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with efect from October 3, 2014, and migrated Flexi subscribers to Telkomsel. We terminated our Flexi
service on May 31, 2015.
As part of our continuing development of our TIMES business, we continue to seek to develop businesses
through which we also provide content to our telecommunications subscribers. We do not yet
have substantial experience as a content provider therefore we cannot assure you that we will be able
to efectively manage the growth of this business.
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 afect our business, inancial condition, results of operations
and prospects.
Our satellites have limited operational life they may be damaged or destroyed during in-orbit operation
or sufer launch delays or failures. The loss or reduced performance of our satellites, whether caused by
equipment failure or its license being revoked, may adversely afect our inancial condition, results of
operations and ability to provide certain services
Our Telkom-1 and Telkom-2 satellites have a limited operational life, currently estimated to end
approximately in 2015 and 2020, respectively. A number of factors afect 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.
Moreover, International Telecommunication Union “ITU” regulations specify that a designated
satellite slot 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 satellite slot, in the event our Telkom-1 and Telkom-2 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 satellite slot 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-3
Satellite System. However, due to a launch failure in August 2012, the Telkom-3 satellite ended up in an
unusable orbit. Although we had fully insured the cost of the satellite, the loss of the Telkom-3 satellite
will require us to lease transponder capacity from a thirdparty provider to fulill our commitments
to our satellite operations customers, with likely lower margins than we would have received from
the use of Telkom-3 had it been successfully launched. We have entered into a contract for the
construction of a replacement satellite, the Telkom- 3S, which is currently planned for launch in late
2016, and another contract for the procurement of a Telkom-4 satellite, which is currently planned for
launch around the end of 2017, as a replacement for Telkom-1. Although the Telkom-1 satellite may still
be operational for several years after the end of its currently estimated operational lifespan in 2015, if
there is any delay in the development and launch of the Telkom-3S andor Telkom-4 satellites, or if
the operational life of the Telkom-1 satellite ends before the Telkom-3S andor Telkom-4 satellites are
successfully launched, or damage or failure renders our existing satellites unit 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 thirdparty provider may also result
in service interruptions andor 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 afect our business, inancial condition and results
of operations.
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2. financial risks
We are exposed to interest rate risk Our debt includes bank borrowings to inance our
operations. Where appropriate, we seek to minimize our interest rate risk exposure by entering into
interest rate swap contracts to swap loating interest rates for ixed interest rates over the duration of
certain borrowings. However, our hedging policy may not adequately cover our exposure to interest
rate luctuations and this may result in a large interest expense and an adverse efect on our business,
inancial condition and results of operations.
Changes in the economic situation in the United States, including improvement or expectations
of improvement in the U.S. economy, 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 efort 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 rose six times
between June 2013 and November 2014 to 7.75 before decreasing to 7.50 in February 2015, 7.25
in January 2016, and 7.00 in February 2016. The increases of Bank Indonesia reference rate in 2013
and 2014 were followed by increases in the JIBOR and Bank Indonesia Certiicate “SBI” interest rates.
There can be no assurance that the Bank Indonesia reference rate, JIBOR or SBI rate 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 afected and may continue to afect our inancial 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 US Dollars. Most of our revenues are denominated in
Indonesian Rupiah and a portion is denominated in US Dollars for example from international
services. We may also incur additional long- term indebtedness in currencies other than the
Indonesian Rupiah, including the US Dollars, to inance further capital expenditures.
The exchange rate of Indonesian Rupiah to the US Dollar has been highly volatile from time to
time in the past. Although we have a inancial 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 three to twelve months, we can give
no assurance that we will be able to manage our exchange rate risk successfully or that our business,
inancial condition or results of operations will not be adversely afected by our exposure to exchange
rate risk.
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, 2013, 2014 and 2015,
our consolidated capital expenditures totaling Rp24,898 billion, Rp24,661 billion, and Rp26,401
billion US1,915 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 inancial, business and other factors, many of which are beyond our control, and upon our
ability to obtain additional external inancing. We cannot assure you that additional inancing will be
available to us on commercially acceptable terms, or at all. In addition, we can only incur additional
inancing in compliance with the terms of our debt agreements. Accordingly, we cannot assure you that
we will have suicient 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 efect on our
business, inancial condition, results of operations and prospects.
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3. legal and Compliance risks
If we are found liable for price ixing by the Indonesian Anti-Monopoly Committee and for
class action allegations, we may be subjected to substantial liability which could lead to a decrease
in our revenue and afect our business, reputation and proitability
The Company, Telkomsel and seven other local operators are being investigated by The Commission
for the Supervision of Business Competition “Komisi Pengawasan Persaingan Usaha” or “KPPU” for
allegations of SMS cartel practices. As a result of the investigations on June 17, 2008, KPPU found that
the Company, Telkomsel and certain operators had violated Law No.5 year 1999 article 5 and charged
the Company and Telkomsel in the amounts of Rp18 billion and Rp25 billion, respectively.
Management believes that there are no such cartel practices that led to a breach of prevailing
regulations. Accordingly, the Company and Telkomsel iled an appeal with the Bandung
District Court and South Jakarta District Court on July 14, 2008 and July 11, 2008, respectively.
Due to the iling of the case by operators in various courts, the KPPU subsequently requested
the Supreme Court to consolidate the cases into the Central Jakarta District Court. Based on the
Supreme Court’s decision letter dated April 12, 2011, the Supreme Court appointed the Central Jakarta
District Court to investigate and resolve the case. On May 27, 2015, the Central Jakarta District Court
accept the objections of the Company and Telkomsel to annul the decision overturned the verdict that
has been issued by the Commission. By decision of the Central Jakarta District Court, the Commission
has now iled a cassation to the Supreme Court.
There can be no assurance that other subscribers, people, or partners will not ile similar cases in the
future, or that we would not be subject to adverse verdicts which could have an adverse efect on our
business, reputation and proitability. 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 in “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.
4. regulation risks
We operate in a legal and regulatory environment that is undergoing signiicant 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 efect
on us.
Reformation in Indonesian telecommunications regulation 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
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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 tarifs to connect to our network. As regulated by the MoCI,
although SMS interconnection rates as a result of ITRB No.60BRTIIII2014 and No.125BRTIIV2014
increased from Rp23 to Rp24, efective April 2014, through December 31, 2016, SMS interconnection
rates have been decreasing prior to that in recent years and may decrease again in the future.
The termination of Telkomsel’s premium SMS services from October 2011 as a result of MoCI
Regulation No.1PERM.KOMINFO012009 resulted in a substantial reduction in our revenues
from these services. These services were resumed by Telkomsel from August 6, 2013 as allowed under
MoCI Regulation No.21 year of 2013 dated July 26, 2013, regarding the Operation of Content Provider
Services on Mobile Cellular Network and Local Fixed Wireless Network with Limited Mobility, as
last amended by MoCI Regulation No.6 of 2015, which replaced MoCI Regulation No.1PERM.
KOMINFO012009. However, pursuant to the new decree, premium SMS service providers are required
to meet stricter requirements that are more diicult to comply with. Accordingly we do not expect
revenues from premium SMS services to return to levels seen prior to October 2011.
In the future, the Government may announce or implement other regulatory changes which
may adversely afect our business or our existing licenses. We cannot assure you that we will be
able to compete successfully with other domestic and 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 promulgated by the Government will not have a material adverse efect
on our business and operating results. The entry of additional Indonesian
telecommunications operators as providers of international direct dialing services could adversely
afect our international telecommunications services operating margins, market share and results of
operations
We obtained a license and entered the international long-distance service market in 2004 and acquired
a signiicant market share for IDD services by the end of 2006. Indosat, one of our primary
competitors, entered this market prior to us and continues to maintain a substantial market share
for IDD services. Bakrie Telecom was awarded an IDD license in 2009 to provide international long
distance service using the “009” access code. There is a possibility that other operators will be
granted IDD licenses in the future. The operations of incumbents and the entrance of new operators into
the international long-distance market, including the VoIP services provided by such operators as well
as smartphone-based VoIP applications, continue to pose a signiicant competitive threat to us. We
cannot assure you that such adverse efects will not continue or that such increased competition will not
continue to erode our market share or adversely afect our ixed telecommunications services
operating margins and results of operations.
We face risks related to the opening of new long distance access codes
In an attempt to liberalize DLD services, the Government issued regulations assigning each
provider of DLD services a three-digit access code to be dialed by customers making DLD calls. In 2005,
the MoCI announced that a three-digit access code for DLD calls will be implemented gradually within
ive years and that it would assign us the “017” DLD access code for ive major cities, including Jakarta,
and allow us to progressively extend it to all other area codes. Indosat was assigned “011” as its DLD
access code. We were required to open DLD access codes in all remaining areas on September 27, 2011,
by which date our network was ready to be opened up to the three-digit DLD access code in all coded
areas throughout Indonesia.
