted to reach 49% of households and 6% of the rural population, while access to mobile broadband infrastructure (with capacity of at least 1 Mbps) is targeted to reach 52% of theruralpopulation by 2019. In the Indonesia Broadband Plan 2014-2019, broadband is defined as internet access with guaranteed nonstop connectivity, guaranteed durability and network security, as well as triple-play capability comprised of voice, internet and IPTV services with a minimum speed of 2 Mbps for fixed access and 1 Mbps for mobile access.

 

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Competition

Measures following the Telecommunications Law’s adoption in 2000 moved the Indonesian telecommunications sector from a duopoly between Indosat and us to one with multiple competing providers. See “Others — Legal Basis and Regulation — Introduction of Competition in the Indonesian Telecommunications Industry”.

Competition Law

TheIndonesian telecommunications sector is regulated by the Telecommunications Law, which became effective on September 8, 2000. The Telecommunications Law sets guidelines for industry reforms, including industry liberalization, to facilitate new entrants as well as to increase transparency and competition. The Telecommunications Law abolished the concept of "organizing entities" in the industry, which terminated the special status of Telkom and Indosat as the organizing body responsible for coordinating telecommunication services domestically and internationally. In order to increase competition, the Telecommunications Law prohibits monopolistic practices and unfair competition among fellow telecommunication operators.

The Telecommunications Law is implemented through various Government regulations and ministerial regulations, including Government Regulation No.52/2000, MoCI Regulation No.1/PER/M.KOMINFO/01/2010 (on provision of telecommunication networks, as amended by MoCI Regulation No.7 of 2015, Decree of the Minister of Transportation No.KM33 of 2004 (on monitoring of fair competition of the fixed network and basic telephone service operations) and Decree of the Minister of Transportation No.KM.4 of 2001 (on the national basic technical plan 2000 for the national telecommunications development) ("National Technical Telecommunications Plan"). The National Technical Telecommunications Plan has been amended several times, most recently by MOCI Decree No.17 of 2014. Along with the Telecommunications Law, the National Technical Telecommunications Plan determines the basic vision for the development of Indonesia’s telecommunications regulator.

The government is currently encouraging healthy competition and transparency in the telecommunications sector, even though the government does not prevent operators from obtaining and increasing its dominance in the market through specific regulations. Nevertheless, the government prohibits market leading operators from abusing its dominant position.

Competition in the telecommunications sector, like all Indonesian business sectors, is also governed more generally by the Competition Law. The Competition Law prohibits agreements and activities which amount to unfair business competition and an abuse of a dominant market position. Pursuant to the Competition Law, the KPPU was established as Indonesia’s antitrust regulator with the authority to enforce the provisions of the Competition Law.

The Competition Law is implemented by various regulations, including Government Regulation No.57/2010 (on mergers and acquisitions potentially causing monopolistic practices or unfair business practices) ("GR No.57/2010").  GR No.57/2010 permits voluntary consultation with the KPPU prior to a merger or acquisition, which will result in the KPPU issuing a non-binding opinion. GR No.57/2010 also requires that a mandatory report be made to the KPPU after a merger or acquisition is completed if the transaction exceeds certain asset or sales value thresholds.

Cellular

We operate our cellular service business through our 65% majority-owned subsidiary, Telkomsel.

As of December 31, 2016, Telkomsel remained the largest cellular provider in Indonesia, with approximately 173.9 million cellular subscribers and a market share of approximately 48% based on the estimated number of total subscribers. The next largest providers were Indosat and XL Axiata, which had a market share of approximately 24% and 13%, respectively, based on the estimated number of total subscribers as of December 31, 2016. Several other smaller GSM and CDMA operators also provide cellular services in Indonesia, including Hutchison, which is part of the Hutchison Asia Telecom Group and operates under the "3" or "Tri" brand, and Smartfren Telecom, which is part of the Sinar Mas Group.

 

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The penetration of SIM cards in the cellular industry in Indonesia is quite high, at well over 100%, making continued growth in penetration increasingly limited. There were approximately 364.3 million cellular subscribers in Indonesia as of December 31, 2016, a 8.9% increase from approximately 334.5 million as of December 31, 2015 according to BMI Research (a Fitch Group company).  The shifting trend from legacy services (such as voice and SMS) to data services continues to advance, driven by cheaper prices of smartphones as well as the rapidly growing youth segment. Data traffic has grown significantly, while SMS service traffic has decreased. We expect that this trend will continue, given that smartphone penetration in Indonesia is still relatively low with relatively low data consumption by smartphone users, and that the growth of the telecommunications industry will be driven by the growth of data services.

The following table sets out information as of December 31, 2016 for each of three leading cellular providers in Indonesia:

 

 

Operator

 

 

Telkomsel

 

Indosat

 

XL Axiata

 

Launch date

1995

 

1967

 

1989

 

2G, 3G and/or 4G spectrum allocation (GSM 900 MHz)

15 MHz**

 

10 MHz

 

7.5 MHz

 

2G, 3G and/or 4G spectrum allocation (GSM 1.8 GHz)

22.5 MHz

 

20 MHz

 

22.5 MHz

 

3G spectrum allocation (2.1 GHz)

15 MHz

 

10 MHz

 

15 MHz

 

Market share*

48%

 

24%

 

13%

 

Subscribers*

173.9 million

 

85.7 million

 

46.5 million

 

(*)As ofDecember 31, 2016

 

(**) Includes 7.5 Mhz which was reallocated to Telkomsel in connection with the termination of our fixed wireless business.

 

 

Fixed Services

Our exclusive right to provide domestic fixed line telecommunications services in Indonesia ended following the Telecommunications Law’s implementation in 2000. We compete with other major fixed broadband service providers such as PT Link Net Tbk, First Media and PT Supra Primatama Nusantara (BizNet Networks) as well as new providers such as PT Media Nusantara Citra Tbk and PT Eka Mas Republik (an affiliate of Smartfren Telecom which operates under the "MyRepublic" brand).

International Direct Dialing (IDD)

We compete in traditional IDD services (non-VoIP) in Indonesia primarily with Indosat. However, in line with development of digital technology, our IDD services also face competition from VoIP and other Over The Top voice services such as Skype, WhatsApp and Line.

Voice over Internet Protocol (VoIP)

We formally launched our voice service through VoIP technology in September 2002. VoIP uses data communications to transfer voice traffic over the internet, which usually provides substantial cost savings to subscribers. A number of other companies, including XL Axiata, Indosat, PT Atlasat Solusindo, PT Gaharu Sejahtera, PT Satria Widya Prima, PT Primedia Armoekadata Internet and PT Jasnita Telekomindo also provide licensed VoIP services in Indonesia.

We currently offer our primary VoIP service “Telkom Global-01017” and the lower-cost alternative “Telkom Save”. Telkom Save offers discounted rates for certain countries to which there is heavy traffic from Indonesia while offering regular VoIP tariff rates for other countries. In addition to other VoIP operators, we also compete with Over The Top voice services such as Skype, Whatsapp and Line.

Satellite

The Asia Pacific region and especially Southeast Asia continues to need satellites for both telecommunications and broadcasting infrastructure, due to the characteristics of the region as an archipelago. The capabilities provided by satellites include cellular backhaul, broadband backhaul, enterprise network, occasional usage TV, military and government network, video distribution, DTH television, flight communication and disaster recovery.

 

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We compete with a number of other satellite operators with satellites covering Southeast Asia and South Asia, and several operators are in the process of developing satellites with coverage over these regions. However, we believe that demand for satellite transponder capacity still exceeds current supply. We are currently conducting in-orbit performance tests on the Telkom-3S satellite, which we expect to be completed by April 2017 and are currently developing the Telkom-4 satellite as a replacement for the Telkom-1 satellite, which is currently planned for launch in the third quarter of 2018. At the completion of the in-orbit performance tests of the Telkom-3S satellite, we plan to locate it at orbital slot 118 E to replace the Telkom-2 satellite and transfer all of the Telkom-2 satellite's transmission services to it. The Telkom-2 satellite currently operates at orbital slot 118 E but we plan to relocate it to orbital slot 157 E.

Tower

As of December 31, 2016, we had approximately 25,700 towers, comprised of approximately 8,700 towers owned by Mitratel and approximately 17,000towers owned by Telkomsel, which was larger than the number of towers that were owned by each of Tower Bersama, Protelindo and PT Solusi Tunas Pratama Tbk, which are our principal competitors in the towers business.

Others

The dynamic development of the telecommunications sector has opened up new opportunities, particularly with the increasing growth ofOverTheTop services which provide a substitute service to basic telecommunications services such as voice and SMS. CertainOverTheTop service providers are particularly popular, including WhatsApp, Facebook, Line and many others. The presence of theseOverTheTop services has affected the use of legacy services, particularly SMS, which has resulted in traffic falling in recent years.

 

Legal Basis and Regulation

The framework for the telecommunications industry comprises specific laws, government regulations, ministerial regulations and ministerial decrees enacted and issued from time to time.

Telecommunications Law

The telecommunications sector is primarily governed by the Telecommunications Law, which became effective on September 8, 2000. The Telecommunications Law sets guidelines for industry reforms, including industry liberalization, facilitation of new entrants, and enhanced transparency and competition.

The Telecommunications Law eliminated the concept of “organizing entities”therebyendingour andIndosat’s responsibility for coordinating domestic and international telecommunications services, respectively. To enhance competition, the Telecommunications Law prohibits monopolistic practices and unfair competition among telecommunications operators.

The Telecommunications Lawwas implemented through several Government Regulations, Ministerial Regulations and Ministerial Decrees. The most important ofsuch regulations include:

·                     Government Regulation No.52/2000 (on telecommunications services).

·                     MoCI Regulation No.1/PER/M.KOMINFO/01/2010 (on operation of telecommunications networks), as amended by MoCI Regulation No.7 of 2015.

·                     Minister of Transportation Decree No.KM.21/2001 (on the provision of telecommunications services) that was most recently amended by MoCI Regulation No.8/2015.

·                     Minister of Transportation Decree No.33/2004 (on the supervision of healthy competition in the provision of fixed network and basic telephony services).

·                     Minister of Transportation Decree No.KM.4/2001 (on the determination of fundamental technical plan national 2000 for national telecommunications development) that was most recently amended by MoCI Regulation No.17/2014.

 

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Telecommunications Regulators

The authority to regulate the telecommunications industry is held by the MoCI. Pursuant to authorities assigned to him under the Telecommunications Law, the Minister of Communication and Informatics sets policies, regulates, supervises and controls the telecommunications industry in Indonesia. The authority to regulate the postal and telecommunications sectors in Indonesia including with respect to licensing, numbering, interconnection, universal service obligation and business competition is held by the Directorate General of Post and Informatics of the MoCI (“DGPI”). The authority to regulate matters related to radio frequency spectrum and standardization of telecommunications equipment in Indonesia is held by the Directorate General of Posts and Informatics Resources and Equipment of the MoCI (“DGRE”).

On July 11, 2003, the Ministry of Communication promulgated the Telecommunications Regulatory Authority Regulation, pursuant to which it delegated its authority to regulate, supervise and control the Indonesian telecommunications sector to the ITRA, while maintaining the authority to formulate policies for the industry. The ITRA is chaired by the DGPI and comprises nine members, including six members of the public and three members selected from Government institutions (DGRE and Director of DGPI and a government representative appointed by the Minister of Communication and Information).

Classification and Licensing of Telecommunications Providers

TheTelecommunications Law organized telecommunication services intofollowingthree categories: (i) provision of telecommunication networks; (ii) provision of telecommunication services; and(iii) provision of special telecommunications services.

Licenses issued by MoCI are required for each category of telecommunications services. MoCI Regulation No.1/2010 and Minister of Transportation Decree No.KM.21/2001 (on operation of telecommunications services) which was last amended by MoCI Regulation No.8/2015 (on amendments relating to the provision of telecommunications services), are the principal implementing regulations governing licensing.

MoCI Regulation No.1/2010classified network operations into fixed and mobile networks. Minister of Transportation Decree No.KM.21/2001categorized the provision of services into basic telephony services, value-added telephony services, and multimedia services.

IDD Services

We have a license to provide IDD services underMoCI Decree No.846/2016. We offer IDD fixed line services to customers using the “007” IDD access code.

Cellular

Cellular telephone service is provided in Indonesia on radio frequency spectrum in the 1.8 GHz (neutral technology) and 2.1 GHz (UMTS technology)and900 MHz (neutral technology). The MoCI regulates the use and allocation of radio frequency spectrum for mobile cellular networks. Telkomsel has obtained frequency allocation for cellular services on the 800 MHz, 900 MHz, 1.8 GHz and 2.1 GHz frequencies. The allocation of spectrum in the 2.1 GHz frequency is regulated by:

·                     MoCI Decree No.19/KEP/M.KOMINFO/2/2006 (on the determination of winner of IMT-2000 mobile cellular operator selection at 2.1 GHz frequency).

·                     MoCI Decree No.268/KEP/M.KOMINFO/9/2009 (on the determination of additional allocation of radio frequency bandwidth blocks, tariffs, and payment scheme radio frequency spectrum right of usage fees for IMT-2000 mobile cellular operators at 2.1 GHz frequency).

·                     MoCI Decree No.191 of 2013 (on the determination of Telkomsel as winner in the selection of users of additional frequency bandwidth at 2.1 GHz frequency for IMT-2000 mobile cellular operators).

 

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Interconnection

The Telecommunications Lawexpressly prohibits monopolistic and unfair businesspractices andrequires network providers to allow users to accessotherusers orobtainservicesfrom other networks by payinginterconnectionfees agreed upon by each network operator. Government Regulation No.52/2000 (on telecommunications operations) provides that interconnection charges between two or more network operators must be transparent, mutually agreedupon and fair.

On February 8, 2006, the MoCI issued Regulation No.8/PER/M.KOMINFO/02/2006 (on interconnection) (“MoCI Regulation No.8/2006”),whichmandated a cost-based interconnection tariff scheme for all network and services operatorsand replacedthepreviousrevenue-sharing scheme. Under the new scheme, interconnection charges are determined by the networkoperatorwhichterminates the call based on along-run incremental cost formula. MoCI Regulation No.8/2006requires operatorsto submit to the ITRA annual RIO proposals containing proposed interconnection tariffs for the coming year. Operators are required to use the cost-based methodology in preparing RIO proposals, and the ITRA and MoCI are required to use the same methodology in evaluating the RIO proposals and approving interconnection tariffs.

Pursuant to MoCI Regulation No.8/2006 and ITRA Letter No.246/BRTI/VIII/2007, we submitted a RIO proposal totheITRA in October 2007, which covered adjustments for operational, configuration, technical and service offerings. In December 2007,we andallothernetwork operators signed new interconnection agreementsthat superseded previous interconnection agreements betweenus and othernetwork operators, andalso amended all interconnection agreements signed in December 2006.

On February 5, 2008, the ITRA required that we and other operators begin implementing the cost-based interconnection tariff regime. Newinterconnection chargeswere implemented as stipulatedinITRA Letter No.227/BRTI/XII/2010 (on the implementation of interconnection charges) in 2011. This was the result of interconnection charges recalculation conducted in 2010 by MoCI that was agreed upon by all operators and outlined in a memorandum of understanding.

On December 12, 2011, the ITRA changed the SMS interconnection fee basis from a “Sender Keep All” basis to a cost basis interconnection fee calculation, which required certain amendments to RIOs agreed upon in 2011. MoCI Regulation No.8/2006 stipulates that the RIO of telecommunications network operators generating operating revenue that is equaltoor more than 25% of the combined revenues of all telecommunication operators that serve the same respective segment, must obtain the ITRA’s approval, necessitating changes inour and Telkomsel’s RIOs which were approved on June 20, 2012. ITRB in its letters No.60/BRTI/III/2014 and No.125/BRTI/IV/2014 approved our and Telkomsel's revisions of RIOs regarding the interconnection tariff. Based on the letter, ITRB also approved the changes to the SMS interconnection tariff to Rp24 per SMS. As of the date of this Annual Report, no recalculation of interconnection fees for 2014 had beencarried outas doing so would have been preceded by an evaluation on interconnection charges in 2013.

VoIP

In January 2007, the Government implemented interconnection regulations and a five-digit access code system for VoIP services pursuant to MoCI Decree No.06/P/M.KOMINFO/5/2005. Under the Decree, the prefix for VoIP, which was originally 01X, was changed to 010XY. On April 27, 2011, the MoCI issued Regulation No.14/PER/M.KOMINFO/04/2011, as partly revoked by MoCI Regulation No.11 of 2014,which imposed quality control standards in relation to VoIP services and this becameeffective three months thereafter, to which we and other operators must adhere.

IPTV

Several provisions in the MoCI Regulation No.11/PER/M.KOMINFO/07/2010 (“MoCI Regulation No.11/2010”) (on the implementation of IPTV service) has been amended by MoCI Regulation No.15/2014 (on the implementation of IPTV service) that became the legal basis for the IPTV licensing and regulates the provision of IPTV services, including the rights and obligations of IPTV providers, technical standards, foreign ownership requirements and the use of domestic independent content providers.

Government Regulation No.52/2005 (on broadcasting implementation of the broadcasting subscription institute) provides that broadcasting can be conducted using satellites, cables and terrestrial transmitters. Broadcasting using satellite could have a nationwide range, while cables and terrestrial transmitters have a range of a particular region.

 

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MoCI Regulation No.11/2010recognizesIPTVas a convergence of telecommunications, broadcasting, multimedia and electronic transactions and provides that only aconsortium comprising at least two Indonesian entities may be licensed as an IPTV provider. Referring to MoCI Regulation No.15/2014, the licenses that we needed, among others, included: (a) local fixed network license, mobile network or fixed closed network license, (b) operating internet access/ISP license,and (c) broadcasting operation of subscription television broadcasting services institution license.

Satellite

Our international satellite business is highly regulated. In addition to being subject to domestic licensing requirements and regulation for the use of orbital slots and radio frequencies, as stipulated in MoCI Regulation, our satellite operationsare also regulated by the Radio Communications Bureau of the International Telecommunications Union.

Furthermore, MoCI Regulation No.21/2014 requires foreign satellite operators to obtain a landing right license to operate in Indonesia which requires such foreign satellite operators to coordinate with domestic satellite operators, including us, to ensure that no Indonesian satellite and terrestrial systems will be disrupted by their operation.

Consumer Protection

Under the Telecommunications Law, eachnetwork provider is required to protect consumerrights in relation to, among others, quality of services,tariffs andcompensation. Customers injured or damaged by negligent operations may file claims against negligent providers. Telecommunications consumer protection regulations provide service standards for telecommunication operators.

USO

All telecommunications operators, whether network or service providers, are bound by a USO regulation that requires them to contribute to providing telecommunication facilities and infrastructure in the interest of opening equal access to telecommunications throughout all regions in Indonesia, which is generally done by way of financial contribution. MoCIRegulation No.25 of 2015 stipulated, among others, that when providing telecommunication access and services in rural areas (as part of the Government's USO program), the provider is determined through a selection process by the Rural Telecommunications and Informatics Center (Balai Telekomunikasi dan Informatika Pedesaan or “BTIP”) which was established based on MoCI Decree No.35/PER/M.KOMINFO/11/2006. Subsequently, based on MoCI Decree No.18/PER/M.KOMINFO/11/2010, BTIP was changed to the Telecommunications and Informatics Financing Provider and Management Center (Balai Penyedia dan Pengelola Pembiayaan Telekomunikasi dan Informatika or "BPPPTI").

USO payment requirements are calculated as a percentage of our and Telkomsel’s unconsolidated gross revenues, net of bad debts and/or interconnection charges and/or connection charges. Pursuant to GovernmentRegulation No.80/2015 (on tariffs for non-tax state revenue that apply to the MoCI) (“GR No.80/2015”), the current USO tariff rate is 1.25% of gross revenue, net of bad debts and/or interconnection charges and/or connection charges. Subsequently, in September 2016, the MoCI issued MoCI Regulation No.17/2016 (on guideline of the implementation of tariffs for non-tax state revenue applicable to the USO), which wasamended by MoCI Regulation No.19/2016, effective as of November 8, 2016 ("MoCI Regulation No.17/2016").MoCI Regulation No.17/2016 stipulates, among other things, the exclusion of certain revenues that are not considered as part of gross revenues as a basis to calculate the USO charged.

Telecommunication Regulatory Charges

On November 9, 2015, the Government issued Government Regulation No.80 of 2015 (on the types and tariffs of non-tax state revenue applicable for the MoCI) ("GR No.80/2015") which sets the types of non-tax state revenues that apply to the MoCI derived from various services, including telecommunications.

Based on GR No. 80/2015, the upfront fee are paid in at twice the amount of the offering price submitted by each bidding process winner, while the annual license fee for telecommunication operations are paid according to the amount of the lowest offering price from the bidding process winner. The MoCI will stipulate the amount and timing of payment for the radiofrequency spectrum right of use.

 

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Further, telecommunication equipment and devices for research, development, education and disaster handling purposes can be used after obtaining a utilization period statement letter. After the utilization period as provided in the statement letter has expired, the respective equipment and devices which will be re-used for its original purposes must be certificated with a 50% certification fee. Telecommunication equipment and devices with a local content certificate of higher than 50% are charged at 50% of the certificate type and a testing fee as provided in the GR.

Under GR No. 80/2015, the gross revenue constituting the basis for telecommunication right of use fee calculation can be deducted by (i) receivables which have been written off from the telecommunication operation and (ii) payment of interconnection fee obligation and/or the interconnectedness received by telecommunication operator, which is the right of another party. This deduction is further governed by a MoCI regulation.

Telecommunications Towers

On March 17, 2008, the MoCI issued MoCI Regulation No.02/PER/M.KOMINFO/3/2008 (on guidelines on construction and utilization of sharing telecommunication towers) (“MoCI Regulation No.02/2008”). Under MoCI Regulation No.02/2008, the construction of telecommunications towers requires permits from the relevant governmental institution, while the local government determines the placement and locations at which telecommunications towers may be constructed. In addition, telecommunications providers that own telecommunication towers and other tower owners are obligated to allow other telecommunication operators to utilize their telecommunication towers without any discrimination, with due regards to the technical capacity of the respective tower.

Since the operations of telecommunication towers involves a number of relevant Government bodies, on March 30, 2009, a joint regulationwas issued in the form of Minister of Home Affairs Regulation No.18/2009, Minister of Public Works Regulation No.07/PRT/M/2009, MoCI Regulation No.19/PER.M.KOMINFO/03/2009 and Head of the Investment Coordinating Board Regulation No.3/P/2009 (on guidelines for the construction and shared use of telecommunications towers) (“Joint Decree”).

The Joint Decree regulates that the license for telecommunication tower construction is to be issued by regents or mayors, and for Jakarta Province, its Governor. The Joint Decree also provides for tower construction standards and requires that telecommunications towers be made generally available for shared use by telecommunications service providers. The owner of a telecommunications tower is allowed to collect a fee, which is determined by reference to investment and operational costs, the return of investment and the profit. Monopolistic practices in the ownership and management of telecommunications towers is prohibited.

Content Provider Service

Content provider service is regulated by the Ministry of Communication and Information through Regulation No.21/2013(on themanagement ofcontentproviderservices oncellularmobilenetworks andwirelesslocalstaticnetworks withlimitedmobility), as amended by the Ministry of Communication and Information Regulation No.6/2015 of February 6, 2015.

C.                 ORGANIZATIONAL STRUCTURE

Wehave adopted a strategic control approach to the management of our Group, which we believe provides productive flexibility throughout our business entities in accordance with the characteristics of each customer facing unit.

In implementing this strategic control approach:

1.    the role of the corporate office is focused on creating and implementing our overall corporate strategy (i.e. directing overall strategy, portfolio strategy and parenting strategy).

2.       we tailor parenting style to the particular characteristics of the business segment and portfolios.

3.       we seek to empower each customer facing unit in line with their respective particular characteristics.

In order to synchronize our organizational structure with our business character as well as with the dynamic business challenges we face, we revised our parenting strategy based on customer segmentation in order to achieve structural and operational alignment with our business portfolios. As a result of this transformation, our strategic control over our subsidiaries is mapped onto five customer facing units, which are discussed in greater detail below:

 

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·                    Ourmobile customer facing unit is responsible for our mobile portfolio.

·                    Ourconsumer customer facing unit is responsible for our fixed portfolio.

·                    Ourenterprise customer facing unitis responsible for our enterprise digital portfolio.

·                    Ourwholesale and international customer facing unitis responsible for our wholesale and international portfolio as well as our network infrastructure portfolio.

·                    Ourdigital services customer facing unitis responsible for our consumer digital portfolio.

Each customer facing unit manages subsidiaries that operate our business portfolios which are relevant to such customer facing unit’s customer segmentation. In addition, each customer facing unit is responsible for the strategic development and performance of the subsidiaries which it oversees.

In order to support our parenting strategy, we have four functional units which perform certain specified internal corporate functions. Our functional units are discussed in greater detail below:

·                    Ourdigitalstrategicportfolio functional unitis responsiblefor creating company value through the optimization and harmonization of functional management strategyand business development, realize synergies within each  customer facing units, maximize cross-customer facing unit synergies and optimize synergies among SOEs.

·                    Ournetwork, IT and solutions functional unit is responsible for promoting integrated network and IT infrastructure across our subsidiaries.

·                    Ourfinance functional unitis responsiblefor implementation cost and capital eficiency program andmaximizing the value of our assets.

·                    Ourhumancapitalmanagementfunctional unit is responsible for implementingan organizational structurebased on customer facing units,implementing shared servicewithin our Company, upgradinghuman resources programs to  enhance digital andinternational talents and foster digital culture to strengthen digital business.

The table below sets forth our operating companies and significant subsidiaries and associate organized under the relevant customer facing unit and functional unit, including those subsidiaries that hold our principal telecommunications licenses, our percentage ownership interest, direct and indirect, and our voting power in each subsidiary as of December 31, 2016.

Subsidiary and associate

 

Customer Facing Unit or Functional Unit

 

Country of Incorporation

 

Percentage

Ownership

Interest

(Direct and

Indirect) (%)

 

Voting Power (%)

 

PT Telekomunikasi Selular (Telkomsel)

 

Mobile

 

Indonesia

 

65

 

65

 

PT Telkom Akses (Telkom Akses)

 

Consumer

 

Indonesia

 

100

 

100

 

PT Finnet Indonesia (Finnet)

 

Enterprise

 

Indonesia

 

60

 

60

 

PT Infomedia Nusantara (Infomedia)

 

Enterprise

 

Indonesia

 

100

 

100

 

PT Jalin Pembayaran Nusantara (Jalin)

 

Enterprise

 

Indonesia

 

100

 

100

 

PT Multimedia Nusantara (Telkom Metra)

 

Enterprise

 

Indonesia

 

100

 

100

 

PT Patra Telekomunikasi Indonesia (Patrakom)

 

Enterprise

 

Indonesia

 

100

 

100

 

PT PINS Indonesia (PINS)

 

Enterprise

 

Indonesia

 

100

 

100

 

PT Sigma Cipta Caraka (Sigma)

 

Enterprise

 

Indonesia

 

100

 

100

 

PT TeltraNet Aplikasi Solusi (Teltranet)

 

Enterprise

 

Indonesia

 

51

 

51

 

PT Dayamitra Telekomunikasi (Mitratel)

 

Wholesale and International

 

Indonesia

 

100

 

100

 

PT Infrastruktur Telekomunikasi Indonesia (Telkominfra)

 

Wholesale and International

 

Indonesia

 

100

 

100

 

 

 

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Subsidiary and associate

 

Customer Facing Unit or Functional Unit

 

Country of Incorporation

 

Percentage

Ownership

Interest

(Direct and

Indirect) (%)

 

Voting Power (%)

 

PT Telekomunikasi Indonesia International (Telin)

 

Wholesale and International

 

Indonesia

 

100

 

100

 

PT Melon (Melon)

 

Digital Services

 

Indonesia

 

100

 

100

 

PT Metra Digital Investama (MDI)

 

Digital Services

 

Indonesia

 

99.99

 

99.99

 

PT Metra Plasa (Metra Plasa)

 

Digital Services

 

Indonesia

 

60

 

60

 

PT Metranet (Metranet)

 

Digital Services

 

Indonesia

 

100

 

100

 

PT Graha Sarana Duta (Telkom Property)

 

Finance

 

Indonesia

 

99.99

 

99.99

 

 

A complete list of our subsidiaries and investments in associated companies, and our ownership percentage of each entity, as of December 31,2016, is contained in Notes 1d and9 to our Consolidated Financial Statements included elsewhere in this report.

D.                            PROPERTY AND EQUIPMENT

Our property and equipment are primarily used for telecommunication operations, which mainly consist of transmission andinstallationequipment, cable network and switching equipment. A description of these is contained in Note10 to our Consolidated Financial Statements and “— Business Overview — Network Infrastructure and Development". See item 5 “Operating and Financial Review and Prospects— Liquidity— Capital Expenditures” for material plans to construct, expand or improve our property and equipment.

Except for ownership rights granted to individuals in Indonesia, reversionary rights to land rests with the Government, pursuant to Agrarian Law No.5 of 1960. Land title is designated through land rights, including Right to Build (Hak Guna Bangunanor HGB) and Right of Use (Hak Guna Usahaor HGU). Land title holders enjoy full use of the land for a specified period, subject to renewal and extensions. In most instances, land rights are freely tradable and may be pledged as security under loan agreements.

We own several pieces of land located throughout Indonesia with theright to buildand use for a period of10 to 45 years, which will expire between 2017 and 2053.We believe that there will be no difficulty in obtaining the extension of the land rights when they expire.We hold registered rights to buildand usefor most of our properties. Pursuant to Government Regulation No.40/1996, the maximum initial period for the right to build is 30 years and is renewable for an additional 20 years. We are not aware of any environmental issues that could affect the utilization of our property and equipment. All assets owned byour Company have been pledged as collateral for bonds and certain bank loans. Certain property and equipment ofour subsidiaries with gross carrying value amounting to Rp11,385 billion as of December 31,2016 have been pledged as collateral for lending agreements.Please refer to Notes16 and17 to our Consolidated Financial Statements.

Insurance

As of December 31, 2016, property and equipment excluding land rights,with net carrying amount of Rp105,144 billionwere insured against fire, theft, earthquake and other specified risks, including business interruption, under blanket policies totaling Rp11,861 billion, US$1,236 million, HKD3 millionandSGD40 million. Management believes that the insurance coverage is adequate to cover potential losses from the insured risks.

 

Disclosure of Iranian Activities under Section 13(r) of the Exchange Act

Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 added Section 13(r) to the Exchange Act. Section 13(r) requires an issuer to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with designated natural persons or entities involved in terrorism or the proliferation of weapons of mass destruction. Disclosure is required even where the activities, transactions or dealings are conducted outside the United States by non-United States affiliates in compliance with applicable law, and whether or not the activities aresanctionableunder U.S. law.

 

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As of the date of this report, we are not aware of any activity, transaction or dealing by us or any of our affiliates in 2016 that requires disclosure in this report under Section 13(r) of the Exchange Act, except as set forth below.

Our subsidiary, Telkomsel, is party to international roaming agreements with Mobile Telecommunication Company of Iran and Irancell Telecommunications Services Company, which are or may be government-controlled entities. In 2016, we recorded gross revenues ofUS$23,126from these agreements. The amount of our net profits earned under these agreements is not determinable, but it does not exceed our gross revenues from these agreements.The purpose of these agreements is to provide Telkomsel’s customers with coverage in areas where Telkomsel does not own networks, and for this reason Telkomsel intends to continue the activities covered by these agreements.

We also provide telecommunications services in the ordinary course of business to the Embassy of Iran in Jakarta, Indonesia. We recorded gross revenue of approximately Rp56.9million from these services in 2016. The amount of our net profits earned under these services is not determinable, but it does not exceed our gross revenues from these services. As one of the primary providers of telecommunications services in Indonesia, we intend to continue providing such services, as we provide to the embassies of many other nations.

ITEM 4A.             UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 5.               OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements included elsewhere in this Form 20-F. These Consolidated Financial Statements were prepared in accordance with IFRS as issued by the IASB.

A.                                       OPERATING RESULTS

We are the principal provider of local, domestic and international telecommunications services in Indonesia, as well as the leading provider of mobile cellular services through our majority-owned subsidiary, Telkomsel. Our objective is to become a leading TIMES player in the region. As of December 31, 2016, we had approximately 173.9 millionmobilecellular subscribers through Telkomsel,10.7 million subscribers on our fixed wireline network, and 64 million broadband subscribers.We also provide a wide range of other communication services, including telephone network, interconnection services, multimedia, data and internet communication-related services, satellite transponder leasing, leased line, intelligent network and related services, cable television and VoIP services. We also operate multimedia businesses such as content and applications. We intend to continue to cope with market and industry challenges that may arise from time to time by leveraging our customer base, network quality, brand name and strategic execution capabilities.

Growth of the Indonesian economy slowed in 2016 as growth in gross domestic product decreased from an average of5.8% between 2011and 2015 to4.8% in 2016and inflation accelerated from an average of4.5% between 2012and 2015 to5.0% in 2016 (source:IndonesiaCentralBureau ofStatistics). The Rupiah depreciated from an average ofRp8,779  to one U.S. Dollarin 2012 to an average of Rp13,307 in 2016 and hitting low of Rp13,946 in 2016 (source: Bank Indonesia). Though the exposure of our Company and our subsidiaries to foreign exchange rates are not material, we are exposed to foreign exchange risk on sales, purchases and borrowings that are primarily denominated inU.S. Dollars and Japanese Yen.

See Item 11 “Quantitative and Qualitative Disclosure about Market Risk –ForeignExchange Rate Risk”.

The growth in our revenuesin 2016 compared with 2015 was largely driven by increases in revenues from data, internet and information technology services of 23.3%.

Our operating resultsin 2016 compared with 2015 also reflected an increase in expenses. This increase was mainly driven by operation, maintenance and telecommunication services expenses, which increased primarily as a result of an increase in our network capacities to better serve our customers, particularly for internet and data service.


 

 

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Principal Factors Affectingour Financial Conditionand Results of Operations

Increase in Data, Internet, and Information Technology Services

In Indonesia mobile phones have become the primary tool for telecommunication, both for voice calls as well as in terms of internet usage. The growing popularity of smartphones has contributed to the growth of our ARPU from approximately Rp43,000 in 2015 to approximately Rp45,000 in 2016.

Data, internet and information technology services revenues accounted for 50.6% of our consolidated revenues for 2016, up from 46.6% for 2015. Revenues from our data, internet and information technology services increased by 23.3% from 2015 to 2016. The increase in data, internet and information technology services revenues in 2016 was primarily due to a 44.0% increase in revenue from cellular internet and data, and 6.2% increase in revenue from non-cellular internet, data communication and information technology service. We seek to continue to increase such revenues as we continue to invest in improving broadband infrastructure.

We expect that revenue from cellular internet and data will continue to increase and contribute a larger portion of our consolidated revenues in line with an expected increase in the prevalence of smartphone usage in Indonesia. We also intend to increase such revenues by focusing our marketing efforts to encourage customers who currently only utilize mobile voice and SMS services to commence utilizing mobile broadband services. We also intend to continue our promotion of mobile package options in order to encourage existing mobile broadband services customers to increase their use of such services.

Flattening Cellular Telephone Revenues

The rapid development of new technologies, new services and products, and new business models has resulted in distinctions between local, long-distance, wireless, cable and internet communication services being lessened and has brought new competitors into the telecommunications market. Traditional cellular services, such as voice and SMS services, are subject to increasing competition from non-traditional telecommunication services, such as Over The Top products including instant voice and messaging services and other mobile services. As a result, while cellular telephone revenues, which comprise usage charges and monthly subscription charges for mobile voice and SMS services, have increased in the past, this increase has moderated and we expect that it will continue to moderate in the future. Our cellular telephone revenues increased by 3.3% from Rp37,285 billion in  2015 to Rp38,497 billion 2016. In addition, we also expect that the contribution of revenues from cellular phone services to our consolidated revenues will continue to decrease in the future, as we expect that contribution from data, internet and information technology services will continue to grow and comprise a greater percentage of our consolidated revenues in the future . Our revenues from cellular phone services accounted for 33.1% of our consolidated revenues for 2016 compared to 36.3% for 2015. See Item 3 “Key Information – Risk Factors – Risks Related to our Business – Risks Related toour Fixed and Cellular Telecommunication Business".

Increase in operations and maintenance expenses

We expect that our operations and maintenance expenses will continue to increase in the future in line with our expected growth in subscribers and traffic as well as the investments that we intend to make to continue developing our network infrastructure, particularly for internet and data service, in order to increase in our network capacities to better serve our customers. Our operations and maintenance expenses increased by Rp1,918 billion, or 12.7%, from Rp15,129 billion in 2015 toRp17,047 billion in 2016. Our operations and maintenance expenses primarily comprise expenses associated with network maintenance to improve our mobile cellular and fixed broadband services and accounted for21.9% of our total expenses for 2016.

Deferred tax benefits realized under Government tax incentive scheme

On December 29, 2015, we filed an application for fixed assets revaluation for tax purpose using self-assessed revaluation amount and paid the related final income tax amounting to Rp750 billion. We are required to submit the revaluation amount that has been evaluated by Public Independent Appraiser (“KJPP”). In 2016, we appointed a KJPP to perform fixed assets revaluation. We planned to submit the related KJPP report in two phases, where KJPP reports Phase 1 and Phase 2 will be submitted before December 31, 2016 and December 31, 2017, respectively.

On October 28, 2016, we submitted KJPP report (Phase 1) reporting a revaluation increment of Rp7,078 billion. As a result, we recognized a deferred tax asset of Rp1,415 billion for 2016 which resulted in a deferred tax benefit of Rp1,721 billion for 2016. We expect to settle such deferred tax benefit with respect to our book income within 20 years.

 

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On December 15, 2016, we re-submitted fixed assets revaluation application for Phase 2 to Directorate General of Taxation (“DGT”). In accordance with the regulation, we are required to submit the fixed assets revaluation assessed by KJPP on December 31, 2017 at the latest. There is no assurance that the Government will approve of such applications.

Telkom’s Consolidated Statements of Profit or Loss and Other Comprehensive Income

The following table sets out our Consolidated Statements ofProfit or Loss and OtherComprehensive IncomeFor the Years ended December 31, 2014, 2015 and 2016. Each item is expressed as a percentage of total revenues or expenses.

2014 

 

2015 

 

2016 

 

(Rp billion)

 

%

 

(Rp billion)

 

%

 

(Rp billion)

 

%

 

(US$ million)

 

Revenues

 

 

 

 

 

 

 

Telephone Revenues

 

 

 

 

 

 

 

Cellular

 

 

 

 

 

 

 

Usage charges

33,723

 

37.6

 

36,853

 

35.9

 

38,238

 

32.9

 

2,838 

 

Monthly subscription charges

567

 

0.6

 

432

 

0.4

 

259

 

0.2

 

19 

 

 

34,290

 

38.2

 

37,285

 

36.3

 

38,497

 

33.1

 

2,857 

 

Fixed Lines

 

 

 

 

 

 

 

Usage charges

5,347

 

6.0

 

4,635

 

4.5

 

3,847

 

3.3

 

286 

 

Monthly subscription charges

2,697

 

3.0

 

2,821

 

2.8

 

3,311

 

2.8

 

246 

 

Call Center

290

 

0.3

 

275

 

0.3

 

290

 

0.2

 

22 

 

Others

101

 

0.1

 

102

 

0.1

 

94

 

0.1

 

 

 

8,435

 

9.4

 

7,833

 

7.7

 

7,542

 

6.4

 

561 

 

Total Telephone Revenues

42,725

 

47.6

 

45,118

 

44.0

 

46,039

 

39.5

 

3,418 

 

Interconnection Revenues

4,708

 

5.2

 

4,290

 

4.2

 

4,151

 

3.6

 

308 

 

Data, Internet and Information Technology Services Revenues

 

 

 

 

 

 

 

Cellular, internet and data

13,563

 

15.1

 

19,665

 

19.2

 

28,308

 

24.3

 

2,101 

 

Short Messaging Service ("SMS")

14,034

 

15.7

 

15,132

 

14.8

 

15,980

 

13.7

 

1,186 

 

Internet, data communication and information technology services

9,987

 

11.1

 

12,307

 

12.1

 

13,073

 

11.2

 

970

 

Pay TV

96 

 

0.1

 

581

 

0.4

 

1,546

 

1.3

 

115 

 

Others

128

 

0.2

 

135

 

0.1

 

64

 

0.1

 

 

Total Data, Internet and Information Technology Services Revenues

37,808

 

42.2

 

47,820

 

46.6

 

58,971

 

50.6

 

4,377 

 

Network Revenues

1,280

 

1.4

 

1,231

 

1.2

 

1,444

 

1.4

 

107 

 

Others Revenues

 

 

 

 

 

 

 

Sales of handset

582

 

0.7

 

1,516

 

1.5

 

1,490

 

1.3

 

111 

 

Telecommunication tower leases

700

 

0.8

 

721

 

0.7

 

733

 

0.6

 

54 

 

Call center service

446

 

0.5

 

668

 

0.7

 

678

 

0.6

 

50

 

E-payment

74

 

0.1

 

126

 

0.1

 

424

 

0.4

 

31 

 

E-health

165

 

0.1

 

192

 

0.2

 

415

 

0.4

 

31 

 

CPE and terminal

61

 

0.1

 

221

 

0.2

 

192

 

0.1

 

14 

 

Others

1,147

 

1.3

 

567

 

0.6

 

1,796

 

1.5

 

134 

 

Total Other Revenues

3,175

 

3.6

 

4,011

 

4.0

 

5,728

 

4.9

 

425 

 

Total Revenues

89,696

 

100.0

 

102,470

 

100.0

 

116,333

 

100.0

 

8,635 

 

Expenses

 

 

 

 

 

 

 

Operations, Maintenance and Telecommunication Services Expenses

 

 

 

 

 

 

 

Operations and maintenance

11,512 

 

18.7

 

15,129 

 

21.1

 

17,047

 

21.9

 

1,265 

 

 

 

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2014 

 

2015 

 

2016 

 

(Rp billion)

 

%

 

(Rp billion)

 

%

 

(Rp billion)

 

%

 

(US$ million)

 

Radio frequency usage charges

3,207 

 

5.2 

 

3,626 

 

5.1

 

3,687

 

4.8

 

274 

 

Leased line and CPE

1,073 

 

1.7 

 

1,913 

 

2.7

 

2,578

 

3.3

 

191 

 

Concession fees and USO charges

1,818 

 

3.0 

 

2,230 

 

3.1

 

2,217

 

2.8

 

165 

 

Cost of IT services

357 

 

0.6 

 

882 

 

1.2

 

1,563

 

2.0

 

116 

 

Cost of handset sold

421 

 

0.7 

 

1,493 

 

2.1

 

1,481

 

1.9

 

110 

 

Electricity, gas and water

1,180 

 

1.9 

 

1,014 

 

1.4

 

960

 

1.2

 

71 

 

Cost of SIM cards and vouchers

610 

 

1.0 

 

444 

 

0.6

 

624

 

0.8

 

46 

 

Vehicles rental and supporting facilities

272 

 

0.4 

 

296 

 

0.4

 

367

 

0.5

 

27 

 

Tower lease

1,065 

 

1.7 

 

646 

 

0.9

 

322

 

0.4

 

24 

 

Insurance

335 

 

0.5 

 

312 

 

0.4

 

256

 

0.3

 

19 

 

Others

438 

 

0.7 

 

131 

 

0.2

 

161

 

0.2

 

13 

 

Total Operations, Maintenance and Telecommunication Services Expenses

22,288 

 

36.1 

 

28,116 

 

39.2

 

31,263

 

40.1

 

2,321 

 

Depreciation and Amortization

17,178 

 

27.9 

 

18,572 

 

25.9

 

18,556

 

23.8

 

1,377 

 

Personnel Expenses

 

 

 

 

 

 

 

Salaries and related benefits

5,076 

 

8.2 

 

5,684 

 

7.9

 

7,122

 

9.2

 

529 

 

Vacation pay, incentives and other benefits

3,504 

 

5.7 

 

4,575 

 

6.5

 

4,219

 

5.4

 

312 

 

Pension benefit cost

643 

 

1.1 

 

443 

 

0.6

 

1,068

 

1.4

 

79 

 

Early retirement program

 

 

683 

 

1.0

 

628

 

0.8

 

47 

 

LSA expenses

115 

 

0.2 

 

152 

 

0.2

 

237

 

0.3

 

18 

 

Net periodic post-employment health care benefit cost

248 

 

0.4 

 

216 

 

0.3

 

163

 

0.1 

 

12 

 

Other employee benefit cost

56 

 

0.1 

 

53 

 

0.1

 

82

 

0.1 

 

 

Other post-employment benefit cost

48 

 

0.1 

 

47 

 

0.1

 

48

 

0.1 

 

 

Others

86 

 

0.1 

 

32 

 

0.0

 

45

 

0.1 

 

 

Total Personnel Expenses

9,776 

 

15.9 

 

11,885 

 

16.7

 

13,612

 

17.5 

 

1,010 

 

Interconnection Expenses

4,893 

 

7.9 

 

3,586 

 

5.0

 

3,218

 

4.1 

 

239 

 

General and Administrative Expenses

 

 

 

 

 

 

 

General Expenses

967 

 

1.6 

 

1,032 

 

1.4

 

1,626

 

2.1 

 

121 

 

Provision for impairment of receivables

784 

 

1.3 

 

1,010 

 

1.4

 

743

 

1.0 

 

55 

 

Professional fees

266 

 

0.4 

 

424 

 

0.6

 

594

 

0.8 

 

44 

 

Travelling

355 

 

0.6 

 

347 

 

0.5

 

436

 

0.5 

 

32 

 

Training, education and recruitment

528 

 

0.9 

 

393 

 

0.5

 

399

 

0.4 

 

30 

 

Meeting

162 

 

0.3 

 

163 

 

0.2

 

207

 

0.3 

 

15 

 

Collection expenses

369 

 

0.6 

 

368 

 

0.5

 

152

 

0.2 

 

11 

 

Social contribution

96 

 

0.2 

 

116 

 

0.2

 

134

 

0.2 

 

10 

 

Others

436 

 

0.7 

 

351 

 

0.5

 

319

 

0.4 

 

24 

 

Total General and Administrative Expenses

3,963 

 

6.6 

 

4,204 

 

5.8

 

4,610

 

5.9 

 

342 

 

Marketing Expenses

3,092 

 

5.0 

 

3,275 

 

4.6

 

4,132

 

5.3 

 

307 

 

Loss on foreign exchange - net

14 

 

0.0 

 

46 

 

0.1

 

52

 

0.1 

 

 

Other expenses

396 

 

0.6 

 

1,917 

 

2.7

 

2,469

 

3.2 

 

183 

 

Total expenses

61,617 

 

100.0 

 

71,603 

 

100.0

 

77,824

 

100.0 

 

5,776 

 

Other income

1,076 

 

 

1,500 

 

 

751

 

 

56 

 

Operating Profit

29,172 

 

 

32,369 

 

 

39,172

 

 

2,908 

 

Finance income

1,238 

 

 

1,407 

 

 

1,716

 

 

127 

 

Finance costs

(1,814)

 

 

(2,481)

 

 

(2,810)

 

 

(209)

 

Share of profit (loss) of associated companies

(17)

 

0.0

 

(2)

 

0.0

 

88

 

0.0

 

 

Profit before Income Tax

28,579 

 

 

31,293 

 

 

38,166

 

 

2,833 

 

Net Income Tax Expense

(7,341)

 

 

(8,023)

 

 

(9,017)

 

 

(669)

 

 

 

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2014 

 

2015 

 

2016 

 

(Rp billion)

 

%

 

(Rp billion)

 

%

 

(Rp billion)

 

%

 

(US$ million)

 

Profit for the Year

21,238 

 

 

23,270 

 

 

29,149

 

 

2,164 

 

Other Comprehensive Income (Expenses) - Net

810 

 

 

493 

 

 

(2,099)

 

 

(156)

 

Net Comprehensive Income for the Year

22,048 

 

 

23,763 

 

 

27,050

 

 

2,008 

 

Profit for the year attributable to owners of the parent company

14,437 

 

 

15,451 

 

 

19,333

 

 

1,435 

 

Net comprehensive income for the year attributable to owners of the parent company

15,291 

 

 

16,003 

 

 

17,312

 

 

1,285 

 

Basic and Diluted Earnings per Share (in full amount)

 

 

 

 

 

 

 

Profit per share

147.78 

 

 

157.38 

 

 

195.99

 

 

0.01 

 

Profit per ADS (100 shares of common stock per ADS)

14,778.00 

 

 

15,738.00 

 

 

19,599.85

 

 

1.45 

 

 

Financial Overview

Yearended December 31, 2016comparedto yearended December 31, 2015

Revenues

Total revenues increased by Rp13,863 billion, or 13.5%, from Rp102,470 billion in 2015 to Rp116,333 billion (US$8,635 million) in 2016. The increase was primarily contributed by increases in internet, data and information technology service revenues,cellular telephone revenues,and others revenues.

a.                  Cellular Telephone Revenues

Cellular telephone revenues  increased by Rp1,212 billion, or 3.3%, from Rp37,285 billion in 2015 to Rp38,497 billion (US$2,857 million) in 2016.This increase was primarily due to anincrease in usage charges by Rp1,385 billion, or3.8%, from Rp36,853 billion in 2015 to Rp38,238 billion in 2016 in line with an increase in Telkomsel subscribers from152.6millionas of December 31, 2015to 173.9million as of December 31, 2016.

This increase waspartiallyoffset by adecrease in monthly subscription charges byRp173billion, or 40.0%, from Rp432 billion in 2015 to Rp259 billion in 2016.

b.                  Fixed Line Telephone Revenues

Fixed lines revenues decreasedby Rp291 billion, or 3.7%, from Rp7,833 billion in 2015 to Rp7,542 billion (US$561 million) in 2016. The decrease in fixed lines revenueswas primarily due to adecrease in usage chargesof Rp788 billion, or 17.0%, from Rp4,635billion in 2015to Rp3,847billion in 2016 due toa decrease in revenues from voice services.

This decrease waspartiallyoffset by an increase in monthly subscriptionchargesof Rp490 billion, or17.4%, due toan increase in revenues from IndiHome services.

c.                   Data, Internet and Information Technology Services Revenues

Our data, internet and information technology service revenues accounted for 50.6% of our consolidated revenues for 2016, compared to 46.6% for 2015. Data, internet and information technology service revenuesincreased by Rp11,151 billion, or 23.3%, from Rp47,820 billion in 2015 to Rp58,971 billion (US$4,377 million) in 2016. This increase was primarily due to an:

 

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·                    increase in data cellular and internet revenues by Rp8,643 billion, or 44.0%, from Rp19,665 billion in 2015 toRp28,308 billion in 2016 primarily driven by an increase in mobile broadband usage and an increase in Flash subscribers from 43.8 million subscribers as of December 31, 2015 to 60.0 million subscribers as of December 31, 2016. For additional information on factors driving the growth of our data cellular and internet revenues, see "--- Principal Factors Affecting our Financial Condition and Results of Operations --- Increase in Data, Internet, and Information Technology Services";

·                    increase in Pay TV income by Rp965 billion, or 166.1%, from Rp581 billion in 2015 toRp1,546billion in 2016 due to an increase in revenues from interactive TV services that we offer as part of the IndiHome bundled service;

·                    increase in SMS revenues by Rp848 billion, or 5.6%, from Rp15,132 billion in 2015 to Rp15,980 billion in 2016 primarily due to our implementation of variable pricing which was based on the geographical location of users;and

·                    increase in internet, data communication and information technology service revenue by Rp766 billion, or 6.2%, from Rp12,307 billion in 2015 to Rp13,073billion in 2016 primarily due to an increase of fixed broadband subscribers from 4.0 million as of December 31, 2015 to 4.3 million as of December 31, 2016.

 

This increase was partially offset by adecreasein other data and internet revenues byRp71billion, or 52.6%,fromRp135billion in 2015toRp64billion in 2016.

d.                  Interconnection Revenues

Interconnection revenues comprised interconnection revenues from our fixed line network and interconnection revenues from Telkomsel’s mobile cellular network, includingincoming international long-distance revenues from our IDD service (TIC-007).

Interconnection revenues decreased by Rp139 billion, or 3.2%, from Rp4,290 billion in 2015 to Rp4,151 billion (US$308 million) in 2016primarilydue to a decrease in domestic interconnectionof Rp365 billion, or 16.0%, from Rp2,276 billion in 2015 to Rp1,911 billion in 2016 primarily due to a decreaseindomestic interconnection traffic.

This decrease waspartiallyoffset by anincrease in international interconnection revenues of Rp226 billion, or 11.2%, fromRp2,014billion in2015toRp2,240billion in 2016 primarily due to an increase in international interconnection traffic.

e.                   Network Revenues

Network revenues increased by Rp213 billion, or 17.3%, from Rp1,231 billion in 2015 to Rp1,444 billion (US$107 million) in 2016 primarily due to an increase in satellite transponder lease revenue by Rp533 billion, or104.1%,from Rp512 billion in 2015 to Rp1,045 billion in 2016 primarily due to anincrease ofsatellite transpondercapacity from  4,648 million MHz as of December 31, 2015 to  6,801 million MHz as of December 31, 2016. This increase was partially offset bya decrease in leased line revenue of Rp320 billion, or 44.5%, fromRp719billion in 2015to Rp399billion in 2016. 

f.                Other Revenues

In 2016, revenues from other services increased by Rp1,717 billion, or 42.8%, from Rp4,011 billion in 2015 to Rp5,728 billion (US$425 million) in 2016. The increase was primarily due to an:

·                    increasein other revenues by Rp1,229billion, or 216.8%, from Rp567 billion in 2015 to Rp1,796 billion in 2016 primarily due to an increase in revenues from leasing and trading activities PT Telkom Akses, manage non-device others, room rentals, and income from building and hotel;

·                    increase ine-Payment revenues by Rp298 billion, or236.5%, from Rp126 billion in 2015 to Rp424 billion in 2016; and

·                    increase in e-health revenue by Rp223billion, or 116.1%, from Rp192 billion in 2015 to Rp415 billion in 2016.

This increase was partially offset by adecrease inCPE revenues byRp29 billion, or 13.1%, fromRp221billion in2015toRp192billion in 2016.

 

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Other Income

Other income decreased by Rp749 billion, from Rp1,500 billion, or49.9%, in 2015 to Rp751 billion (US$56 million) in 2016 primarily due to a decrease in income from sales of scrapped copper cables extracted during the process of replacing copper cables with fiber optic cables and income frompenalties received from third partyvendors.

Expenses

Total expensesincreased by Rp6,221 billion, or 8.7%, from Rp71,603 billion in 2015 to Rp77,824 billion (US$5,776 million) in 2016. The increase in expenses was attributable primarily to increases in operations, maintenance and telecommunication service expenses, personnel expenses and marketing expenses.

a.                  Operations, Maintenance and Telecommunication Service Expenses

Operations, maintenance and telecommunication service expenses increased byRp3,147 billion, or 11.2%, from Rp28,116 billion in 2015 to Rp31,263 billion (US$2,321 million) in 2016.

The increase in operations, maintenance and telecommunication service expenses was primarily attributable to an:

·                    increase inoperations, maintenance and telecommunication service expenses by Rp1,918 billion, or 12.7%,from Rp15,129 billion in 2015 to17,047 billion in 2016 due to an increase in expenses associated with network maintenance to improve our mobile cellular and IndiHome service;

·                    increasein informatics technology services expenses byRp681billion, or 77.2%, from Rp882 billion in 2015 to Rp1,563 billion in 2016in line with an increase in information technology service revenues;

·                    increase in leased lines and CPE expenses of Rp665billion, or 34.8%, from Rp1,913 billion in 2015 to Rp2,578 billion in 2016 which was used for operation and maintenance of leased lines; and

·                    increaseincost ofSIM card and voucher sales by Rp180billion, or 40.5%, from Rp444 billion in 2015 to Rp624 billion in 2016.

This increase waspartiallyoffset by adecreasein tower leases of Rp324billion, or50.2%, from Rp646 billion in 2015 to Rp322 billion in 2016.

b.                  Depreciation and Amortization

Depreciation and amortizationdecreased by Rp16 billion, or 0.1%, from Rp18,572 billion in 2015 to Rp18,556 billion (US$1,377 million) in 2016.

c.                   Personnel Expenses

Personnel expenses  increased by Rp1,727 billion, or 14.5%, from Rp11,885 billion in 2015 to Rp13,612 billion (US$1,010 million) in 2016. This increase was primarily due to an:

·                    increase in employees’ salary expensesof Rp1,438 billion, or 25.3%,from Rp5,684 billion in 2015 to Rp7,122 billion in 2016 primarily due to performance bonus paid during the year;

·                    increase in net periodic pension costsof Rp625 billion, or 141.1%, from Rp443 billion in 2015 to Rp1,068 billion in 2016 primarily due to an increase in our contributions to our employees' pension schemes;

The above increases were partially offset by a decrease in vacation pay, incentives and other benefits expenses of Rp356 billion, or 7.8%, from Rp4,575 billion in 2015 to Rp4,219 billion primarily due to a reclassification of certain benefits that we provide to our employees as salaries.

 

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d.                  Interconnection Expense

Interconnection expensedecreased by Rp368 billion, or 10.3%, from Rp3,586 billion in 2015 to Rp3,218 billion (US$239 million) in 2016 in line with a decrease in interconnection revenues.

e.                   General and Administrative Expense

General and administrative expenses increased by Rp406 billion, or 9.7%, from Rp4,204 billion in 2015 to Rp4,610 billion (US$342 million) in 2016 primarily due to anincreasein general and administrative expensesof Rp594billion, or 57.6%, from Rp1,032billion in 2015 to Rp1,626 billion in 2016.

Thisincrease waspartiallyoffset by a:

·                    decrease in provision for  impairment of receivablesof Rp267 billion, or 26.4%, from Rp1,010 billion in 2015 to Rp743 billion in 2016; and

·                    decrease in collection expensesofRp216 billion, or 58.7%, from Rp368 billion in 2015 to Rp152 billion in 2016.

f.                   Marketing Expense

Marketing expensesincreased by Rp857 billion, or 26.2%, from Rp3,275 billion in 2015 to Rp4,132 billion (US$307 million) in 2016. This increase was primarily due to  increasedexpenses for the marketing of our products, primarily related to Telkomsel's 4G/LTE services and our IndiHome services.

g.                   Loss on Foreign Exchange - net

Losson foreign exchange – netincreased by Rp6 billion, or13.0%, from Rp46 billion in 2015 to Rp52 billion (US$4 million)in 2016.

h.                  Other Expenses

Other expenses increased by Rp552 billion, or28.8%, from Rp1,917 billion in 2015 to Rp2,469 billion (US$183 million) in 2016 primarily due to the accrual of expenses relating to value-added tax liabilities for 2016 which are currently under calculation by the Indonesian Tax Office.

Operating Profit and Operating Profit Margin

As a result of the foregoing, operating profitincreased by Rp6,803 billion, or 21.0%, from Rp32,369 billion in 2015 to Rp39,172billion (US$2,908 million) in 2016. Operating profit margin increased from 31.6% in 2015 to 33.7% in 2016.

Profit before Income Tax and Pre-Tax Profit Margin

As a result of the foregoing, profit before income tax increased by Rp6,873 billion, or 22.0%, from Rp31,293 billion in 2015 to Rp38,166 billion (US$2,833 million) in 2016. Pre-tax marginincreased from 30.5% in 2015 to 32.8% in 2016.

Net Income Tax Expense

Income tax expense increased by Rp994 billion, or 12.4%, from Rp8,023 billion in 2015 to Rp9,017 billion (US$669 million) in 2016, in line with the increase in profit before income tax. This was partially offset by deferred tax benefits of Rp1,721billion in 2016 compared to Rp342 billion in 2015, primarily due to deferred tax assets recognized in 2016. For more information regarding such deferred tax benefits, see "--- Principal Factors Affecting Our Financial Condition And Results of Operations --- Deferred tax benefits realized under Government tax incentive scheme

 

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Other Comprehensive Income (Expenses) – Net

We recorded other comprehensive expenses of Rp2,099 billion (US$156 million) for 2016 compared to other comprehensive income of Rp493 billion for 2015 primarily due to actuarial losses recognized in 2016 relating to our Defined Benefit Pension Plan.

Net Comprehensive Income for the Year

Net comprehensive income for the year increased by Rp3,287billion, or 13.8%, from Rp23,763 billion in 2015 to Rp27,050 billion (US$2,008 million) in 2016.

Profit for the Year Attributable to Owners of the Parent Company

Profit for the year attributable to owners of the parent company increased by Rp3,882 billion, or 25.1%, from Rp15,451 billion in 2015 to Rp19,333 billion (US$1,435 million) in 2016.

Net Comprehensive Income for the Year Attributable to Owners of the Parent Company

Net comprehensive income for the year attributable to owners of the parent companyincreased by Rp1,309billion, or 8.2%, from Rp16,003 billion in 2015 to Rp17,312billion (US$1,285 million)  in 2016.

Profit per Share

Profit per share increased by Rp39, or 24.5%, from Rp157.38 in 2015 to Rp195.99 in 2016.

Yearended December 31, 2015compared toyearended  December31,2014

Revenues

Total revenues increased by Rp12,774 billion, or 14.2%, from Rp89,696 billion in 2014 to Rp102,470 billion  in 2015. The increasewas primarily contributed by increases in data, internet and information technology service revenues,cellular telephone revenuesand others telecommunication services revenues.

a.                  Cellular Telephone Revenues

Cellular telephonerevenues increased by Rp2,995 billion, or 8.7%, from Rp34,290 billion in 2014 to Rp37,285 billion in 2015.

Usage charges increased by Rp3,130 billion, or9.3%, from Rp33,723 billion in 2014 to Rp36,853 billion in 2015 due to an increase of 8.6% in both our prepaid and postpaid subscribers .This increasewaspartially offset byadecrease in monthly subscription charges of Rp135billion, or 23.8%, from Rp567 billion in 2014 to Rp432 billion in 2015.

Our total cellular telephone revenues accounted for 36.3% of our consolidated revenues for the year ended December 31, 2015.

b.                  Fixed Line Telephone Revenues

Fixed lines revenues decreased by Rp602 billion, or 7.1%, from Rp8,435 billion in 2014 to Rp7,833 billion in 2015. The decrease in fixed lines revenueswasdue to a decrease in usage charges of Rp712 billion, or 13.3%,primarilydue to a decrease in local and domestic long distance usage. This decrease waspartiallyoffset by anincreaseinmonthly subscription charges of Rp124 billion, or 4.6%.

c.                   Data, Internet and Information Technology Services Revenues

Our data, internet and information technology service revenues accounted for 46.6% of our consolidated revenues for 2015, compared to 42.2% for 2014.

 

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Data, internet and information technology service revenues increased by Rp10,012 billion, or 26.5%, from Rp37,808 billion in 2014 to Rp47,820 billion in 2015. This increasewasprimarilydue to an increase in revenues from data cellularinternetby Rp6,102 billion, or 45.0%, which was driven primarily by a growth in mobile broadband usage including from an increase of 40.3% in Flash subscribers from 31.2 million subscribers as of December 31, 2014 to 43.8 million subscribers as of December 31, 2015 which was primarily driven by an increase in the adoption of smartphones.

SMS revenues increased by Rp1,098 billion, or 7.8%, from Rp14,034 billion in 2014 to Rp15,132 billion in 2015driven primarily by the successful implementation of cluster-based pricing and Pay TV revenues increased by Rp485 billion, or505.2%.

d.                  Interconnection Revenues

Interconnection revenues comprised interconnection revenues from our fixed line network and interconnection revenues from Telkomsel’s mobile cellular network, includingincoming international long-distance revenues from our IDD service (TIC-007).

Interconnection revenues decreased by Rp418 billion, or 8.9%, from Rp4,708 billion in 2014 to Rp4,290 billion in 2015 primarily due to a decrease in domestic interconnection by Rp632 billion, or 21.7%. This decreasewas partially offset byanincreasein international interconnection revenues of Rp214 billion, or 11.9%.

e.                   Network Revenues

Network revenues decreased by Rp49 billion, or 3.8%, from Rp1,280 billion in 2014 to Rp1,231 billion in 2015 primarily due to a decrease in our satellite transponder lease revenue by Rp158 billion, or 23.6%, from Rp670 billion in 2014 to Rp512 billion in 2015, which was partially offset  byanincrease in leased lines revenue of Rp109 billion, or 17.9%.

f.                   Other Revenues

In 2015, revenues from other services increased by Rp836 billion, or 26.3%, from Rp3,175 billion in 2014 to Rp4,011 billion in 2015. The increase was primarily due to an increase ofRp934 billion, or 160.5% in sales of handset,Rp222 billion, or 49.8% in call centerservicerevenues and Rp160 billion, or 262.3% in CPE and terminal revenues. Itwas partly offset primarily bydecrease inother revenues by Rp580 billion, or 50.6%.

Other Income

Other income increased by Rp424 billion, from Rp1,076 billion in 2014 to Rp1,500 billion  in 2015due to an increase in gain on disposal or sale of property and equipment.

Expenses

Total expenses increased by Rp9,986billion, or 16.2%, from Rp61,617 billion in 2014 to Rp71,603 billion in 2015. The increase in expenses was attributable primarily to increases in operations, maintenance and telecommunication services, personnel expenses and other expenses.

a.                  Operations, Maintenance and Telecommunication Service Expenses

Operations, maintenance and telecommunication service expenses increased by Rp5,828 billion, or 26.1%, from Rp22,288 billion in 2014 to Rp28,116 billion in 2015.

The increase in operations, maintenance and telecommunication service expenses was primarily attributable to the following:

·                    operations and maintenance increased by Rp3,617 billion, or 31.4%, due to anincrease in expenses associated with network maintenance to improve our mobilecellularand IndiHomeservice;

·               ��    cost ofhandsetsales increased by Rp1,072 billion, or 254.6%, from Rp421 billion in 2014 to Rp1,493 billion in 2015 due to anincreasein cost relating to handset sales;

 

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·                    leased lines and CPE increased by Rp840 billion, or78.3%,whichwas used for operation and maintenance of leased lines;

·                    cost of ITservices increased by Rp525 billion, or147.1%;

·                    radiofrequency and usage charges increased by Rp419 billion, or 13.1%, due to an increase in annual frequency usage fee of Telkomsel; and

·                    concession fees and USO charges increased by Rp412 billion, or 22.7%.

The above increases were partially offset primarily by decreases intower leases by Rp419 billion, or39.3%, from Rp1,065 billion in 2014 to Rp646 billion in 2015 due to our termination of ourfixed wireless services in 2015 andother expenses by Rp307 billion, or70.1%, from Rp438 billion in 2014 to Rp131 billion in 2015.

b.                  Depreciation and Amortization

Depreciation and amortizationexpenses increased by Rp1,394 billion, or 8.1%, from Rp17,178 billion in 2014 to Rp18,572 billion in 2015, primarily due to anincrease in property, plant and equipment to improve our service to customersand accelerated depreciation of fixed wireless assets. Fixed wireless assets in the  amount of Rp545 billion were fully depreciated in connection with the termination of our fixed wireless business.

c.                   Personnel Expenses

Personnel expenses increased by Rp2,109 billion, or 21.6%, from Rp9,776 billion in 2014 to Rp11,885 billion in 2015 due to anincreaseof Rp1,071 billion, or30.6%, in vacation pay,incentives and other benefit expenses,in line with our performance and an increase in early retirement program expenses by Rp683 billion or 100% and in salaries and related benefits by Rp608 billion, or 12.0%.This increase was partially offset by adecrease in pension benefit costofRp200 billion, or 31.1%.

d.                  Interconnection Expense

Interconnection expense decreased by Rp1,307 billion, or 26.7%, from Rp4,893 billion in 2014 to Rp3,586 billion in 2015 primarily due to a decrease in domestic interconnection expense by Rp1,288 billion, or 35.4% and international interconnection expense by Rp19 billion, or 1.5% primarily due to the application discounts on our interconnection tariffs.

e.                   General and Administrative Expense

General and administrative expensesincreased by Rp241 billion, or 6.1%, from Rp3,963 billion in 2014 to Rp4,204 billion in 2015 primarilydue to an increase in provision for  impairment of receivables by Rp226 billion, or 28.8%.

f.                   Marketing Expense

Marketing expenses increased by Rp183 billion, or 5.9%, from Rp3,092 billion in 2014 to Rp3,275 billion in 2015 due to an increase in advertising and promotion expenses by Rp142 billion, or 5.9%,  for the marketing of our products, primarily related to Telkomsel's 4G/LTE services and our IndiHome services.

g.                   Loss on Foreign Exchange - net

Losson foreign exchange - net increased by Rp32 billion, from Rp14 billion in 2014 to Rp46 billion in 2015.

h.                  Other Expenses

Other expenses increased by Rp1,521 billion, or 384.1%, from Rp396 billion in 2014 to Rp1,917 billion in 2015, due to an increase in commitment and penalty charge by Rp806 billion, mainly contributed by provisions for early termination of the operating leases agreements related to restructuring of our fixed wireless business which amounted to Rp666 billion, and others non-operating expense.

 

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Operating Profit and Operating Profit Margin

As a result of the foregoing, operating profit increased by Rp3,197 billion, or 11.0%, from Rp29,172 billion in 2014 to Rp32,369 billion in 2015. Operating profit margin decreased from 32.5% in 2014 to 31.6% in 2015.

Profit before Income Tax and Pre-Tax Profit Margin

As a result of the foregoing, profit before income tax increased by Rp2,714 billion, or 9.5%, from Rp28,579 billion in 2014 to Rp31,293 billion in 2015. Pre-tax margin decreased from 31.9% in 2014 to 30.5% in 2015.

Net Income Tax Expense

Income tax expense increased by Rp682 billion, or 9.3%, from Rp7,341 billion in 2014 to Rp8,023 billion in 2015, in line with the increase in profit before income tax.

Other Comprehensive Income (Expenses) – Net

Other comprehensive income decreased by Rp317 billion, or39.1%, from Rp810 billion in 2014 to Rp493 billion  in 2015  primarily due toadecrease in defined benefit planactuarial gains by Rp417 billion, or53.1%, which was partially offset by an increase in foreign currency translation by Rp104 billion, or 433.3%.

Net Comprehensive Income for the Year

Net comprehensive income for the year increased by Rp1,715 billion, or7.8%, from Rp22,048 billion in 2014 to Rp23,763 billion in 2015.

Profit for the Year Attributable to Owners of the Parent Company

Profit for the year attributable to owners of the parent company increased by Rp1,014 billion, or 7.0%, from Rp14,437 billion in 2014 to Rp15,451 billion in 2015.

Net Comprehensive Income for the Year Attributable to Owners of the Parent Company

Net comprehensive income for the year attributable to owners of the parent companyincreased by Rp712 billion, or 4.7%, from Rp15,291 billion in 2014 to Rp16,003 billion in 2015.

Profit per Share

Profit per share increased by Rp9.60, or 6.5%, from Rp147.78 in 2014 to Rp157.38 in 2015.

Segment Overview

We have four main operating segments,described in more details as follows:

·                    Ourcorporate segment provides telecommunications services including interconnection, leased lines, satellite, VSAT, contact center, broadband access, information technology services, data and internet services to companies and institutions.

·                    Ourhome segment provides fixed wireline telecommunications services, pay TV, data and internet services to home customers.

·                    Ourpersonal segment provides mobile cellular and fixed wirelesstelecommunications to individual customers.

·                    Ourothers segment provides building management services.

 

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For more detailed information regarding our segment information, see Note32 to our Consolidated Financial Statements. Our segment results for2014,2015and2016were as follows:

 

Telkom's Results of Operation By Segment

 

 

 

 

 

Years Ended December 31,

 

2014

 

2015

 

2016

 

2016-2015

 

(Rp billion)

 

(Rp billion)

 

(Rp billion)

 

(US$ million)

 

(%)

 

Corporate

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

External Revenues

18,763 

 

21,072 

 

24,177 

 

1,795 

 

14.7 

 

Inter-segment revenues

10,652 

 

14,347 

 

32,675 

 

2,425 

 

127.7 

 

Total segment revenues

29,415 

 

35,419 

 

56,852 

 

4,220 

 

60.5 

 

Total segment expenses

(22,575)

 

(28,305)

 

(48,345)

 

(3,589)

 

70.8 

 

Segment Results

6,840 

 

7,114 

 

8,507 

 

631 

 

19.6 

 

Depreciation and amortization

(2,699)

 

(2,708)

 

(4,148)

 

(308)

 

53.2 

 

Provision for impairment of receivables

(184)

 

(560)

 

(87)

 

(6)

 

(84.5)

 

Home

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

External Revenues

6,682 

 

7,319 

 

7,803 

 

579 

 

6.6 

 

Inter-segment revenues

2,667 

 

4,352 

 

5,077 

 

377 

 

16.7 

 

Total segment revenues

9,349 

 

11,671 

 

12,880 

 

956 

 

10.4 

 

Total segment expenses

(8,894)

 

(11,411)

 

(12,576)

 

(933)

 

10.2 

 

Segment Results

455 

 

260 

 

304 

 

23 

 

16.9 

 

Depreciation and amortization

(1,495)

 

(1,203)

 

(1,711)

 

(127)

 

42.2 

 

Provision for impairment of receivables

(467)

 

(297)

 

(424)

 

(31)

 

42.8 

 

Personal

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

External Revenues

64,000 

 

73,766 

 

83,990 

 

6,234 

 

13.9 

 

Inter-segment revenues

2,686 

 

2,365 

 

2,724 

 

202 

 

15.2 

 

Total segment revenues

66,686 

 

76,131 

 

86,714 

 

6,436 

 

13.9 

 

Total segment expenses

(44,769)

 

(51,303)

 

(51,303)

 

(3,808)

 

0.0 

 

Segment Results

21,917 

 

24,828 

 

35,411 

 

2,628 

 

42.6 

 

Depreciation and amortization

(12,071)

 

(14,531)

 

(12,549)

 

(931)

 

(13.6)

 

Impairment of fixed assets

(805)

 

 

 

 

 

Provision for impairment of receivables

(133)

 

(148)

 

(222)

 

(16)

 

50.0 

 

Other

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

External Revenues

251 

 

313 

 

363 

 

27 

 

16.0 

 

Inter-segment revenues

1,632 

 

1,943 

 

2,395 

 

178 

 

23.3 

 

Total segment revenues

1,883 

 

2,256 

 

2,758 

 

205 

 

22.3 

 

Total segment expenses

(1,718)

 

(2,040)

 

(2,549)

 

(190)

 

25.0 

 

Segment Results

165 

 

216 

 

209 

 

15 

 

(3.2)

 

Depreciation and amortization

(61)

 

(92)

 

(124)

 

(9)

 

34.8 

 

Provision for impairment of receivables

 

(5)

 

(10)

 

(1)

 

100.0 

 

 

 

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Year ended December 31, 2016 compared to year ended  December 31, 2015

Corporate Segment

Our corporate segment revenuesincreasedby Rp21,433billion, or 60.5%, from Rp35,419billion in 2015 to Rp56,852 billionin 2016. The increase was primarily due to an increase in:

·        other revenues by Rp16,397billion, or186.7%, due to an increasee-payment revenues by Rp8,572 billion,or 2,817.2%,managed services revenues by Rp5,556billion, or616.7%,manage device others revenues by Rp656 billion,or 100%, health facilities and services revenues by Rp222 billion,or 2,579.5%, technical assistance service revenues by Rp201 billion,or 218.1%,CPE revenuesby Rp581billion, or665.0%,call centerservicesby Rp402 billion, or19.6%,e-healthrevenuesby Rp23billion, or 13.0%, power supply lease revenuesby Rp191 billion, or74.6%. This increase waspartiallyoffset due to a decrease in directory assistance revenues by Rp9 billion,or 2.3%;

·        data and internet revenues by Rp3,630 billion, or37.0%, due toanincrease in data communicationothers revenuesby Rp991billion, or72.8%,data communication IT service revenues by Rp1,339 billion,or 71.1%, data communication VPN and ethernet revenues by Rp272 billion,or 9.0%,e-businessrevenuesby Rp346 billion, or85.4%,Astinet revenuesby Rp339 billion, or 44.4%,anddata accessinternetrevenuesby Rp304billion,or 13.3%;and

·        network revenues by Rp1,499 billion, or17.6%, as a result of increases in leased line revenues by Rp1,203 billion, or20.9% and transponder revenuesby Rp295 billion, or10.7%.

The revenues increase waspartiallyoffset bya decrease in interconnection revenuesby Rp155billion, or2.5%, due to a decrease in internasionalinterconnection revenuesby Rp536 billion, or11.6%, andincreaseofdomesticinterconnection revenuesby Rp381billion,or22.0%.

Our corporate segment expenses increased by Rp20,040billion, or70.8%, from Rp28,305billion in 2015 to Rp48,345billion in 2016, primarily due toan increase in:

·        operation, maintenance and telecommunication services expenses by Rp17,168 billion, or121.1% as a result of increases in cooperation expensesbyRp9,480billion,or262.1%, operation and maintenance (O&M) expenses by Rp6,651billion, or126.6%,cost of IT servicesexpensesby Rp960 billion, or108.8% andelectricity cost by Rp54 billion,or 9.3%;

·        personnel expensesby Rp1,420 billion, or34.6%, due to an increase in personnel expensesby Rp500 billion, or70.7%, net periodic pension cost by Rp399 billion, or361.7%, benefit expensesby Rp395 billion,or 37.3%,and bonuses expenses increased by Rp121 billion, or16.4%;and

·        depreciation expenses by Rp1,440 billion,or 53.2%,due to depreciation of transmission, satellite and other equipment.

Home Segment

Our home segment revenues increasedby Rp1,209billion, or 10.4%, from Rp11,671billion in 2015 to Rp12,880billion in 2016 mainly due toanincrease in:

·        other revenues by Rp926 billion, or51.5%, primarily due toanincrease in CPE revenues by Rp930 billion,or 53.5%,andpartiallyoffset by decrease in other telecommunication service revenues by Rp4 billion,or 78.0%;and

·        data and internet revenues by Rp163billion, or2.9%, as a result of an increase in Pay TV revenues by Rp591 billion, or141.8%, in line with the increase in the IndiHome subscribers of8.3% from3.6millionas of December 31,2015 to3.9millionas of December 31,2016. This increase partially offset by decrease in data communication othersrevenuesby Rp451billion, or38.2%.

The increase was partially offset by a decrease infixed wireline revenues by Rp74 billion,or 1.7%;

 

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Our home segment expenses increased by Rp1,165billion, or10.2%, from Rp11,411billion in 2015 to Rp12,576billion in 2016. This increase was primarily due to an increase in:

·        operation, maintenance and telecommunication services expenses by Rp1,187 billion, or27.1%, due to an increase in cooperation expenses by Rp566 billion, or79.7%, leased lines and CPE expenses by Rp376 billion, or71.2%,operation and maintenance expenses by Rp102 billion,or 39.1%,andcall center expensesby Rp134billion, or157.9%;and

·        marketing expensesby Rp145billion, or25.4%,due toanincrease in advertising and promotion by Rp114 billion,or 32.5%.

The increase was partially offset by a decrease inpersonnel expensesby Rp186 billion, or4.9%, due to a decrease in early retirement program expensesbyRp154 billion, or46.9%,and post retirement health care by Rp49 billion,or 39.7%.

Personal Segment

Our personal segment revenues increased by Rp10,583 billion, or 13.9%, from Rp76,131 billion in 2015 to Rp86,714 billion in 2016, mainly due to an increase in:

·        data and internet revenues by Rp9,416 billion, or27.1%, due toanincrease in cellular data communication revenues by Rp8,548billion, or43.8%, in line with the increase in Telkomsel Flash subscribers37.1% from 43.8 millionas of December 31,2015 to60.0millionas of December 31,2016. SMS revenues increased by Rp868billion, or5.8% as a result of cluster based pricing implementation;and

·        cellular revenues by Rp1,263 billion, or3.4%, due toanincrease in cellularmonthly subscriptionby Rp1,369 billion, or13.9%, in line with increased cellular subscribers by13.9% to173.9million of December 31, 2016. The increase partialy offset by decrease international usage by Rp120 billion, or20.9%.

The increase waspartiallyoffset by a decrease in fixed wireless revenuesby Rp101 billion, or109.0%, because of the termination of our fixed wireless business.

Our personal segment expenses constant atRp51,303billion  in2016. The expensesprimarily due to the increase in:

·        operation, maintenance andtelecommunication services expenses by Rp1,255 billion, or5.0%, due to the increase inradio frequency usage charges by Rp1,129 billion, or28.3%, andleased lineand CPEexpensesby Rp85billion, or5.0%;

·        marketing expenses by Rp728 billion, or26.4%, mainly due to an increase in advertising and promotion by Rp609 billion, or27.0% and customer educationand press releaseby Rp119billion, or24.1%;and

·        personnel expenses by Rp505billion, or13.2%, primarily due to an increase inpersonnel expenses andemployee benefit by Rp285billion, or 19.4.%, net periodic pension Rp132 billion, or262.7%,andbonuses expenses by Rp60 billion, or5.6%.

The increase was partially offset by a decrease in:

·        depreciation and amortization expenses by Rp1,982 billion, or13.6%,primarily due to depreciation of transmission and switching equipment;

·        general and administration expensesby Rp174 billion, or121.9%, due to a decrease in collectionfeeexpensesby Rp277 billion, or63.7%, partially offset byprovision for impairment of receivables by Rp73 billion, or49.0%,andincrease in social contribution by Rp27 billion, or55.2%;and

·        other expensesby Rp244 billion, or121.9%,due toa decreaseinnon-operating expenses.

 

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Other Segment

Our other segment revenues increased by Rp502 billion, or22.3%, from Rp2,256 billion in2015 to Rp2,758 billion in2016mainly due to an increase in otherrevenues by Rp502 billion, or22.3%. This increasewas primarilycontributed by lease building and hotel revenues of Rp140 billion, or10.7% and project management service, property development and retailrevenues increased of Rp362 billion, or38.2%.

Our other segment expenses increased by Rp509 billion, or 25.0%, from Rp2,040 billion in 2015 to Rp2,549 billion in 2016 mainly due to an increase in:

·        operation, maintenance and telecommunication service expensesby Rp402 billion, or23.3%, due to an increase in project management expenses by Rp311 billion, or268.2%, and inoperationandmaintenance otherby Rp57billion, or61.1%;

·        depreciation expenses by Rp32 billion, or34.8%, mainly due to an increase in depreciation ofproperty;

·        general and administration expensesby Rp14 billion, or22.7%, primarily due to an increase in provision for impairment of receivables by Rp6 billion, or114.3% andremunerationexpenses by Rp4 billion, or12.8%;and

·        personnel expenses by Rp19 billion, or 13.6%, due to an increase inpersonnelexpenses, position,andmedical benefit.

Year ended December 31, 2015 compared to year ended December 31, 2014

Corporate Segment

Our corporate segment revenues increased by Rp6,004 billion, or 20.4%, from Rp29,415 billion in 2014 to Rp35,419 billion in 2015. The increase was primarily due to an increase in:

·        network revenues by Rp4,284 billion, or 101.2%, as a result of increases in leased line revenues by Rp4,144 billion, or 309.9% and transponder revenuesby Rp252 billion, or 10.1%. The increasewas partially offset by a decrease in international leased line by Rp119 billion, or 85.1%;

·        data and internet revenues by Rp939 billion, or 10.5%, due toanincrease in data communication others revenues by Rp1,037 billion, or 318.4% which was partially offset by a decrease in high speed internet revenues by Rp86 billion, or 8.6%;

·        interconnection revenues  by Rp565 billion, or 11.1%, due to an increase in international IDD OLO revenues by Rp360 billion, or 35.5% and an increase in international IDD incoming revenues by Rp354 billion, or 16.0%. The increase waspartiallyoffset by decreases of long distance cellular revenues by Rp89 billion, or 2.2%, and other local by Rp68 billion, or 29.9%;and

·        other revenues by Rp418 billion, or 5.7%, due to an increase in call center services revenues by Rp591 billion, or 40.4%andpartially offset by a decrease in revenues from CPE and terminal by Rp225 billion, or 24.3%.

The increase was partially offset bya decrease in fixed wirelinerevenuesby Rp212 billion, or 5.6%, due to a decrease in local usage revenues by Rp117 billion, or 24.5%, long distance usage revenues by Rp53 billion, or 12.3%, and IDD 007 usage revenues by Rp22 billion, or 16.9%.

Our corporate segment expenses increased by Rp5,730billion, or 25.4%, from Rp22,575billion in 2014 to Rp28,305 billion in 2015, primarily due to an increase in:

·        operation, maintenance and telecommunication services expenses by Rp3,467 billion, or 32.2% as a result of increases in operation and maintenance (O&M) expenses by Rp1,210 billion, or 57.9%, including increased cooperation expenses by Rp771 billion, or 27.2%, leased lines and CPE expenses by Rp716 billion, or 61.7%, cost of IT services by Rp525 billion, or 146.8%, O&M supporting facilities expensesby Rp130 billion, or 36.0%, transportation expensesby Rp65 billion, or 7.3%, and O&M land and building expensesby Rp46 billion, or 14.4%;

 

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·        interconnection expenses by Rp779 billion, or 19.4%, as a result of an increase in international IDD007 interconnection expenses by Rp530 billion, or 28.1% and Telkom Global international interconnection expenses by Rp258 billion, or 95.8%;

·        personnel expensesby Rp534 billion, or 14.9%, due to an increase in early retirement program expenses by Rp246 billion, or 100.0%, bonuses expenses increased by Rp179 billion, or 31.7% and personnel expensesincreased by Rp101 billion, or 16.7%;

·        others expensesincreasedby Rp886 billion, or 293.5%, due to increases inpenalty and commitment charge by Rp460 billion, or 100.0%, income tax expenses by Rp117 billion, or 25,415.4%, others non-operating expenses by Rp265 billion, or 127.3%, and tax expensesby Rp33 billion, or 82.9%;and

·        marketing expensesby Rp49 billion, or 6.7%, due to an increase in advertising and promotion expenses by Rp43 billion, or 10.2%.

Home Segment

Our home segment revenues increased by Rp2,322 billion, or 24.8%, from Rp9,349 billion in 2014 to Rp11,671 billion in 2015 mainly due toanincrease in:

·        data and internet revenues by Rp1,361 billion, or 32.3%, as a result of an increase in data communication others by Rp722 billion, or 26.3%, increase in Pay TV revenues by Rp341 billion, or 451.7%, in line with the increase in the IndiHome subscribers more than 1 million subscribers, while high speed internet revenues increased by Rp150 billion, or 4.0% and high speed internet monthly subscription increased by Rp52 billion, or 408.7%;and

·        other revenues by Rp1,118 billion, or 164.6%, primarily due toanincrease in sales of handset.

The increase waspartiallyoffset by a decrease in other revenuesby Rp49 billion, or 21.9%, and fixed wireline revenuesby Rp25 billion, or 0.6%.

Our home segmentexpenses increased by Rp2,517 billion, or 28.3%, from Rp8,894 billion in 2014 to Rp11,411 billion in 2015. This increase wasprimarily due to an increase in:

·        operation, maintenance and telecommunication services expenses by Rp1,932 billion, or 79.2%, due to an increase in terminal/handset expenses by Rp1,071 billion, or 258.4%, increase in cooperation expenses by Rp552 billion, or 349.6%, increase in leased lines and CPE expenses by Rp403 billion, or 322.2%, which were partially offset by a decrease in insurance expensesby Rp40 billion, or 33.4%,and vehicle rent by Rp30 billion, or 30.7%;

·        personnel expenses by Rp508 billion, or 15.4%, due to an increase inearly retirement program expenses by Rp328 billion, or 100.0%, bonuses expenses increased by Rp231 billion, or 35.1%, net periodic post-retirement healthcare benefits increased by Rp81 billion, or 192.1% and partially offset by a decrease in net periodic pension costs by Rp156 billion, or 51.2%;

·        other expensesby Rp606 billion, or 1,444.9%, due to an increase in penalty and commitment charge by Rp364 billion, or 100.0% and others non-operating expensesby Rp243 billion, or 1,151.1%.

The increase was partially offset by a decrease in:

·        general administrative expensesby Rp291 billion, or 19.7%,due to a decrease in provision for impairment of receivables by Rp160 billion, or 35.1%, and training, education and recruitment by Rp119 billion, or 46.4%;and

·        depreciation and amortization expensesby Rp291 billion, or 19.4%.

 

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Personal Segment

Our personal segment revenues increased by Rp9,445 billion, or 14.2%, from Rp66,686 billion in 2014 to Rp76,131 billion in 2015, mainly due to an increase in:

·        data and internet revenues by Rp7,083 billion, or 25.7%, due toanincrease in cellular data communication revenues by Rp6,015 billion, or 44.5%, in line with the increase in Telkomsel Flash subscribers 40.3% from 31.2 millionas of December 31,2014 to 43.8 millionas of December 31,2015, payload data increased by 109.6% to 492,245 TB in 2015. Cellular SMS revenues increased by Rp1,195 billion, or 8.6% as a result of cluster based pricing implementation. The increase is partially offset byadecrease in SMS fixed wireless by Rp100 billion, or 97.0%;and

·        cellular revenues  by Rp3,088 billion, or 9.1%, due toanincrease in cellular commitment revenues by Rp2,083 billion, or 28.3%, in line with increased cellular subscribers by 8.6% to 152.6 million in 2015, cellular long-distance usage by Rp658 billion, or 7.0%, cellular feature revenues by Rp286 billion, or 37.5%.

The increase waspartiallyoffset by a decrease in:

·        fixed wireless revenuesby Rp437 billion, or 82.5%, because of the termination of our fixed wireless business, decrease in local used by Rp119 billion, or 71.9%, long distance usage by Rp266 billion, or 89.4% and monthly subscription by Rp49 billion, or 78.1%;and

·        other revenues by Rp110 billion, or 50.0%, due toadecrease in others non operating income.

Our personal segment expenses increased by Rp6,534 billion, or14.6%, fromRp44,769 billion in 2014 toRp51,303billion in 2015, primarily due to an increase in:

·        operation, maintenance andtelecommunication services expenses by Rp4,540 billion, or 21.9%, due to the increase in manage capacity service by Rp1,686 billion, or 100.0%, increase in O&M power supply expensesby Rp906 billion, or 43.8% in line with the growth in the BTSs of Telkomsel by 20.9% to 103,289 units in 2015, and O&M transport expenses increased by Rp749 billion, or 16.2%, O&M radio base station increased by Rp1,024 billion, or 24% and rental expensesincreased by Rp210 billion, or 23.2%;

·        depreciation and amortization expenses by Rp2,460 billion, or 12.8%, mainly due to an increase in depreciation of transmission installation and equipment by Rp1,771 billion, or 21.8%, increase in amortization by Rp226 billion, or 67.3%, and increases in depreciation of leased assets by Rp216 billion, or 34.1%, increase in depreciation of building by Rp20 billion, or 76.6%, increase in depreciation of cable network by Rp55 billion, or 103.9%, increase in depreciation switching by Rp13 billion, or 1.1%, increase in depreciation of leasehold by Rp17 billion, or 34.5%, and increase in depreciation of vehicles by Rp3 billion, or 11.4%;and

·        personnel expenses by Rp1,091 billion, or 39.9%, primarily due to an increase in bonuses expenses by Rp497 billion, or 87.2%, increase in employees income tax expenses by Rp200 billion, or 44.6%, increase in early retirement program expenses by Rp216 billion, or 100%, and increase in long service award increased by Rp190 billion, or 165.5%.

The increase was partially offset by a decrease in:

·        interconnection expenses by Rp1,481 billion, or 31.3%, due to a decrease in Blackberry cooperation expenses by Rp1,078 billion, or 69%, in line with decreased of Blackberry subscribers by 31.7% to 4.0 million subscribers as of December 31, 2015 and a decrease in cellular to IDD interconnection expensesby Rp331 billion, or 54.1%;

·        general administration expensesby Rp66 billion, or 4.1%, due to a decrease in collection expensesby Rp270 billion, or 38.3%, partially offset by increased professional fees by Rp118 billion, or 98.7%, training, education and recruitment by Rp28 billion, or 40.6%, social contribution by Rp22 billion, or 83.6%  and provision for impairment of receivables by Rp15 billion, or 11.5%;and

·        foreign exchange loss by Rp55 billion, or 53.5%.

 

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Other Segment

Our other segment revenues increased by Rp373 billion, or 19.8%, from Rp1,883 billion in 2014 to Rp2,256 billion in 2015, mainly due to an increase in:

·        leased revenues by Rp225 billion, or 20.8%, due to an increase in building maintenance revenues by Rp193 billion, or 20.5% and an increase in building leased revenues by Rp28 billion, or 22.6%;and

·        otherrevenues by Rp148 billion, or 18.4%, due toretailrevenues increased by Rp72 billion, or 329.1%, transport management service revenues increased by Rp50 billion, or 40.1%, and security service revenues increased by Rp44 billion, or 13.6%. The increase was partially offset by a decrease in project management revenues by Rp30 billion, or 13.7%.

Our other segment expenses increased by Rp322 billion, or 18.7%, from Rp1,718 billion in 2014 to Rp2,040 billion in 2015, mainly due to an increase in:

·        operation, maintenance and telecommunication service expensesby Rp246 billion, or 16.7%, due to an increase in cooperation expenses by Rp112 billion, or 71.7%, vehicles rental and supporting facilities by Rp42 billion, or 43.9%, electricity, gas and water expenses by Rp44 billion, or 6.8%, and security operational expenses by Rp44 billion, or 15.7%;

·        depreciation expenses by Rp35 billion, or 67.2%, mainly due to an increase in depreciation of power supply, depreciation of vehicles, and depreciation of building;

·        general and administration expensesby Rp20 billion, or 53.6%, primarily due to an increase in provision for impairment of receivables by Rp5 billion, or 2,793.9%, meeting expenses by Rp4 billion, or 155.7%, and professional fees expenses by Rp3 billion, or 224.0%;and

·        personnel expenses by Rp16 billion, or 12.9%, due to an increase in outsourcing expenses by Rp6 billion, or 11.9%, bonuses expenses by Rp4 billion, or 61.9%, pension assistance expensesby Rp3 billion, or 158.9% and incentives expenses by Rp2 billion, or 20.8%, meanwhile marketing expenses increased by Rp2 billion, or 19.7%.

B.                           LIQUIDITY

Liquidity Sources

The main source of our corporate liquidity is cash provided by operating activities and long-term debt through the capital markets as well as long-term and short-term loans through bank facilities. We divide our liquidity sources into internal and external liquidity.

A.     Internal Liquidity Sources

To fulfill our obligations we rely primarily on our internal liquidity.As of December 31,2016, we had Rp29,767 billion (US$2,209 million) in cash and cash equivalents available, an increase of  Rp1,650 billion, or 5.9%, from  Rp28,117 billion as of December 31, 2015.

Cash receiptsfrom revenues comprisedprimarilycash receipts from revenue from customer, which amounted to Rp113,288 billion (US$8,409 million) in 2016, and are used for payment of operating expenses, acquisition of property and equipment,intangible assets, long-term investment and business, placement in time deposits, payment of cash dividends and repayment of loans and other borrowings.

Our internal liquidity strengthisreflected in our current ratio, which we calculate as current assets divided by current liabilities. As of December 31, 2016, our current ratio was 120.0%compared to135.3% as of December 31, 2015.

 

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B.     External  Liquidity Sources

Our primary external sources of liquidity are short and long-term bank loans, bonds and notes payable,other borrowingsand two-step loans. We had external liquidityfromloans and other borrowingof Rp7,479 billion as of December 31, 2016.

External Outstanding Liquidity Sources

As of December 31,2016, we had undrawn loan facilities which include the following sources of unused liquidity:

·                    BNI loan facility in the amount of Rp1,539 billion;

·                    Bank CIMB Niaga loan facility in the amount of Rp291billion;

·                    The Bank of Tokyo Mitsubishi UFJ, Ltd loan facility in the amount ofRp83billion;

·                    PT Bank Sumitomo Mitsui Indonesia loan facility in the amount of Rp83 billion;

·                    Bank Mandiri loan facility in the amount of Rp88billion;

·                    BankRakyatIndonesia loan facility in the amount of Rp42billion;

· ��                  BNI, BRI and Bank Mandiri syndicated loan facility in the amount of Rp103 million;

·                    Bank UOB loan facility in the amount of Rp82billion;

·                    Bank UOB Singaporeloan facility in the amount of Rp323billion;

·                    Bank Ekonomi Raharjaloan facility in the amount of Rp22billion;

·                    Bank Danamonloan facility in the amount of Rp60billion; and

·                    Bank Syariah Mandiriloan facility in the amount of Rp15billion.

Cash Flows

The following table sets out information concerning our consolidated cash flows, as set out in (and prepared on the same basis as) our Consolidated Financial Statements:

 

 

 

Years Ended December 31,

 

2014 

 

2015 

 

2016 

 

(Rp billion)

 

(Rp billion)

 

(Rp billion)

 

(US$ million)

 

Net cash flows:

 

 

 

 

provided by operating activities

37,736 

 

43,669 

 

47,231 

 

3,506 

 

used in investing activities

(24,748)

 

(27,421)

 

(27,557)

 

(2,046)

 

used in financing activities

(10,083)

 

(6,407)

 

(17,905)

 

(1,329)

 

Net increase in cash and cash equivalents

2,905 

 

9,841 

 

1,769 

 

131 

 

Effect of exchange rate changes on cash and cash equivalents

71 

 

604 

 

(119)

 

(8)

 

Cash and cash equivalents at beginning of year

14,696 

 

17,672 

 

28,117 

 

2,087 

 

Cash and cash equivalents at end of year

17,672 

 

28,117 

 

29,767 

 

2,210 

 

 

 

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Year ended December 31, 2016 compared to year ended December 31, 2015

As of December 31, 2016, total cash and cash equivalent amounted to Rp29,767 billion, an increase of Rp1,650 billion, or 5.9%, from Rp28,117 billion as of December 31, 2015.

In 2016, operating activity accounted for the largest cash receipts which amounted toRp118,326billion, or89.5% of total cash receipts,followed by financing activity which amounted to Rp10,921 billion, or 8.2% of total cash receipts, and investing activity which amounted toRp3,007 billion, or 2.3% of total cash receipts.In total, cash receipts increased byRp8,051 billion, or 6.5%, compared to 2015.

In 2016, cash used for operating activities amounted to Rp71,095billion, or54.5% of total cash disbursements, followed by investing activitieswhichamounted to Rp30,564billion, or23.4%of total cash disbursements, and financing activitieswhichamounted to Rp28,826billion, or22.1% of total cash disbursements. Compared to 2015, cash disbursements increased byRp16,123 billion, or 14.1%.

Cash Flows from Operating Activities

Net cash provided by operating activities was Rp47,231billion (US$3,506 million), compared to Rp43,669 billion in 2015, an increase of Rp3,562billion, or8.2%.

Cash receipts from operating activities amounted to Rp118,326 billion,anincreaseof Rp15,663 billion, or 15.3%, compared to 2015. The cash receipts came from:

·                     cash receipts from customers and other operators ofRp116,116billion;

·                     interest income receivedofRp1,736 billion; and

·                     other cash receipts after netted with the other cash disbursementofRp474 billion.

Cash disbursements from operating activities amounted to Rp71,095 billion,anincreaseof Rp12,101 billion, or 20.5%, compared to 2015.The cash disbursements were used for:

·                    cashpayments for expenses of Rp42,433 billion;

·                    payments forcorporate and finalincome taxes ofRp11,304 billion;

·                    cashpayments to employees ofRp11,207 billion;

·                    payments for interest costsofRp3,455 billion; and

·                    payments for value added taxes after netted withthe receipt ofclaim for value added taxesof Rp2,696billion.

Cash Flows from Investing Activities

Net cash flows used in investing activities in 2016 was Rp27,557 billion (US$2,046 million), compared to Rp27,421 billion in 2015, an increase of Rp136billion, or0.5%.

Cash receipts from investing activities amounted to Rp3,007 billion,anincreaseof Rp2,101 billion, or 231.9%, compared to 2015. The cash receipts came from:

·                    proceeds from escrow accountsof Rp2,159 billion;

·                    proceeds from sale of property and equipment ofRp765 billion;

·                    proceeds from insurance claimsofRp60 billion; and

 

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·                    dividends received from associated companyof Rp23 billion.

Cash disbursements from investing activities amounted to Rp30,564 billion,anincreaseof Rp2,237 billion, or 7.9%, compared to 2015.The cash disbursements were used for:

·                    purchases of property and equipmentof Rp26,787 billion;

·                    increases in advances for purchases of property and equipmentof Rp1,338 billion;

·                    purchases of intangible assetsof Rp1,098billion;

·                    placements in time deposits and available-for-sale financial assetsof Rp983billion;

·                    acquisition of non-controlling interest in subsidiaryof Rp138 billion;

·                    acquisition of business, net of acquired cashof Rp137 billion;

·                    additional contribution on long-term investmentsof Rp43 billion; and

·                    increase in other assetsof Rp40 billion.

Cash Flows from Financing Activities

Net cash flows used in financing activities in 2016 was Rp17,905 billion (US$1,329 million), compared to Rp6,407 billion in 2015, an increase of Rp11,498billion, or179.5%.

Cash receipts from financing activities amounted to Rp10,921 billion,a decreaseof Rp9,713 billion, or 47.1%, compared to 2015. The cash receipts came from:

·                    proceeds from loans and other borrowingsof Rp7,479 billion;

·                    proceeds from sale of treasury stockof Rp3,259 billion; and

·                    capital contribution of non-controlling interests in subsidiariesof Rp183 billion.

Cash disbursements from financing activities amounted to Rp28,826 billion,an increaseof Rp1,785 billion, or 6.6%, compared to 2015.The cash disbursements were used for:

·                    cash dividends paid to the Company’s stockholdersofRp11,213 billion;

·                    cash dividends paid to non-controlling interests of subsidiariesofRp7,058 billion; and

·                    repayments ofloans and other borrowingsof Rp10,555 billion.

Yearended December 31, 2015comparedtoyearended December 31, 2014

As of December 31, 2015, total cash and cash equivalent amounted to Rp28,117 billion, increased by Rp10,445 billion, or 59.1%, compared to 2014.

In 2015, operating activity accounted for the largest cash receipts Rp102,663 billion, or 82.7%,followed by financing activity amounted to Rp20,634 billion, or 16.6% and investing activity amounted toRp906 billion, or 0.7%.In total, cash receipts increased byRp13,859billion, or12.6% compared to 2014.

 

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Cash used for operating activities amounted to Rp58,994 billion, or 51.6% of total cash expenditures in 2015. Cash used in investment activities amounted to Rp28,327 billion, or 24.8% of total cash expenditures in 2015 and financing activities amounted to Rp27,041billion, or 23.6% of total cash expenditures in 2015. Compared to 2014, cash disbursement in 2015 increased byRp6,923 billion, or6.4%.

Cash Flows from Operating Activities

Net cash provided by operating activities in 2015 was Rp43,669 billion compared to Rp37,736billion in 2014.

Cash receipts from operating activities amounted to Rp102,663 billion, an increase ofRp12,300billion, or13.6%compared to 2014. The cash receipts from operating activities came from:

·                    cash receipts from customersand other operatorofRp100,702 billion;

·                    interest income receivedofRp1,386billion; and

·                    other cash receipts after netted with other cash disbursementofRp575 billion.

Cash disbursements from operating activities amounted to Rp58,994 billion in 2015,whichincreased byRp6,367billion, or12.1%compared to 2014.Thecash disbursementswere used for:

·                    cashpayments for expenses ofRp35,922 billion;

·                    cashpayments to employeesofRp10,940billion;

·                    payments for corporate and finalincome taxes of Rp9,299billion;

·                    payments for interest costsof R2,623 billion; and

·                    payments for value added taxes after netted with the receipt of claim for value added taxes of Rp210 billion.

Cash Flows from Investing Activities

Net cash flows used in investing activities in 2015 was Rp27,421 billion compared to Rp24,748 billion in 2014.

Cash receipts from investing activities amounted to Rp906 billion in 2015, which decreased byRp6,006billion, or86.9%compared to 2014. The cash receipts from investing activities came from:

·                    proceeds from sale of property and equipmentofRp733 billion;

·                    proceeds from insurance claimsof Rp119billion;

·                    decrease in other assetsof Rp36 billion; and

·                    dividends received from associated companyof Rp18 billion.

Cash disbursements from investing activities amounted to Rp28,327 billion in 2015,which decreased byRp3,333billion, or10.5%compared to 2014. The cash disbursements were used for:

·                    purchases of property and equipment ofRp26,499billion;

·                    purchasesof intangible assets ofRp1,439billion;

·                    placements in time deposits and available-for-sale financial assetsof Rp146 billion;

 

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·                    acquisitions of business, net of acquired cashof Rp114 billion;

·                    increase in advances for purchases of property and equipmentof Rp67 billion; and

·                    additional contribution on long-term investmentsof Rp62 billion.

Cash Flows from Financing Activities

Net cash flows used in financing activities in 2015wasRp6,407 billion comparedtoRp10,083 billion in 2014.

Cash receipts from financing activities amounted toRp20,634billion, an increase ofRp7,565billion, or57.9%, compared to 2014. The cash receipts from financing activities came from:

·                    proceeds from loans and other borrowingsofRp20,561billion;

·                    proceeds from sale of treasury stockof Rp68 billion; and

·                    capital contribution of non-controlling interests in subsidiariesof Rp5 billion.

Cash disbursements from financing activities amounted to Rp27,041 billion, which increased byRp3,889billion, or16.8%compared to 2014. The cash disbursementswere used for:

·                    repayments ofloans and other borrowings of Rp10,427 billion;

·                    cash dividends paid to the Company’s stockholders ofRp8,783billion; and

·                    cash dividends paid to non-controllinginterests of subsidiaries ofRp7,831billion.

Current Assets

As of December 31,2016, our current assets wereRp47,701 billion (US$3,541million) compared to Rp47,912billion as of December 31, 2015, a decreaseof Rp211 billion, or0.4%. This decrease was primarily due to:

·                    a decrease in other current financial assetsof Rp1,347billion, or 47.8%, from Rp2,818 billion as of December 31, 2015 to Rp1,471 billion as of December 31, 2016primarily due to withdrawals of cash from escrow accounts;

·                    a decreaseinadvances and prepaid expense of Rp593billion, or 10.2%, from Rp5,839 billion as of December 31, 2015 to Rp5,246 billion as of December 31, 2016; and

·                    a decreasein prepaid other taxes byRp36billion, or 1.4%, from Rp2,657 billion as of December 31, 2015 to Rp2,621 billion as of December 31, 2016.

This decrease waspartiallyoffset by:

·                    an increase in our cash and cash equivalents of Rp1,650 billion, or 5.9%, from Rp28,117 billion as of December 31, 2015 to Rp29,767 billion as of December 31, 2016;

·                    an increase ininventories by Rp56 billion, or 10.6%  from Rp528 billion as of December 31, 2015 to Rp584 billion as of December 31, 2016;

·                    an increase intrade and other receivables by Rp28 billion, or 0.4%, from Rp7,872 billion as of December 31, 2015 to Rp7,900 billion as of December 31, 2016; and

·                    an increase in prepaid income taxes by Rp28 billion, or 34.6%,from Rp81 billion as of December 31, 2015 to Rp109 billion as of December 31, 2016.

 

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Current Liabilities

As of December 31, 2016, our current liabilities wereRp39,762billion (US$ 2,951million)compare toRp35,413billion as of December 31,2015, an increase of Rp4,349 billion, or 12.3%.The increase was primarily due to:

·                    an increase in accrued expensesof Rp3,036 billion, or 36.8%, from Rp8,247 billionas of December 31, 2015 to Rp11,283 billionas of December 31, 2016 in line with payments of general and administrative expenses and marketing expenses;

·                    an increase in unearned incomeof Rp1,203 billion, or 27.6%, from Rp4,360 billionas of December 31, 2015 to Rp5,563 billionas of December 31, 2016 related to cellular prepaid vouchers;

·                    an increase in short-term bank loans and current maturities on long-term liabilitiesofRp988 billion, or 22.2%, from Rp4,444 billionas of December 31, 2015 to Rp5,432 billionas of December 31, 2016;

·                    an increase in other tax liabilities of Rp247 billion, or 16.8%, from Rp1,471 billion as of December 31, 2015 to Rp1,718 billion  as of December 31, 2016;and

·                    an increase in advances from customers and suppliers Rp35 billion, or 4.3%, from Rp805 billion as of December 31, 2015 to Rp840 billion as of December 31, 2016.

This increase waspartiallyoffset by:

·                    a decrease in tradeand otherpayableof Rp594 billion, or 4.2%, from Rp14,284 billionas of December 31, 2015 to Rp13,690 billionas of December 31, 2016due to a decrease in trade payables to related party; and

·                    a decrease current income tax liabilitiesof Rp566 billion, or 31.4%, from Rp1,802 billionas of December 31, 2015 to Rp1,236 billionas of December 31, 2016.

Working Capital

Net working capital, calculated as the difference between current assets and current liabilities, amounted to  Rp12,499billion as of December 31, 2015 compared to Rp7,939billion (US$590million) as of December 31, 2016, a decrease of Rp4,560 billion, or36.5%. The decrease in net working capital was primarily due to:

·                    a decrease in other current financial assetsof Rp1,347billion, or 47.8%, from Rp2,818 billion as of December 31, 2015 to Rp1,471 billion as of December 31, 2016;

·                    a decreasein advances and prepaid expense of Rp593billion, or 10.2%, from Rp5,839 billionas of December 31, 2015 to Rp5,246 billionas of December 31, 2016;

·                    a decreasein prepaid other taxes byRp36billion, or 1.4%, from Rp2,657 billion as of December 31, 2015 to Rp2,621 billion as of December 31, 2016;

·                    an increase in accrued expensesof Rp3,036 billion, or 36.8%, from Rp8,247 billionas of December 31, 2015 to Rp11,283 billionas of December 31, 2016 in line with payment of general and administrative expenses and marketing expenses;

·                    an increase in unearned incomeof Rp1,203 billion, or 27.6%, from Rp4,360 billionas of December 31, 2015 to Rp5,563 billionas of December 31, 2016 related to cellular prepaid vouchers;

·                    an increase in short-term bank loans and current maturities on long-term liabilitiesofRp988 billion, or 22.2%, from Rp4,444 billionas of December 31, 2015 to Rp5,432 billionas of December 31, 2016;

·                    an increase in other tax liabilitiesofRp247 billion, or 16.8%, from Rp1,471 billionas of December 31, 2015 to Rp1,718 billionas of December 31, 2016; and

 

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·                    an increase in advances from customers and suppliers of Rp35 billion, or 4.3%, from Rp805 billion as of December 31, 2015 to Rp840 billion as of December 31, 2016.

We believe that our working capital is sufficient for our present requirements. We expect that our working capital requirements will continue to be addressed by various funding sources, including cash from operating activities and bank loans.

Capital Structure

Our capital structure as of December 31, 2016  is described as follows:

Amount

 

Portion

 

(Rp billion)

 

(%)

 

Short-term debt

911 

 

0.8 

 

Long-term debt

30,888 

 

26.6 

 

Totaldebt

31,799 

 

27.4 

 

Equity attributable to owners of the parent company

84,163 

 

72.6 

 

Total

115,962 

 

100.0 

 

 

We take a qualitative approach towards our capital structure and debt levels. Under our syndicated loan agreement with BNI and BCA, we are required to maintain a debt to equity ratioshould not exceed2.5 anddebt service coverage ratioshould not be lessthan 1.0. As of December 31,2016, our debt to equity ratio was0.30 andour debt service coverage ratio was3.94 times, indicating our strong ability to meet our debt obligations. Our debt levels are primarily driven by our plans to develop our existing and new strategic businesses. In determining our optimum debt levels, we also consider our debt ratios with reference to regional peers in the telecommunications industry.

For further information on our Company’s management policies related to capital, see Note36 to our Consolidated Financial Statements.

Indebtedness

Consolidated total indebtedness (consisting of short-term bank loans, long-term liabilities, current maturities of long-term liabilities and other borrowings as of December 31, 2014, 2015 and 2016 were as follows:

As of December 31,

 

2014

 

2015

 

2016

 

(Rp billion)

 

(Rp billion)

 

(Rp billion)

 

(US$ million)

 

Indonesia Rupiah

20,013 

 

31,041 

 

30,100 

 

2,234 

 

U.S. Dollar(1)

2,643 

 

2,779 

 

992 

 

74 

 

Japanese Yen(2)

796 

 

792 

 

707 

 

52 

 

Total

23,452 

 

34,612 

 

31,799 

 

2,360 

 

(1) The amounts as of December 31, 2014, 2015 and 2016 translated into Rupiah at Rp12,385, Rp13,785 and Rp13,472.5 = US$1, respectively, being the Reuters average rates for U.S. Dollar at each of those dates.

 

(2) The amounts as of December 31, 2014, 2015 and 2016 translated into Rupiah at Rp103.59, Rp114.52 and Rp115.06 = Yen 1, respectively, being the Reuters average rates for Yen at each of those dates.

 

 

Of our total indebtedness, as of December 31, 2016,Rp5,432 billion,Rp8,982 billion, Rp7,254 billion and Rp10,131 billion were scheduled for repayment in 2017, 2018-2019, 2020-2021 and thereafter, respectively.

For further information on our Company’s indebtedness, see Notes 16 and 17to our Consolidated Financial Statements.

 

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Capital Expenditures

In 2016, we incurred capital expenditures of Rp29,199billion(US$2,167million). Our capital expenditures are grouped into the following categories for planning purposes:

·                    Broadband services, which consist of broadband, IT, application and content and service node;

·                    Network infrastructure, which consists of core transmission network,metro-ethernet and Regional Metro Junction (“RMJ”),IP backbone and satellite;

·                    Optimizing legacy, for fixed lines; and

·                    Capex supports.

Of our Rp29,199billioncapital expenditure in 2016, Telkom,as parent company, incurred capital expenditures of Rp10,309billion (US$765 million), Telkomsel incurred capital expenditures of Rp12,564billion(US$932million) and our other subsidiaries incurred capital expenditures of Rp6,326 billion(US$470 million). The following table set forth our capital expenditure breakdown between Telkom as a parent company, Telkomsel and our other subsidiaries for the periods indicated.

 

 

Years Ended December 31,

 

2014 

 

2015 

 

2016 

 

(Rp billion)

 

(Rp billion)

 

(Rp billion)

 

(US$ million)

 

Telkom (parent company)

8,099 

 

9,641 

 

10,309 

 

765 

 

Subsidiaries

 

 

 

 

Telkomsel

13,002 

 

11,321 

 

12,564 

 

932 

 

Others

3,560 

 

5,439 

 

6,326 

 

470 

 

Subtotal for subsidiaries

16,562 

 

16,760 

 

18,890 

 

1,402 

 

Total for Telkom Group

24,661 

 

26,401 

 

29,199 

 

2,167 

 

 

Material Commitments for Capital Expenditures

As of December 31, 2016, we had material commitments for capital expenditures under contractual arrangements totaling Rp11,812 billion (US$877 million), principally relating to procurement and installation of data, internet and information technology, cellular, transmission equipment and cable network in Indonesia.

The following table sets forth information on our committed capitalexpenditures undercontractualagreements as of December 31, 2016.

Currencies

 

Amounts in Foreign Currencies

 

Equivalent in Rupiah

 

 

(in millions)

 

(in billions)

 

Rupiah

 

 

7,210 

 

U.S. Dollar

 

341 

 

4,600 

 

Euro

 

0.16 

 

 

Total

 

 

11,812 

 

 

For a more detailed discussion regarding our material commitments for capital expenditures, see Note 33a to our Consolidated Financial Statements.

Source of Funds

We have historically funded our capital expenditures primarily with cash generated from operations. In 2017, we expect that our capital expenditure to revenue ratio will be approximately in the range of 25%-30%. We expect that the most significant proportionsof capital expenditurewill be allocatedtobroadband services, with a portion of the increase allocated to our subsidiaries. We expect to fund the above commitments with our internal and external source of funds.

 

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The realizationand use of future capital expenditures may differ from the amounts indicated above due to various factors, including but not limited to changes in the Indonesian and global economy, the Rupiah/U.S. Dollar or other applicable foreign exchange rates, the availability of supply or vendor or other financing on terms acceptable to us, and also any technical or other problems in the implementation.

Critical Accounting Policies, Estimates and Judgments

For a complete discussion of our critical accounting policies, estimates and judgments, see Note2aa to our Consolidated Financial Statements.

New Standards and Interpretations

See Note39 to our Consolidated Financial Statements for a discussion of the new standards, amendments to standards and interpretations not yet effective for  2016 which have not been applied in preparing the Consolidated Financial Statements.

C.                           Research and Development, Patents and Licenses, etc.

 As a technology-based company, we continue to focus on product and service innovation through ongoing research and development. Our research and development activities are conducted under the Digital Service Division. The primary activity of our Digital Service Division is to analyze new technologies and equipment which we plan to integrate into our network infrastructure in order to ensure a seamless integration process. In addition, our Digital Service Division is mandated with conducting feasibility studies on prospective technologies that we will need to procure in order to support our transformation into a digital telecommunications company.

We also conduct joint innovation activities with certain partners to enhance our current products and services and create new business models that could produce new revenue generators. We also conduct joint innovation activities that aim to enhance our current products and services and create new business models to produce new revenue generators.  Involving a number of partners, namely Cisco, Huawei, NEC/NetCracker, NTT, SK Telecom and ZTE, the joint innovation has resulted in new IndiHome digital services, enhancement to IndiHome architecture as well as new technology mastery in virtualization/cloudification and Internet of Things. In the area of IndiHome digital services, new business opportunities have been developed, such as personalized IPTV EPG, Android Over The Top TV, TV messaging system, TV video call and speed-on demand services. With regard IndiHome architecture, innovation on open STB, IPTV service quality monitoring as well as introduction of video centric network design were key improvements that we expect will drive cost efficiency and improve quality of services. Exploration on future technology and observation onInternet Of Things has also contributed much toour long term benefit in terms of updated knowledge as well as human capital development that may create opportunities for additional revenue and cost savings in the future.

Our research and development activities include our open innovation program where we aim to leverage the creativity of Indonesian digital technology entrepreneurs with the aim of integrating the products and services that they develop into our business. We provide office facilities such as shared meeting rooms, classrooms and common areas for entrepreneurs which are known as Digital Innovation Lounges at 14 locations in Indonesia. In 2016, we received 20,000 proposals from startups as part of our startup discovery program. We conduct incubation and acceleration activities under which we provide mentorships to assist startups to develop and validate their business model.  We occasionally provide seed financing in the form of equity to startups which we believe are commercially viable.  We also support startups to market their products and services and obtain follow-on financing. In 2016, we successfully integrated the products and services of certain startups including Priviy-ID (an application that facilitates secure electronic signatures), Modegi (a developer of residential Internet of Things enablers), X-Igent (an application that facilitates emergency messages) and Run-system (an enterprise resources planning application for SMEs).

Our  total expenditure for  research and development activities was approximately Rp4 billion, Rp11 billion and Rp13 billion in 2014, 2015 and 2016, respectively.

 

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D.                           Trend Information

The significant trends, or developments that have had in recent years, and may have in the future, a material impact on our results of operations, financial condition and capital expenditures, include (i) an increase in revenues from data, internet and information technology services revenues and (ii) a flattening in the growth of legacy services such as fixed line telephone, cellular voice and SMS revenues. See “Operating Results”.

We believe favorable external factors, among others, will support our ability to continue to drive revenue growth from both cellular and non-cellular data, internet and information technology services. Indonesia's economy recorded a healthy growth in recent years. With good economic fundamentals, Indonesia’s national economy is expected to continue to grow steadily, with a corresponding increase in consumer purchasing power, which in turn is expected to result in higher demand for telecommunications services, for both basic telecommunications services as well as value-added services that are part of the increasingly prevalent digital lifestyle in modern societies.

In the longer term, Indonesia’s information and communication technology sector is also expected to enjoy support from Government initiatives such as the Indonesia Broadband Plan 2014-2019. Under the Indonesia Broadband Plan 2014-2019, the Government intends to facilitate an increase in access to fixed broadband infrastructure in Indonesia. Access to fixed broadband infrastructure in urban areas (with capacity of at least 20 Mbps) is targeted to reach 71% of households and 30% of the urban population, while access to mobile broadband infrastructure (with capacity of at least 1 Mbps) is targeted to reach the entireurbanpopulation by 2019. For rural areas, access to fixed broadband infrastructure (with capacity of at least 10 Mbps) is targeted to reach 49% of households and 6% of the rural population, while access to mobile broadband infrastructure (with capacity of at least 1 Mbps) is targeted to reach 52% of theruralpopulation by 2019.

In addition, the Government has implemented a National Medium-Term Development Plan (RPJMN) 2015-2019 under which it intends to accelerate economic development in Indonesia by, among others, developing infrastructure at major economic corridors. We expect that the development of these economic corridors will provide opportunities for us to expand our sales of products and services and allow us to reach customers in a much larger scale.

In line with Indonesia Broadband Plan, President Joko Widodo aspires for  Indonesia to be one of the largest digital economies in Southeast Asia by 2020. We believe that our Indonesia Digital Network program is in line with the foregoing Government initiatives.

We believe the foregoing trends will lead to continuing increase in demand for data, internet and information technology services as well as cloud and digital services, compensating for the flattening in the growth of legacy services such as fixed lines telephone, cellular voice and SMS revenues.

E.                           Off-Balance Sheet Arrangements

As of December 31, 2016, we had no off-balance sheet arrangements that were reasonably likely to have a current or future material effect on our financialcondition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

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F.                           Tabular Disclosure of Contractual Obligations

The following table sets forth information on certain of our material contractual obligations as of December 31, 2016:

 

By Payment Due Date

 

Contractual Obligation

 

Total

 

Less Than 1 Year(7)

 

1-3 years(7)

 

3-5 years(7)

 

More than 5 years(7)

 

 

(Rp billion)

 

(Rp billion)

 

(Rp billion)

 

(Rp billion)

 

(Rp billion)

 

Long-Term Debts(1)(5)

 

26,878 

 

3,863 

 

7,751 

 

6,007 

 

9,257 

 

Capital Lease Obligation(2)

 

4,010 

 

658 

 

1,231 

 

1,247 

 

874 

 

Interest on Long-Term Debts and Capital Lease(6)

 

15,879 

 

2,715 

 

4,116 

 

2,547 

 

6,501 

 

Operating Lease(3)

 

29,617 

 

3,814 

 

7,269 

 

7,210 

 

11,324 

 

Unconditional Purchase Obligations(4)

 

11,812 

 

11,812 

 

 

 

 

Total

 

88,196 

 

22,862 

 

20,367 

 

17,011 

 

27,956 

 

(1) See notes 16 and 17 to our Consolidated Financial Statements

 

(2) Related to the lease of the slot site of the tower, transmission installation and equipment, power supply, data processing equipment, office equipment, vehicles and CPE assets

 

(3) Related to leases of leased line, telecommunication installation and equipment and land and building

 

(4) Capital expenditure committed under contractual arrangements

 

(5) Excludes the related contractually committed interest obligations

 

(6) See item 3 "Key Information - Business Overview - Risk Factors - Risk Related to Our Business - Financial Risk - We are exposed to interest rate risk"

 

(7)Less than 1 year = 2017, 1-3 years = 2018-2019, 3-5years = 2020-2021, more than 5 years = 2022andthereafter

 

 

See Note33 to our Consolidated Financial Statements for further details on our contractual commitments. In addition to the above contractual obligations, we had long-term liabilities fordefinedpension benefits and post-employment health care benefit provision. In2016, wedid notcontribute to our defined benefit pension plan and post-employment health care benefit provision. See Note29 to our Consolidated Financial Statements.

G.                          Safe Harbor

All information that is not historical in nature disclosed under “Off-Balance Sheet Arrangements” and “Tabular Disclosure of Contractual Obligations” is deemed to be a forward-looking statement. See “Forward-Looking Statements".

 

ITEM 6.                DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A.                                         DIRECTORS AND SENIOR MANAGEMENT

 

               In accordance with Law No.40 of 2007 on Limited Liability Companies, we have a Board of Commissioners and a Board of Directors. These boards are separate and no individual may be a member of both boards.

 

The members of the Board of Commissioners and Board of Directors are elected and dismissed by shareholders’ resolutions at a GMS. As stated in our Articles of Association, to be elected, candidates must be nominated by the Government as holder of the Dwiwarna Share.The term of office for each Commissioner and Director commences at the closing of the GMS which appoints such Commissioner or Director or such other time as specified by such GMS, and terminates at the closing of the fifth AGMS held after his/her appointment. Shareholders, through an AGMS or an EGMS, have the right to discharge a Commissioner or Director at any time before the expiration of his/her term of office.

 

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Board of Commissioners

 

Our Board of Commissioners is responsible for supervising and advising the Board of Directors. Our Board of Commissioners consists of seven members, one of whom is designated the President Commissioner.

 

As of December 31, 2016, the Board of Commissioners consisted of seven members as listed below:

 

Name

 

Age

 

Date of Birth

 

Commissioner Since

 

Position

 

Hendri Saparini

 

52

 

June 16, 1964

 

2014

 

President Commissioner

 

Hadiyanto

 

54

 

October 10, 1962

 

2012

 

Commissioner

 

Dolfie Othniel Fredric Palit

 

48

 

October 27, 1968

 

2014

 

Commissioner

 

Pontas Tambunan

 

56

 

February 16, 1961

 

2016

 

Commissioner

 

Margiyono Darsasumarja

 

40

 

September 14, 1976

 

2015

 

Independent Commissioner

 

Rinaldi Firmansyah

 

56

 

June 10, 1960

 

2015

 

Independent Commissioner

 

Pamiyati Pamela Johanna Waluyo

 

58

 

June 20, 1958

 

2015

 

Independent Commissioner

 

 

Each of our Commissionerswas a citizenofand domiciled inIndonesia as of December 31, 2016. In accordance with OJK regulations and IDX rules which require 30% of our Board of Commissioners to be independent, three Commissioners have been designated as Independent Commissioners. Our Independent Commissioners are: Margiyono Darsasumarja, Rinaldi Firmansyah and Pamiyati Pamela Johanna Waluyo. The principal duty of our Independent Commissioners, in addition to exercising supervision, is to represent the interests of minority shareholders.

 

Set forth below is a brief biography of each of our Commissioners:

 

Hendri Sapariniassumed the role of President Commissioner in December 2014. Dr. Saparini founded the Center of Reform on Economics (CORE Indonesia) and has served as its executive director from 2013.  Currently, she also serves as a member of the National Industry and Economics Committee(Komite Ekonomi dan Industri Nasional orKEIN) from2016 and as lecturer at the Institute of State Administration (Lembaga Administrasi Negara)from 2009. Previously Dr. Saparini served as managing director (2005-2013) and researcher (1994-2013) at the ECONIT Advisory Group. She has also served as budgetary consultant for the Indonesian House of Representatives Secretariat General (2009-2012).Dr. Saparini holds a doctorate in international political economics and a master degree in international policymanagementfrom Tsukuba University, Japan and a bachelor of arts degree in economics from Gadjah Mada University, Yogyakarta.

Hadiyantoassumed the role of Commissioner in May 2012. Currently, he also serves asSecretaryGeneral of the Ministry of Financefrom 2015.Dr. Hadiyanto has assumed, among other positions, Director General for State Assets of the Ministry of Finance (2006-2016), Head of the LegalBureau of theSecretariat General of the Ministry of Finance(2005-2006) andAlternate Executive Director at the World Bank in Washington D.C.(2003-2005). He has also served asPresident Commissioner of PT Garuda Indonesia (Persero) Tbk (2007-2012) and President Commissioner of PT Bank Export Indonesia (Persero) (also known as Indonesia Exim Bank) (2007-2009). He holds a doctorate in legal studies and a bachelor of law degree from the University of Padjadjaran, Bandung and a Master of Laws from Harvard University Law School.

Dolfie Othniel Fredric Palit assumed the role of Commissioner in December 2014.Previously, Mr. Palit has served as Executive Director of the Strategic Consultancy Institute for Research on Policy and Regional Autonomy (Lembaga Konsultan Strategis Riset Kebijakan dan Otonomi Daerah or REKODE) (2004-2009) and as Operational Director at Bumi Indonesia Hijau Foundation (2001-2003). Mr. Palit served as a member of the Indonesian House of Representatives (2009-2014), where he acted as member of the Special Committee for the Prevention and Combating Money Laundering, the Bank Century Supervisory Team, the Budget Committee of the House of Representatives and the Special Committee of the Law on the Healthcare and Social Security Agency (Badan Penyelenggara Jaminan Sosial or BPJS). He holds a bachelor degree from the Bandung Institute of Technology.

 

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Pontas Tambunanassumed the role ofCommissioner in April 2016. Currently, he also serves as Deputy for the Construction and Transportation Infrastructure and Facilities Business Sectors of the MSOE from 2015.Previously, he served asa commissioner of PT Pertamina EP (2015-2016) and served at the MSOE as First Assistant Deputy for the Infrastructure and Logistics Business Sectors (2010-2012) and Assistant Deputy for the Transportation Facilities Business Sector (2006-2010).In addition, Mr. Tambunan has served as finance director of PT Perkebunan Nusantara V (Persero) (2012-2015) and a commissioner of PT Wijaya Karya (Persero) Tbk (2007-2012), PT Pelabuhan Indonesia II (Persero) (2010-2012) and PT Sucofindo (Persero) (2010-2012). He holds a master degree in management from Gadjah Mada University, Yogyakarta and a bachelor degree in law from Tarumanegara University, Jakarta.

Margiyono Darsasumarjaassumed the role ofIndependentCommissioner in April 2016. He has served as coordinator of advocacy and partnership for government reform of the Bureaucracy Reform Project (2012-2015), a lecturer in law and media ethics at Ahmad Bakrie University (2012-2014) and a media development manager at Voice of Human Rights Media, a radio program in Indonesia (2001-2011). He holds a master of laws from the University of Leeds, England and a bachelor of law from the University of Indonesia.

Rinaldi Firmansyahassumed the role of Independent Commissioner in April 2015. Currently, he also serves asacommissioner at PT Elnusa Tbk from 2014 and PT Bluebird Tbk from 2013. Mr. Firmansyah also serves as an advisoryboardmember of Daestrum Capital from 2016 and as managing partner of Fidelitas Capital from 2015. Dr. Firmansyah served as a commissioner atIndosat(2015), our President Director (2007-2012) and our Director of Finance (2004-2007).He holds a doctorate in management from the University of Padjadjaran, Bandung, an MBA from the Indonesian Institute of Management Development (IPMI), Jakarta and a bachelor degree in electrical engineering from the Bandung Institute of Technology. Dr. Firmansyah is a Chartered Financial Analyst.

PamiyatiPamela Johanna Waluyoassumed the role of Independent Commissioner in April 2015. Previously, she has served as corporate marketing director of Obsession Media Group (2014-2015), assistantdirector of sales and marketing at PT Media Televisi Indonesia (the broadcaster of Metro TV) (2006-2014), andcorporate public relations professional at PT Media Televisi Indonesia and Media Group (2000-2006). She holds a master degree from the Delft UniversityofTechnology, the Netherlands and a bachelor degree from the Trisakti Business School, Jakarta.

Board of Directors

 

Our Board of Directors is responsible for our overall management and day-to-day operations under the supervision of the Board of Commissioners. The Board of Directors consists of eight members, includinga President Director.

 

The following table sets forth the functions and authority of our Directors.

 

Role

 

Functions and Authority

 

Director of Consumer Services

 

1.                  Responsible for the business strategy to drive disruptive competitive growth through winning competition and growing thefixed and consumer digital segment business portfolio.

2.                  Oversees our parenting strategy by implementing strategic control, coordination and subsidiary performance management over the consumer customer facing unit, in order to create company value through optimizing and harmonizing relations between our Company and our subsidiaries and managing the operations of subsidiaries under the consumer customer facing unit.

 

Director of Enterprise and Business Service

 

1.                  Responsible for the business strategy to drive disruptive competitive growth through winning competition and growing theenterprise digitalsegment business portfolio (enterprise, government and business).

2.                  Oversees our parenting strategy by implementing strategic control, coordination and subsidiary performance management over the enterprise customer facing unit, in order to create company value through optimizing and harmonizing relations between our Company and our subsidiaries and managing the operations of subsidiaries under the enterprise customer facing unit.

 

 

 

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Role

 

Functions and Authority

 

Director of Wholesale and International Services

 

1.                  Responsible for the business strategy to drive disruptive competitive growth through winning competitions and growing the wholesale and international segment business portfolio.

2.                  Oversees our parenting strategy by implementing strategic control, coordination and subsidiary performance management over the wholesale and international customer facing unit, in order to create company value through optimizing and harmonizing relations between our Company and our subsidiaries and managing the operations of subsidiaries under the wholesale and international customer facing unit.

 

Director of Network, IT and Solution

 

1.                  Responsible for the business strategy to leverage our existing resources in order to develop and exploit our established businesses and services by utilizing infrastructure, IT and solutions to support our business portfolio synergistically.

2.                  Oversees our parenting strategy over the network, IT and solutions functionalunitin order to create company value through optimizing and harmonizing the functional management of network, IT and solutions within our Group.

 

Director of Digital and Strategic Portfolio

 

1.                  Responsible for (i) distributing corporate strategy, including directional strategy, portfolio strategy and parenting strategy, (ii) exploring new sources of growth through collaboration, acquisition and synergy and (iii) developing a strategy for innovation in order to optimize business exploration in digital services.

2.                  Oversees our parenting strategy over the digital strategic portfolio functional unit in order to create company value through optimizing and harmonizing the management of strategy and business development within our Group

3.                  Oversees our parenting strategy by implementing strategic control, coordination and subsidiary performance management over the digital services customer facing unit, in order to create company value through optimizing and harmonizing relations between our Company and our subsidiaries and managing the operations of subsidiaries under the digital services customer facing unit.

 

Director of Finance

 

1.                  Responsible for distributing corporate strategy, including portfolio strategy and parenting strategy with regard to financial operations and procurement in order to encourage optimal financial performance, procurement and assets growth, and drive disruptive competitive growth within our Group.

2.                  Oversees our parenting strategy by implementing strategic control, coordination and subsidiary performance management over the finance functional unit, in order to create company value through optimizing and harmonizing relations between our Company and our subsidiaries and managing the operations of subsidiaries under the finance functional unit.

 

Director of Human Capital Management

 

1.                  Responsible for distributing corporate strategy, including directional strategy, portfolio strategy and parenting strategy on aspects related to the development of human capital, employee organization, corporate culture, leadership architecture and industrial relations.

2.                  Oversees human capital management within the Telkom Group and supervises the Pension Fund and Telkom Foundation (Yayasan Telkom) by implementing strategic control, coordination and foundation performance management in order to create Company value through optimizing and harmonizing relations between our Company and our subsidiaries and managing the operations of subsidiaries under the human capital management functional unit.

 

 

 

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As ofDecember 31, 2016, the Board of Directors consisted ofseven members as listed below :

Name

 

Age

 

Date of Birth

 

Director Since

 

Position

 

Alex J. Sinaga

 

55

 

September 27, 1961

 

2014

 

President Director(1)

 

Harry M. Zen

 

48

 

January 9, 1969

 

2016

 

Director of Finance(2)

 

Indra Utoyo

 

55

 

February 17, 1962

 

2007

 

Director of Digitaland Strategic Portfolio

 

Abdus Somad Arief

 

53

 

September 25, 1963

 

2014

 

Director of Network, ITand Solution

 

Herdy Rosadi Harman

 

53

 

June 28, 1963

 

2014

 

Director of Human Capital Management

 

Dian Rachmawan

 

52

 

May 14, 1964

 

2014

 

Director of Consumer Services

 

Honesti Basyir

 

48

 

June 24, 1968

 

2012

 

Director of Wholesaleand International Services and Acting Director of Enterpriseand Business Service

 

(1)         This position is of the same level as Chief Executive Officer (“CEO”).

(2)         This position isof the same level as Chief Financial Officer (“CFO”).

 

Each of our Directors was a citizen and domiciled in Indonesia as of December 31, 2016. In accordance with Listing Regulation No.IA in KEP.00001/BEI/01-2014 issued by the IDX (“IDX Regulation I-A”), the board of directors of a listed company must consist of at least one independent director. We have appointed Honesti Basyir as our Independent Director.

Set forth below is a brief biography of each of our Directors:

Alex J. Sinaga assumed the role of President Director in December 2014.Currently, he also serves as President Commissioner of Telkomsel from 2014. Mr. Sinaga started his career with our Company in 1987. He has served as President Director of Telkomsel (2012-2014), President Director ofTelkomMetra (2007-2012), Executive General Manager of our Enterprise Services Division (2005-2007), Executive General Manager of our Fixed Wireless Division (2002-2005), Senior Manager of Business Performance for Telkom's Regional Division II Jakarta (2002) and General Manager of Telkom West Jakarta Branch Office (2000-2002). Prior to that, Mr. Sinaga served as General Manager at the West Surabaya Branch Office (1998-1999) and Malang Branch Office (1997-1998).He is currently the Chairman of the Indonesian Cellular Telecommunication Association (ATSI) and is an executive member of the Indonesia Chamber of Commerce (KADIN) for England and Europe for the information, communication and technology sector.Mr. Sinaga holds a master degree in telematics from the University of Surrey, England and a bachelor degree inelectrical engineering from the Bandung Institute of Technology.

Harry M. Zenassumed the role of Director of Finance in April 2016. Currently, he also serves as President Commissioner ofTelkom Propertyfrom2016and as a commissioner ofTelkomsel from2016.Prior to his appointment as our Director, Mr. Zen served as President Director of PT Credit Suisse Securities Indonesia (2008-2015), Director of Barclays Capital (2007-2008) and co-head of investment banking at PT Bahana Securities (2001-2008). Mr. Zen holds an MBA from the State University of New York at Buffalo and a bachelor degree in metallurgical engineering from the University of Indonesia.

Indra Utoyo assumed the role of Director ofDigital and Strategic Portfolio in April 2012.Currently, he also serves as President Commissioner of PT Metra Digital Investama (our venture capital fund which is also known as MDI Ventures) from2016 and Commissioner of Telkom Metra from2015.He joined our Company in 1986 and has held various other positions including Director of Information Technology Solution and Supply (2007-2012) andSenior General Manager of our Information System Center (2005-2007). Mr. Utoyo holds a master degree in communication and signal processing from Imperial College, London and a bachelor degree in electrical telecommunications engineering from the Bandung Institute of Technology.

Abdus Somad Arief assumed the role of Director of Network,IT and Solution in December 2014.Currently, he also serves as President Commissioner of Telkominfra from2015and Commissioner of PT TeltraNet Aplikasi Solusifrom2015. Mr. Arief started hiscareer with our Company in 1992. He has served as Director of Network at Telkomsel (2012-2014)and Executive General Manager for our Enterprise Services Division (2009-2012), Vice-President of Business Development for our Enterprise and Wholesale Directorate (2008-2009) and Deputy Executive General Manager ofour Enterprise Services Division (2007-2008).In addition, Mr. Arief has servedas President Commissioner of PT Pramindo Ikat Nusantara (which has changed its name to PINS) (2011-2012) and as aCommissioner of PT Infomedia Nusantara(2010-2011). Mr. Arief holds a master degree in information and technology systems and a bachelor degree in electrical engineering from the Bandung Institute of Technology.

 

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Herdy Rosadi Harman assumed the role of Director of Human Capital Management in December 2014. Currently, he also serves as Commissioner of Telkom Propertyfrom2015 and as the President Commissioner ofPT Infomedia Nusantarafrom 2016. Mr. Harman started his career with our Company in 1987.Prior to his appointment as our Director, Mr. Harman served as Director of Human Capital Management at Telkomsel (2012-2014), Vice-President of Regulatory Management at our Company (2007-2012) and Vice-President of Legal & Compliance at our Company (2006-2007). He has also served as our Company's General Manager for Management Support (2004-2006). Mr. Harman holds a Master of Laws from Washington College of Law, at the American University,Washington D.C.,an MBAfrom the Asian Institute of Management, Philippines, and theBandung Institute of Management (now known as Telkom University) and a bachelor of law degree fromtheUniversity of Padjadjaran, Bandung.

Dian Rachmawan assumed the role of Director of Consumer Services in December 2014. Currently, he also serves as President Commissioner of Telkom Akses from 2015. Mr. Rachmawan started his career with our Company in 1989. He has served as CEO of Telin Hong Kong (2011-2014), Director ofNetwork Operation & Engineering at Telin (2007-2011) and Executive General Manager for Fixed Wireless Network Division at our Company (2005-2007). Previously, Mr. Rachmawan served as our Company's General Manager for South Jakarta Branch Office (2004-2005), General Manager for Interconnection & Partnership for Regional Division II Jakarta (2001-2004) and Assistant Vice President for Interconnection Planning at our headquarters (2000-2001). Mr.Rachmawan holds a master degree in telecommunications engineeringand a master of science in communication and real time systems from Bradford University, England and a bachelor degree inelectronicand telecommunication engineering fromSurabaya Institute of Technology.

Honesti Basyir assumed the role of Director of Wholesaleand International Services in December 2014 before which he served as our Director of Finance from May 2012.Currently,healso serves asour Acting Director of Enterprise & Business Service from September 13, 2016,President Commissioner ofTelinfrom2015andPresidentCommissioner ofTelkom Metrafrom2016. Mr. Basyirstarted his career with our Company in 1994 andhas held a number of key positions within our Company, including Vice-President for Strategic Business Development at theIT, Solution & Strategic Portfolio Directorate (2012), Vice-President for Strategic Business Development atthe Strategic Investment & Corporate Planning Unit (2010-2011), Project Controller (Level 1) of Project Management Office (2009-2010) and Assistant Vice-President for Business & Finance Analysis at the Strategic Investment & Corporate Planning Unit (2006-2009).He holds a master degree in corporate finance from the Bandung Instituteof Management (now known as Telkom University), and a bachelor degree in industrial engineering from the Bandung Institute of Technology.

Other than as provided for under our Articles of Association, none of our Commissioners or Directors has any arrangement or understanding with any major shareholder, customer, supplier or with us pursuant to which such person was selected as a Commissioner or Director, nor are any such arrangements, understanding or contracts proposed or under consideration. There is no family relationship between or among any of the Commissioners or Directors listed above. The business address of our Commissioners and Directors isJl. Japati No.1, Bandung,40133, Indonesia.

 

B.                                        COMPENSATION

 

Compensationof Commissionersand Directors

 

Compensation of Commissioners and Directors are determined by the shareholders at the GMS, who grant authority and authorization to the Board of Commissioners, with prior approval fromthe holder of theDwiwarna Share, to decide on the amount of tantiem which will be given to the members of Board of Director and Board of Commissioners for the 2016 financial year and also as to the amount of the salary orhonorarium, including facilities and allowances for the members of Board of Directors and Board of Commissioners for the 2016 financial year. The Nomination and Remuneration Committee is responsible for formulating the honorarium of our Commissioners and Directors, which is further discussed in a joint meeting of our Board of Directors and Board of Commissioners for approval.

Each Commissioner is entitled to monthly remuneration and benefits. They are also entitled to bonuses based on our business performance and achievements.

Each Director is entitled to a remuneration consisting of a monthly salary and other allowances. Directors also receive an annual bonus based on our business performance and achievements. The bonus and incentive are budgeted every year based on a formula prepared by the Nomination and Remuneration Committee and confirmation from the Board of Commissioners before being considered by shareholders at the GMS.

 

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In accordance with regulations relating to SOEs in Indonesia, all of our Commissioners and Directors are entitled to post-employment benefits, including an insurance scheme into which we are required to contribute up to 25% of the salary of our Commissioners and Directors. There are no service contracts providing for benefits to be provided for our Directors or Commissioners upon their termination as Directors or Commissioners. We also provide our Commissioners and Directors with long-term incentives in the form ofsharesor for our Independent Commissioners in the form of cash.

We budgeted incentives for the current year but will be distribute such incentives in the following year after the publication of our audited financial statements and having the approval in a GMS. We only distribute cash incentives if we achieve certain performance targets.

For 2016, the total remuneration paid to the entire Board of Commissioners was Rp58.8billion. Taxes from remuneration borne by our Company amounted to Rp4.3 billion. The table below sets forth the remuneration that our Commissioners received in 2016:

Board ofCommissioners

 

Honorarium and Allowance

 

Tantiem,THR(1), Long-term Incentives and Post-employment Benefit

 

Total

 

 

(Rp million)

 

Hendri Saparini

 

1,244

 

7,889

 

9,133

 

Dolfie Othniel Fredric Palit

 

1,120

 

7,100

 

8,220

 

Hadiyanto

 

1,120

 

7,100

 

8,220

 

Pontas Tambunan(2)

 

774

 

71

 

845

 

Margiono Darsasumarja

 

1,120

 

5,040

 

6,160

 

Rinaldi Firmansyah

 

1,120

 

5,040

 

6,160

 

Pamiyati Pamela Johanna Waluyo

 

1,120

 

5,040

 

6,160

 

Parikesit Suprapto(3)

 

346

 

7,889

 

8,235

 

Imam Apriyanto Putro(4)

 

-

 

1,904

 

1,904

 

Johny Swandi Sjam(4)

 

-

 

1,904

 

1,904

 

Virano Gazi Nasution(4)

 

-

 

1,904

 

1,904

 

Note

(1) “THR” refers totunjangan hari raya or religious holiday allowance.

(2) Since the AGMS on April 22, 2016.

(3) Up to the AGMS on April 22, 2016.

(4) Up to the AGMS on April 17, 2015.

 

 

For 2016, the total remuneration of the entire Board of Directors was Rp121.6 billion. Taxes from remuneration borne byourCompany amounted to Rp7.6 billion.The table below sets forth theremunerations thatour Directors receivedin2016:

 

Board of Directors

 

Honorarium

 

TantiemandTHR(1)

 

Allowance

 

Total

 

 

(Rp million)

 

Alex J. Sinaga

 

2,304

 

14,128

 

300

 

16,732

 

Harry M. Zen(2)

 

1,434

 

158

 

208

 

1,800

 

Indra Utoyo

 

2,074

 

12,715

 

300

 

15,089

 

Dian Rachmawan

 

2,074

 

12,597

 

300

 

14,971

 

Abdus Somad Arief

 

2,074

 

12,715

 

300

 

15,089

 

Herdy Rosadi Harman

 

2,074

 

12,715

 

300

 

15,089

 

Honesti Basyir

 

2,074

 

12,715

 

300

 

15,089

 

Heri Sunaryadi(3)

 

634

 

12,557

 

100

 

13,291

 

Muhammad Awaluddin(4)

 

1,555

 

12,715

 

225

 

14,495

 

Note

(1) “THR” refers totunjangan hari raya or religious holiday allowance.

(2) Since the AGMS on April 22, 2016.

(3) Up to the AGMS on April 22, 2016.

(4) Up to September 2016.

 

 

Thetotal accrued remuneration of Board of Commissioners and Directors for 2016 was Rp524 billion, consisting of long-term incentives and tantiem.


 

 

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C.                                        BOARD PRACTICES

 

Our Board of Commissioners acts as our overall supervisory and monitoring body with principal functions including planning and development, operations and budgeting in compliance with our Articles of Association, and to carry out the mandate and resolutions of the AGMS and EGMS. The Board of Commissioners does not have the authority to run or manage our Company, except in the exceptional situation when all members of the Board of Directors are suspended for any reason. The Board of Commissioners provides advice and opinions to the AGMS with respect to financial reporting, business development, appointment of auditors, and other important and strategic matters related to corporate actions. The Board of Commissioners also reviews our work plan and budget, keeps abreast of our progress, and in case our Company gives an indication of any decline in the growth of our business immediately requests the Board of Directors to notify the shareholders and provides recommendations on measures for mitigation. Finally, the Board of Commissioners ensures that our corporate governance program is properly applied and maintained in accordance with the applicable regulations.

The Board of Commissioners is obliged to carry out its duties and responsibilities in accordance with our Articles of Association, decisions made during any AGMS and EGMS and applicable laws and regulations.

The Board of Commissioners is assisted by a Board of Commissioners Secretary as well as the Audit Committee, the Nomination and Remuneration Committee and the Planning and Risk Evaluation and Monitoring Committee. As necessary, the Board of Commissioners may seek assistance from professional advisors.

Meetings of the Board of Commissioners are held at least once a month at any time deemed necessary by one or more members of the Board of Commissioners, or at the request of the Board of Directors, or at the written request of one or more shareholders holding at least one-tenth of our outstanding shares of common stock. The Board of Commissioners must hold joint meetings with the Board of Directors at least once every four months. Decisions at Board of Commissioners meetings are taken through a process of deliberation and consensus. If consensus cannot be reached, decisions are based on a majority vote of the Commissioners in attendance or who are represented at the meeting. In the event of a tie, the proposed resolution will be decided by the Commissioner who chairs such Board of Commissioners meeting. The quorum for all Board of Commissioners meetings requires attendance in person, through video conference, or by proxy granted to another Commissioner, of Commissioners representing more than one-half of the total number of Commissioners.

The Board of Directors is generally responsible for managing our business in accordance with applicable laws, our Articles of Association and the policies and directives issued by the GMS and the Board of Commissioners. The Board of Directors also has the right to act for and on our behalf, inside or outside a court of law, on any matter and for any event, with another party.

Meetings of the Board of Directors may be convened at any time deemed necessary or at the request of one or more members of the Board of Directors, or at the request of the Board of Commissioners or upon a written request from one or more shareholders representing one-tenth or more of the total number of outstanding shares of common stock.

Meetings of the Board of Directors are chaired by the President Director. In the event that the President Director is unavailable or absent for any reason, the meeting will be chairedbyanother Director.

Decisions at Board of Directors meetings are taken through a process of deliberation and consensus. If consensus cannot be reached, decisions are based on a majority vote of the Directors in attendance at the meeting. In the event of a tie, the proposed resolution will be decided by a Director who chairs such Board of Directors meeting. The quorum for all Board of Directors meeting requires attendance in person, or through video conference or by proxy granted to another Director, of Directors representing more than one-half of the total number of Directors. Each Director who is present at a Board of Directors meeting is entitled to cast one vote (and one vote for each other Director represented by proxy).

Individual Directors are charged with specific responsibilities.For more detailed information regarding the functions and authority of each of our Directors, see "— Directors and Senior Management — Board of Directors".

 

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Audit Committee

 

The Audit Committee operates under the authority of the Audit Committee Charter, which was adopted under a Decree of the Board of Commissioners No.07/KEP/DK/2013 dated July 23, 2013 in relation to the Charter of the Telkom Group Audit Committee. The Audit Committee Charter is regularly evaluated and, if necessary, amended to ensure compliance with OJK and SEC requirements and other relevant regulations. In 2016, no changes were made to regulations related to our Audit Committee that would require us to amend our Audit Committee Charter.

The Audit Committee Charter outlines the Audit Committee’s purpose, function and responsibilities. It provides that the Audit Committee is responsible for, among others:

·                    overseeing our financial reporting process on behalf of the Board of Commissioners;

·                    providing recommendations to the Board of Commissioners regarding the selection of our external auditor, subject to shareholder approval;

·                    discussing with our internal and external auditors on the overall scope and plans of their respective audits;

·                    reviewing our consolidated financial statements and the effectiveness of internal controls over financial reporting (ICOFR);

·                    convening regular meetings with internal and external auditors, without the presence of management, to discuss the results of their evaluation and audit of our internal controls as well as the overall quality of our financial reporting;

·                    providing independent advice in cases where difference of opinion exists between management and our independent auditors;

·                    monitoring the steps taken by Directors to follow up on the findings of our internal auditors; and

·                    carrying out additional tasks that are assigned by the Board of Commissioners, especially on financial and accounting related matters as well as other obligations required by the Sarbanes-Oxley Act of 2002.

           The Audit Committee may engage an independent consultant or other professional advisors to assist in carrying out its functions. In addition, the Audit Committee receives and handles complaints.

 

Audit Committee Independence

 

OJK Rule No.55/POJK.04/2015 on Establishment and Code of Conduct for Audit Committees (the "OJK Audit Committee Regulation") and IDX Regulation No.1-A require the board of commissioners of a public company which is listed on the IDX (such as our Company) to establish an audit committee which is chaired by an independent commissioner. In addition, the OJK Audit Committee Regulation requires each member of such audit committee to be either an independent commissioner or external independent member, with the audit committee comprised of at least three members with at least one independent commissioner presiding over the audit committee as chairman and one external independent member and at least one member of the audit committee having expertise in accounting or finance. We also require at least one external independent member to have expert knowledge (in the context of Item 16A of Form 20-F) in the field of accounting or finance.

In order to be considered independent under the prevailing Indonesian rules, the members of the audit committee may not:

·                    be an executive officer of a public accountant firm that has provided audit or non-audit services to us within the six months prior to his or her appointment as an audit committee member;

·                    have been our executive officer within the six months prior to his or her appointment as an audit committee member;

·                    be affiliated with our majority shareholder;

·                    have a family relationship with any member of the board of commissioners or board of directors;

 

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·                    own, directly or indirectly, any of our shares; and

·                    have any business relationship that relates to our businesses.

 

Currently, the Audit Committee consists of six members: (i) Rinaldi Firmansyah (Independent Commissioner and Chairman of the Audit Committee); (ii) Tjatur Purwadi (Secretary of the Audit Committee and external independent member); (iii) Margiyono Darsasumarja (Independent Commissioner); (iv) Dolfie Othniel Fredric Palit (Commissioner and non-voting member); (v) Pontas Tambunan (Commissioner and non-voting member); and (vi) Sarimin Mietra Sardi (external independent member).

Audit Committee Financial Expert

See Item 16A “Audit Committee Financial Expert”.

Exemption From U.S. Listing Standards For Audit Committees

See Item 16D “Exemptions from the Listing Standards for Audit Committees”.

Nomination and Remuneration Committee

Our Nomination and Remuneration Committee was formed pursuant to Board of Commissioner’s decree No.6/KEP/DK/2016 dated April 25, 2016 regarding the Establishment of the Nomination and Remuneration Committee.

The objective of the Nomination and Remuneration Committee is to establish, administer and enforce corporate governance principles in the process of nomination for strategic management positions and the determination of the Board of Directors’ remuneration. The duties of the Nomination and Remuneration Committee include the following:

·                    to devise a nomination and selection system for strategic positions within our Company by, referring to corporate governance principles, such as transparency, accountability, responsibility, fairness and independence;

·                    to assist the Board of Commissioners who are engaged with the Directors in selecting candidates for strategic positions in our Company (i.e. positions which are one level under the directorships of our Company) and directors and commissioners of any consolidated subsidiary that contributes 30% or more of our consolidated revenue, such as Telkomsel). For Telkomsel, the Nomination and Remuneration Committee’s recommendation would be passed on to the holder of the Dwiwarna Share; and

·                    to formulate a remuneration system for Directors based on fairness and performance.

Currently, the members of our Nomination and Remuneration Committee are Margiyono Darsasumarja (Independent Commissioner and Chairman of the Nomination and Remuneration Committee), Pontas Tambunan (Commissioner), Hadiyanto (Commissioner), Dolfie OthnielFredricPalit (Commissioner), Rinaldi Firmansyah (Independent Commissioner), Pamiyati Pamela Johanna Waluyo (Independent Commissioner) and Ario Guntoro (Secretary of the Board of Commissioner). To maintain independence in the execution of their tasks, members of the Nomination and Remuneration Committee have no relationship, either directly or indirectly, with us.

D.                                        EMPLOYEES

 

We had a total of 23,876 employees as of December 31, 2016, consisting of 14,933 Telkom employees and 8,943 employees of our subsidiaries. This represented a decrease of 909 employees compared to our total number of employees as of December 31, 2015, due to an increased participation by our employees in our early retirement program. See “Retirement Program”.

As of December 31, 2016, we had 620 senior management employees, compared with  608 senior management employees as of December 31, 2015. Total middle management employees increased from  4,651 employees as of December 31, 2015 to  5,290 employees as of December 31, 2016. Supervisor level employees decreased from  13,017 employees as of December 31, 2015 to  12,044 employees as of December 31, 2016. Other employees decreased from  6,509 employees as of December 31, 2015 to  5,922 employees as of December 31, 2016. We did not employ a significant number of temporary employees in 2016. The following table shows our employee profile by position.

 

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Position

 

As of December 31, 2016

 

 

Telkom

 

Subsidiaries

 

Telkom Group

 

Percentage (%)

 

Senior Management

 

207

 

413

 

620

 

2.6

 

Middle Management

 

3,856

 

1,434

 

5,290

 

22.2

 

Supervisors

 

8,917

 

3,127

 

12,044

 

50.4

 

Others

 

1,953

 

3,969

 

5,922

 

24.8

 

Total

 

14,933

 

8,943

 

23,876

 

100.0

 

 

Our employee profile based on educational background as of December 31, 2016 was dominated by university graduates which accounted for 51.6% of our total employees. This reflects our focus to recruit highly educated candidates with the right qualifications to support our growth. The following table shows our employee profile by educational background.

 

Level of Education

 

As of December 31, 2016

 

 

Telkom

 

Subsidiaries

 

Telkom Group

 

Percentage (%)

 

Pre University

 

3,834

 

689

 

4,523

 

18.9

 

Diploma Graduates

 

3,217

 

1,261

 

4,478

 

18.8

 

University Graduates

 

5,987

 

6,337

 

12,324

 

51.6

 

Post Graduates

 

1,895

 

656

 

2,551

 

10.7

 

Total

 

14,933

 

8,943

 

23,876

 

100.0

 

 

As of December 31, 2016, 23,793 of our employees were located in Indonesia and 83  of our employees were located outside of Indonesia.

 

Retirement Program

 

The retirement age for all our employees is 56 years.We havetwo pension schemes: (a) Defined Benefit Pension Plan (“DBPP”), which is applicable to permanent employees who were hired prior to July 1, 2002 (other than our Directors) and (b) Defined Contribution Pension Plan (“DCPP”) which is applicable to all other permanent employees (other than our Directors).

 

a.                  Defined Benefit Pension Plan 

 

DBPP is calculated for participants based on years of service, salary level at retirement and is transferable to dependent families if the respective employee passes away. Telkom Pension Fund Division administers the program while the main source of pension fund comes from us and employee contributions. Employees participate in the program with18% of their basic salary (before March 2003, the employee contribution rate was 8.4%) while we contribute the remaining balance. The minimum monthly pension benefit for retired employees is approximately Rp425,000 per month. We did not make any contribution to the DBPP pension fund for 2014, 2015 and 2016.

Telkomsel operates its own DBPP for its employees. With this program, employees are entitled to retirement benefits calculated based on their latest basic salary or take-home pay and years of services. PT Asuransi Jiwasraya (Persero) manages this program under annuity insurance contracts. Up to 2004, employees would contribute 5% of their monthly basic salaries to the program, while Telkomsel would contribute the remaining balance. Since 2005, Telkomsel has contributed the entire amount to the program, which totaled Rp98 billion, Rp192 billion and Rp83 billion for 2014, 2015 and 2016, respectively.

b.                  DefinedContribution Pension Plan

 

We operate a DCPP for permanent employees other than Directors who were recruitedon orafter July 1, 2002. DCPP is managed by several appointed financial institutions pension fund from which employees can choose. Our contribution to the financial institutions pension fund is determined by the portion taken from participating employee’s basic salary, whichtotaled Rp6 billion, Rp7billion and Rp9 billion, for December 31,2014, 2015 and 2016, respectively.

To create a more effective and competitive business environment, we have implemented an Early Retirement Program. The Early Retirement Program is run in line with the implementation of the 2016 to 2020 Human Capital Master Plan under which we expect to release 985 employees. This program is offered to employees who are deemed to have met certain requirements in terms of education, age, position and performance. In 2016, we spent Rp628 billion as compensation for 382 employees who participated in the Early Retirement Program.

 

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Management of Employee Relations

 

Pursuant to Presidential Decree No.83/1998 regarding Ratification of ILO Convention No.87/1948regarding Freedom of Association and Protection of the Right Organize,our employees established SEKAR. As of December 31, 2016, SEKARrepresented a total of14,472 employees or89.9% ofour totalworkforce (excluding the employees of our subsidiaries).

 

Pursuant to Law No.13/2003 regarding Manpower and Regulation of the Minister of Manpower and Transmigration No.PER.16/2011 concerning Procedures, Preparation and Ratification of Company Regulations and Preparation and Registration of Collective Work Agreement, SEKAR is entitled to represent employees in the negotiation of collective work agreements with our management. Our Company and SEKAR entered into a sixth collective work agreement dated September 18, 2015 (the "Sixth CWA"), which has been ratified by the Ministry of Manpower and Transmigration. The Sixth CWA is in effect for a period of two years.

The employees of Telkomsel and PT Infomedia Nusantara have also established employees’ unions. As of December 31, 2016, the Telkomsel Workers’ Union (Serikat Pekerja Telkomselor SEPAKAT) represented a total of 3,929 Telkomsel employees or 75.7% of Telkomsel’s total employees. Neither we nor our subsidiaries have experienced material labor action.

 

E.                                        SHARE OWNERSHIP

 

As of February 28, 2017, none of our Commissioners, Directors or Senior Managers beneficially owned more than 1.0% of our outstanding shares of common stock. For information regarding share ownership of our Commissioners, Directors and Senior Management, see Item 7 “Major Shareholders and Related Party Transactions — Major Shareholders.”

 

Employee Stock Ownership Program

 

The Employee Stock Ownership Program (“ESOP”) is an employee-owner scheme that provides our employee with an ownership interest in our Company. At our initial public offering on November 14, 1995, a total of 116,666,475 shares were issued to 43,218 employees. On June 14, 2013, we transferred a portion of our treasury stock to our employees as part of the 2012 annual incentives. On such date, 59,811,400 (equal to 299,057,000 shares after stock split) shares of common stock were transferred to 24,993 employees with a total fair value of Rp661 billion. As of March 21, 2016, 110,256,210 of our shares were owned by 14,373 of our employees and our retirees. In 2014, 2015, and 2016, we did notexercise any ESOP. We also provide our Commissioners (except for Independent Commissioners) and Directors with long-term incentives in the form of shares. See “Compensation — Compensation of Commissioners and Directors”.

 

Stock Split and Depositary Receipt Ratio

 

At our GMS on April 19, 2013, a stock split with a ratio of 1:5 was approved by our shareholders. New shares of common stock were deposited into shareholders accounts on September 2, 2013 as part of the stock split. In connection with our stock split, effective September 3, 2013, we changed the ratio of our ADSs from one ADS representing 40 shares of common stock, par value Rp250 per share, to one ADS representing 200 shares of common stock, par value Rp50 per share.

 

OnOctober 26, 2016,we changed the ratio of our ADSs from one ADS representing 200 shares of common stock, par value Rp50 per share, to one ADS repres