ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. OPERATING RESULTS Overview
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 the preferred digital telecommunications company in the region. As of December 31, 2020, we had approximately 169.5 million mobile cellular subscribers through Telkomsel, 9.1 million subscribers on our fixed wireline network, and 123.9 million broadband subscribers (consisting of 115.9 million mobile broadband subscribers and 8.0 million fixed broadband IndiHome 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.
The Indonesian gross domestic product increased by 5.07% annually on average between 2016 and 2019 but the gross domestic product suffered a 2.07% contraction in 2020, according to the Indonesian Central Bureau of Statistics (computed at constant market prices as at February 2021). This contraction in 2020 was mainly due to the negative impact of the COVID-19 pandemic and related containment measures. Inflation decreased from an average of 3.12% between 2016 and 2019 to 1.68% in 2020, according to the Indonesian Central Bureau of Statistics. A decrease in the inflation rate due to depressed demand could create deflationary pressure making it more difficult to stimulate economic growth, which in turn would affect our enterprise segment. Overall the decline in inflation did not materially affect our Company
.
The Rupiah depreciated from an average of Rp13,307 to one U.S. Dollar in 2016 to an average of Rp14,572 to one U.S. Dollar in 2020 and reached its lowest value against the U.S. Dollar in April 2020 at Rp16,741 to one U.S. Dollar, according to data from Bank Indonesia. Though the exposure of our Company and our subsidiaries to foreign exchange rates is not material, we are exposed to foreign exchange risk on sales, purchases and borrowings that are primarily denominated in U.S. Dollar and Japanese Yen.See "Item 11. Quantitative and Qualitative Disclosure about Market Risk – Foreign Exchange Rate Risk."
The growth in our revenues in 2020 compared with 2019 was largely driven by increases in revenues from data, internet, and information technology services that increased by 8.4% and from IndiHome that increased by 21.2%.
Our operating results in 2020 compared with 2019 also reflected an increase in expenses. This increase was mainly driven by an increase in depreciation and amortization expenses of 6.3% as a result of our infrastructure development to better serve our customers, particularly for internet and data services. The adoption of IFRS 16 (Amortization of Right-of-use Assets) also contributed to the increase in depreciation and amortization expense. See Note 14 to our Consolidated Financial Statements.
Key Performance Indicators
We use certain key performance indicators to monitor and manage our business. We use these indicators to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions. We believe these indicators provide useful information to investors in understanding and evaluating our operating results in the same manner we do. The key indicators that we use to evaluate the performance of our business are set forth below:
Number of Fixed Broadband Subscribers
We track the number of our broadband subscribers (e.g., our IndiHome subscribers) as an indicator of our competitiveness and ability to capture increased or new revenue streams in the future, as we expect an increase in the use of broadband internet at home, a further diversification of digital services offered to customers, and the development and continuation of megatrends that favor an increase in the consumption of digital services.
Number of Mobile Broadband Subscribers
We track the number of our mobile cellular subscribers (through Telkomsel) as an indicator of competitiveness and ability to capture growth opportunities generated by increased consumption of internet data and digital services on cellular phones.
Number of BTS
We track the number of our BTS as an indicator of the strength and the competitiveness of our network. It is also an indicator of our ability to capture growth opportunities.
Operating Profit
Operating profit is equal to total revenues, primarily comprising telephone revenues, data, internet, and information technology service revenues, network revenues, IndiHome revenues, and other revenues, and total expenses, mainly comprising operations, maintenance, and telecommunications service expenses, depreciation and amortization expenses, personnel expenses, marketing expenses, general and administrative expenses, interconnection expenses, and other expenses. Changes in those line-items have a direct impact on our operating profit and depend on a variety of factors, as further discussed below under "– Principal Factors Affecting our Financial Condition and Results of Operations."
Profit for the Year
Profit for the year is equal to operating profit minus finance costs, plus finance income, share of profit/loss of associated companies, minus income tax and impairment of long-term investments in associated companies.
Principal Factors Affecting our Financial Condition and 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 traffic in 2020.
However, ARPU slightly decreased from approximately Rp46,000 in 2019 to approximately Rp44,000 in 2020. This decrease in ARPU was mainly due to the negative impact of the COVID-19 pandemic on the overall Indonesian economy and our customers’ purchasing power which restricted their ability and/or willingness to purchase pricier packages.
The share of our revenue generated by data, internet, and information technology services revenues has been increasing in the last few years and accounted for 55.6% of our consolidated revenues for 2020. A key driver of this trend is the increase in revenue from cellular internet and data.
We expect that revenue from cellular internet and data will continue to increase and contribute to a larger portion of our consolidated revenues in line with an expected continued 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 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. In addition, we believe there is opportunity for growth in non-cellular internet, data communication and internet technology revenue, particularly through greater adoption of broadband internet at homes in Indonesia through our IndiHome service, as penetration of broadband internet at homes in Indonesia is still relatively low.
Increase in revenue generated by IndiHome
Since launch in 2015, the number of IndiHome subscribers has increased significantly. The number of IndiHome subscribers increased by 14.5% from 7.0 million subscribers in 2019 to 8.0 million subscribers in 2020. This increase drove an increase in revenue generated by IndiHome subscriptions.
We believe there is opportunity for further growth in revenue generated by IndiHome, particularly due to an increase in the use of broadband internet at home in Indonesia, as penetration of broadband internet at home in Indonesia is still relatively low. We seek to continue to increase such revenue as we continue to invest in improving our broadband infrastructure. We also continue to have promotions to encourage customers to buy various additional services, such as speed upgrades, additional set-top boxes, and the minipack package upgrade.
In addition, due to increased data consumption caused by the COVID-19 outbreak and containment measures implemented by the Government and companies, such as work-from-home or study-from-home initiatives, and increased consumption of digital services such as online shopping, revenue generated by IndiHome increased in 2020.
Declining Legacy 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 telecommunications services, such as Over The Top products including instant voice, messaging services and other mobile services. As a result, our cellular telephone revenues, which comprise usage charges and monthly subscription charges for mobile voice and SMS services, have flattened in recent years, and in 2017 began to decline. We expect that such revenues will continue to decline in the future.
Our cellular telephone revenues decreased by 30.4% from Rp27,907 billion in 2019 to Rp19,427 billion in 2020. 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 14.2% of our consolidated revenues for 2020 compared to 20.6% for 2019. See "Item 3 Key Information — Risk Factors — Risks Related to our Business — Risks Related to our Fixed and Cellular Telecommunications Business."
Variations in operation and maintenance expenses
Our operation and maintenance expenses primarily comprise expenses associated with network maintenance to improve our mobile cellular and fixed broadband services. In 2020, our operations and maintenance expenses decreased compared to 2019. We expect that our operation and maintenance expenses will remain relatively stable or increase slightly 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 operation and maintenance expenses decreased by 2.3%, from Rp20,417 billion in 2019 to Rp19,956 billion in 2020. This decrease was primarily due to more selective investments and delays in the incurrence of certain expenses related to projects delayed due to the COVID-19 pandemic.
Increase in Depreciation and Amortization Expenses
The telecommunications industry is characterized by rapid and significant changes in technology. Our technology can become obsolete faster than expected. We also need to acquire new technologies necessary to compete under rapidly evolving circumstances on commercially acceptable terms. In 2019, the adoption of IFRS 16 (Amortization of Right-of- use Assets) also contributed to the increase in depreciation and amortization expenses. See Note 14 to our Consolidated Financial Statements.
We expect depreciation and amortization expenses will increase in the future due to the development of our network for improving broadband services we provide for both mobile and fixed broadband.
Telkom's Consolidated Statements of Profit or Loss and Other Comprehensive Income
The following table sets out our Consolidated Statements of Profit or Loss and Other Comprehensive Income For the Years ended December 31, 2018, 2019 and 2020. Each item is expressed as a percentage of total revenues or expenses.
2018 2019 2020
(Rp billion) % (Rp billion) % (Rp billion) % (US$
million)
REVENUES
Telephone revenues
Cellular 34,338 26.3 27,907 20.6 19,427 14.2 1.383
Fixed line 3,304 2.5 3,000 2.2 2,183 1.6 155
Total telephone revenues 37,642 28.8 30,907 22.8 21,610 15.8 1,538
Interconnection revenues 5,462 4.2 6,290 4.6 7,686 5.6 547
Data, internet, and information technology service revenues
Cellular internet and data 41,036 31.4 52,858 39.0 59,502 43.6 4,235
Internet, data communication, and information technology
services 10,387 8.0 9,072 6.7 9,744 7.1 694
Short Messaging Service ("SMS") 9,298 7.1 6,954 5.1 4,817 3.5 343
Others 820 0.6 1,029 0.8 1,753 1.3 125
Total data, internet and information technology service
revenues 61,541 47.1 69,913 51.6 75,816 55.6 5,397
Network revenues 1,719 1.3 1,845 1.4 1,671 1.2 119
IndiHome revenues 12,728 9.7 18,325 13.5 22,214 16.3 1,581
Other services
Manage service and terminal 1,449 1.1 1,672 1.2 1,293 0.9 92
Call center service 1,052 0.9 799 0.6 845 0.7 59
E-health 563 0.4 523 0.4 549 0.4 39
E-payment 449 0.3 566 0.4 499 0.4 36
Sales of peripherals 1,852 1.4 1,109 0.8 0 0 0
Others 3,844 2.9 2,369 1.7 1,987 1.5 141
Total other services 9,209 7.0 7,038 5.2 5,173 3.8 368
Total revenues from contract with customer 128,301 98.1 134,318 99.1 134,170 98.3 9,550
Revenues from lessor transaction 2,487 1.9 1,239 0.9 2,277 1.7 162
Total revenues 130,788 100.0 135,557 100.0 136,447 100.0 9,712
EXPENSES
Operation, maintenance, and telecommunications service
expenses
Operation and maintenance 25,215 27.3 20,417 22.0 19,956 21.3 1,420
Radio frequency usage charges 5,473 5.9 5,736 6.2 5,930 6.3 422
Leased lines and CPE 5,125 5.6 4,709 5.1 3,353 3.6 239
Concession fees and USO charges 2,297 2.5 2,370 2.6 2,411 2.6 172
Electricity, gas, and water 1,051 1.1 1,102 1.2 946 0.9 67
Project Management 647 0.7 460 0.5 538 0.6 38
Cost of SIM cards and vouchers 866 0.9 645 0.7 487 0.6 35
Insurance 193 0.2 246 0.3 378 0.4 27
Vehicles rental and supporting facilities 413 0.4 386 0.4 334 0.4 24
Cost of sales of peripheral 1,860 2.0 1,109 1.2 57 0.1 4
Tower leases 480 0.5 — — — — —
Others 273 0.3 273 0.3 185 0.2 13
Total operation, maintenance, and telecommunications
service expenses 43,893 47.5 37,453 40.2 34,575 36.9 2,461
Depreciation and amortization 21,442 23.3 27,204 29.3 28,925 30.9 2,059
Personnel expenses
Salaries and related benefits 8,077 8.8 7,945 8.6 8,272 8.8 589
Vacation pay, incentives, and other benefits 3,292 3.6 3,538 3.8 4,321 4.6 308
Pension benefit cost 1,120 1.2 840 0.9 804 0.9 57
LSA expense 161 0.2 290 0.3 290 0.3 21
Obligation under the Labor Law 113 0.1 136 0.1 258 0.3 18
Net periodic post-employment health care benefit cost 335 0.4 167 0.2 253 0.3 18
Other post-employment benefit cost 32 0.0 33 0.0 81 0.1 6
Long service benefit cost — — — — 53 0.1 4
Others 48 0.1 63 0.1 58 0.1 4
2018 2019 2020 (Rp billion) % (Rp billion) % (Rp billion) %
(US$
million)
Marketing expenses 4,001 4.3 3,416 3.7 3,482 3.7 248
General and administrative expenses
Allowance for expected credit losses 2,208 2.4 1,899 2.0 2,344 2.5 167
General expenses 1,792 1.9 1,651 1.8 1,805 1.9 128
Professional fees 823 0.9 793 0.9 981 1.0 70
Training, education, and recruitment 463 0.5 461 0.5 308 0.3 22
Travelling 415 0.5 410 0.4 275 0.3 20
Social contribution 181 0.2 200 0.2 223 0.2 16
Collection expenses 157 0.2 176 0.2 193 0.2 14
Meeting 233 0.3 276 0.3 184 0.2 13
Others 322 0.3 341 0.4 251 0.3 18
Total general and administrative expenses 6,594 7.2 6,207 6.7 6,564 7.0 467
Interconnection expenses 4,283 4.6 5,077 5.5 5,406 5.8 385
Gains (losses) on foreign exchange - net 71 0.1 (89) (0.1) (86) (0.1) (6)
Other income - net 1,065 1,2 895 1.0 939 1.7 66
Total expenses 92,202 100.0 92,901 100.0 93,497 100.0 6,655
Operating profit 38,533 43,994 43,958 3,128
Finance income 1,014 1,095 799 57
Finance costs (3,523) (5,452) (4,602) (328)
Share in profit (loss) of associated companies - net 53 (166) (245) (17)
Impairment of long-term investment in associated
companies — (1,172) (763) (54)
Profit before income tax 36,077 38,299 39,147 2,786
Income tax (expense) benefit (9,366) (10,439) (9,257) (659)
Profit for the year 26,711 27,860 29,890 2,127
Other comprehensive income (losses) - net 4,954 (2,189) (3,581) (255)
Total comprehensive income for the year 31,665 25,671 26,309 1,872
Profit for the year attributable to owners of the parent
company 17,802 19,068 21,052 1,498
Total comprehensive income for the year attributable to
owners of the parent company 22,631 17,029 17,840 1,270
Basic and diluted earnings per share (in full amount)
Profit per share 179.71 192.49 212.51 0.02
Profit per ADS (100 Series B Shares per ADS) 17,970.52 19,248.51 21,251.29 1.51
Please note that the above table should be read in conjunction with the below discussion on comparability of financial information of and for the financial years ended December 31, 2019 and 2018. See "— New Standards and Interpretations."
Financial Overview
Year ended December 31, 2020 compared to year ended December 31, 2019 Revenues
Total revenues increased by Rp890 billion, or 0.7%, from Rp135,557 billion in 2019 to Rp136,447 billion (US$9,712 million) in 2020. This increase was primarily due to an increase in data, internet and information technology service revenues, IndiHome revenues, and interconnection revenues but was partially offset by a decrease in cellular telephone revenues, SMS revenues and other revenues.
a. Cellular Telephone Revenues
Cellular telephone revenues represented 14.2% of our consolidated revenue in 2020. Cellular revenues decreased by Rp8,480 billion, or 30.4%, from Rp27,907 billion in 2019 to Rp19,427 billion (US$1,383 million) in 2020. This decrease was primarily due to a decrease in usage of voice services because customers increasingly choose to use non- traditional telecommunications services, such as Over the Top services, as an alternative to voice services.
b. Fixed Line Telephone Revenues
Fixed line telephone revenues decreased by Rp817 billion, or 27.2%, from Rp3,000 billion in 2019 to Rp2,183 billion (US$155 million) in 2020. This decrease in fixed line telephone revenues was primarily due to a decrease in voice service usage due to competing other cellular services.
c. Interconnection Revenues
Interconnection revenues comprise interconnection revenues from our fixed line network and interconnection revenues from Telkomsel's mobile cellular network, including incoming international long-distance revenues from our IDD service (TIC-007).
Interconnection revenues increased by Rp1,396 billion, or 22.2%, from Rp6,290 billion in 2019 to Rp7,686 billion (US$547 million) in 2020, primarily due to an increase in voice wholesale traffic between countries and SMS A2P (application to person) services.
d. Data, Internet and Information Technology Service Revenues
Our data, internet and information technology service revenues accounted for 55.6% of our consolidated revenues in 2020, compared to 51.6% in 2019. Data, internet and information technology service revenues increased by Rp5,903 billion, or 8.4%, from Rp69,913 billion in 2019 to Rp75,816 billion (US$5,396 million) in 2020. This increase was primarily due to:
• an increase in cellular internet and data revenues by Rp6,644 billion, or 12.6%, from Rp52,858 billion in 2019 to Rp59,502 billion in 2020. This increase was primarily driven by an increase in mobile broadband subscribers from 110.3 million subscribers as of December 31, 2019 to 115.9 million subscribers as of December 31, 2020. The increase in such revenues also reflected increased mobile traffic data due to the impact of COVID-19 on customers' habits (for instance increased use of digital services). For additional information on factors driving the growth of our cellular internet and data revenues, see "— Principal Factors Affecting our Financial Condition and Results of Operations — Increase in Data, Internet, and Information Technology Services;"
• an increase in other data and internet revenues by Rp724 billion, or 70.4%, from Rp1,029 billion in 2019 to Rp1,753 billion in 2020, primarily due to an increase in volume of collocation data center and value added services; and
• an increase in internet, data communication and information technology service revenues by Rp672 billion, or 7.4%, from Rp9,072 billion in 2019 to Rp9,744 billion in 2020, primarily due to an increase in volumes of enterprise solutions services such as enterprise connectivity and IT services.
Such increases were partially offset by a decrease in SMS revenues of Rp2,137 billion, or 30.7%, from Rp6,954 billion in 2019 to Rp4,817 billion in 2020. This decrease was primarily due to increased competition from non-traditional telecommunications services, such as Over The Top products including instant voice, messaging services and other mobile services.
e. Network Revenues
Network revenues decreased by Rp174 billion, or 9.4%, from Rp1,845 billion in 2019 to Rp1,671 billion (US$119 million) in 2020, primarily due to a decrease in leased lined and VSAT revenue from the enterprise segment due to lower demand as a consequence to the COVID-19 pandemic.
f. IndiHome Revenues
IndiHome revenues increased by Rp3,889 billion, or 21.2%, from Rp18,325 billion in 2019 to Rp22,214 billion (US$1,581 million) in 2020. The increase was primarily due to an increase in the number of fixed broadband subscribers from 7.0 million as of December 31, 2019 to 8.0 million as of December 31, 2020. Data traffic of IndiHome increased from 13.7 million terabytes in 2019 to 24.5 million terabytes in 2020. The increase in such revenues also reflected increased mobile traffic data due to the impact of COVID-19 on customers' habits (for instance increased use of digital services and more generally the internet during periods customers studied or worked from home).
g. Other Services
In 2020, revenues from other services decreased by Rp1,865 billion, or 26.5%, from Rp7,038 billion in 2019 to Rp5,173 billion (US$368 million) in 2020. The decrease was primarily due to:
• a decrease in revenues from sales of peripherals by Rp1,109 billion, or 100.0%, from Rp1,109 billion in 2019. This decrease was in line with our business strategies to adapt our product mix so as to reduce the share of our revenue sourced from the sale of lower margin products such as hardware products. We were also more selective in terms of our partners' portfolio and ceased sales to certain partners whose creditworthiness we had found questionable;
• a decrease in others revenues by Rp382 billion, or 16.1%, from Rp2,369 billion in 2019 to Rp1,987 billion in 2020, primarily due to a decrease in sales of device and construction revenue from TelkomInfra; and
• a decrease in management service and terminal revenues by Rp379 billion, or 22.7%, from Rp1,672 billion in 2019 to Rp1,293 billion in 2020, primarily due to a decrease in management service revenues from the enterprise segment due to delayed projects as a consequence of the COVID-19 pandemic. This decrease was also in line with our business strategy to adapt our product mix so as to reduce the share of our revenue sourced from the sale of lower margin products such as hardware products.
h. Revenues from Lessor Transactions
Revenues from lessor transaction increased by Rp1,038 billion or 83.8% from Rp1,239 billion in 2019 to Rp2,277 billion (US$162 million) in 2020. This increase resulted primarily from increased rental revenues from the telecommunication towers, which reflected an increase in the number of tenants.
Expenses
Total expenses increased by Rp596 billion, or 0.6%, from Rp92,901 billion in 2019 to Rp93,497 billion (US$6,655 million) in 2020. This increase in expenses was attributable primarily to increases in depreciation and amortization.
a. Operation, Maintenance, and Telecommunications Service Expenses
Operation, maintenance, and telecommunications service expenses decreased by Rp2,878 billion, or 7.7%, from Rp37,453 billion in 2019 to Rp34,575 billion (US$2,461 million) in 2020.
This decrease in operation, maintenance and telecommunications service expenses was primarily attributable to:
• a decrease in leased line and CPE expenses by Rp1,356 billion, or 28.8%, from Rp4,709 billion in 2019 to Rp3,353 billion in 2020, in line with the decrease in network revenue and also as a result of the