When Cash Costs Outgrow Revenue, the EBITDA Loop Breaks
Telkom Indonesia's first quarter of 2015 told a clean story: healthy double-digit revenue and profit growth, with the only real wrinkle buried inside a single segment's depreciation line. The second quarter - the three months ended June 30, 2015 - looks clean on the same two headline lines: revenue grew 13.2% year-over-year to Rp25,224 billion, and operating profit grew 7.3% to Rp7,675 billion. But one metric breaks the pattern entirely: Adjusted EBITDA» was Rp11,370 billion, functionally unchanged from Rp11,369 billion a year earlier - a 45.1% EBITDA margin this quarter versus 51.0% a year ago, a nearly six-percentage-point compression.
The usual telecom-business loop is straightforward: more subscribers and usage generate more revenue, and because the network is mostly built already, each incremental rupiah of revenue should fall through to EBITDA at a high rate - operating leverage compounding in the company's favor. That loop broke this quarter. Cash operating costs - operations, maintenance and telecommunication service expenses plus personnel expenses, the two lines that actually consume cash rather than just being non-cash depreciation - grew a combined 40.9% year-over-year (from Rp8,069 billion to Rp11,367 billion for those two lines alone, before adding interconnection, G&A and marketing), more than three times the 13.2% revenue growth rate. Depreciation and amortization actually fell 12.3% year-over-year (Rp4,215 billion to Rp3,695 billion) now that last quarter's Flexi impairment charge has rolled off (see Beyond the Usual), so the margin story this quarter isn't a one-off write-down the way Q1's was - it's the underlying cash cost base growing faster than the business generating it.
The Prescription
Telkom should treat this quarter's cash-cost growth as a line-item problem to solve now, not a trend to explain away next quarter. The footnotes show real, identifiable one-off and volume-driven pressure inside personnel and operations expense (see Beyond the Usual) - not a structural repricing of the business. Isolating and reporting the one-off charges separately, the way the Company already does for restructuring provisions elsewhere in its disclosures, would let a reader see whether the underlying cost base is actually growing in line with revenue or not - right now the consolidated numbers blend a genuine one-off with what may or may not be a real trend, and a reader can't tell which from the outside.
What it should stop doing: letting Corporate - the segment that did the most to offset Personal's margin weakness last quarter - become the drag this quarter without comment. Corporate's segment margin fell from 38.1% to 29.3% year-over-year even as its revenue grew a healthy 11.4%, the steepest margin decline of any segment this quarter (see Segment Comparison). A segment that was the star of the previous quarter's story shouldn't quietly become this quarter's weak point without the filing calling out why - the segment note discloses the numbers but never explains the shift, and a reader following the company quarter to quarter deserves at least a directional explanation.
Key Financial Metrics
Q2 2015 (three months ended Jun 30, 2015) vs Q2 2014, consolidated
FX: Rp13,342 = US$1 (Jun 30, 2015) and Rp11,885 = US$1 (Jun 30, 2014) - approximate quoted market rates for each date, used only to convert the USD columns below; like last quarter, this filing doesn't itself disclose a period-end rate the way some Indonesian filers do. Telkom's interim filings report cumulative six-month results rather than a discrete second-quarter statement, so every standalone Q2 figure below is derived by subtracting the already-reported Q1 2015 and Q1 2014 figures (see the prior post for the Q1 source numbers) from this filing's six-month totals for 2015 and 2014 respectively - the same arithmetic applies to the segment table further down.
| Metric | Q2 2015 (Rp) | Q2 2015 (US$) | Q2 2014 (Rp) | YoY (Rp) | YoY (US$) |
|---|---|---|---|---|---|
| Revenue | Rp25,224B | ~$1,890.6M | Rp22,292B | ✅ +13.2% | ➖ +0.8% |
| Adjusted EBITDA» (operating profit + D&A) | Rp11,370B | ~$852.2M | Rp11,369B | ⚠️ +0.0% | ⚠️ -10.9% |
| Operating Income» | Rp7,675B | ~$575.3M | Rp7,154B | ✅ +7.3% | ⚠️ -4.4% |
| Net Income (profit for the period) | Rp5,471B | ~$410.1M | Rp5,210B | ✅ +5.0% | ⚠️ -6.5% |
| ...of which, attributable to owners of the parent | Rp3,633B | ~$272.3M | Rp3,701B | ⚠️ -1.8% | ⚠️ -12.6% |
| ...of which, attributable to non-controlling interests» | Rp1,838B | ~$137.8M | Rp1,509B | ✅ +21.8% | ✅ +8.5% |
| Free Cash Flow» (operating cash flow - capex) | Rp4,768B | ~$357.4M | Rp3,615B | ✅ +31.9% | ✅ +17.5% |
| Total Cash | Rp24,286B | ~$1,820.3M | not available | n/a | n/a |
Basic EPS was Rp37.00 this quarter, down 2.7% from Rp38.03 a year earlier - the one headline per-share number that actually declined, and it traces to the same split the net-income row shows. Consolidated net income grew 5.0%, but the profit attributable to Telkom's own shareholders fell 1.8%, because non-controlling interests» - overwhelmingly the outside 35% of Telkomsel not owned by Telkom - grew profit 21.8%. Telkomsel's mobile business (inside the Personal segment) had the strongest margin quarter of the three material segments this quarter (see Segment Comparison), and a disproportionate share of the resulting profit growth flowed to the minority shareholder sitting alongside Telkom in that subsidiary, not to Telkom's own stockholders. Total cash's year-over-year comparison isn't available this quarter - this filing's balance sheet only shows June 30, 2015 against December 31, 2014 and January 1, 2014 (all restated) as comparative dates, not June 30, 2014, so there's no filed same-date balance to compare against; sequentially, cash grew 19.7% from Rp20,282 billion at the end of Q1 2015.
Revenue and operating profit both grew at a healthy clip in rupiah terms again this quarter. What breaks the pattern is Adjusted EBITDA, flat year-over-year despite double-digit revenue growth - see Beyond the Usual for the specific cost lines driving it.
Key Operational Metrics
As with Q1, no investor presentation or press release was located for this quarter - only the filed six-month financial statements - so subscriber counts, ARPU», and minutes-of-usage data are not available for this specific post.
What the filing does disclose:
- Employee headcount: 25,259 as of June 30, 2015, essentially flat versus 25,284 at December 31, 2014 (-0.1%) and up slightly from 25,190 at the end of Q1 2015 (+0.3%) - headcount barely moved even as a new early-retirement charge hit the P&L this quarter (see Beyond the Usual), suggesting the charge is an accrual for benefits ahead of actual departures rather than a completed headcount reduction
- Capital expenditure (accrual basis, per the property-and-equipment and segment notes): Rp7,682 billion this quarter, up a modest 1.5% from Rp7,565 billion a year earlier
- Committed capital expenditure under signed vendor contracts: Rp16,879 billion (~$1.27B) as of quarter-end, up 13.8% from Rp14,837 billion at the end of Q1 2015
- Future minimum operating lease payments: Rp30,280 billion as lessee (essentially flat versus Rp30,379 billion at the end of Q1 2015), Rp4,901 billion as lessor
Segment Comparison
Telkom reports the same four segments as last quarter: Personal, Home, Corporate, and Others. Figures below are the external-revenue and segment-result view disclosed in the segment footnote, derived the same way as the consolidated numbers above (six-month total minus the already-reported Q1 figure).
| Segment | Revenue Q2 2015 | Revenue Q2 2014 | YoY | Segment Result Q2 2015 | Margin 2015 | Margin 2014 |
|---|---|---|---|---|---|---|
| Personal (mobile + fixed wireless) | Rp17,630B | Rp15,531B | ✅ +13.5% | Rp5,922B | ✅ 33.6% | 32.7% |
| Corporate (enterprise/wholesale/international) | Rp5,630B | Rp5,052B | ✅ +11.4% | Rp1,650B | ⚠️ 29.3% | 38.1% |
| Home (fixed-line, pay TV, data) | Rp1,875B | Rp1,592B | ✅ +17.8% | Rp15B | ⚠️ 0.8% | 7.5% |
| Others (building management) | Rp89B | Rp117B | ⚠️ -23.9% | Rp88B | 98.9% | 26.5% |
| Total segment | Rp25,224B | Rp22,292B | ✅ +13.2% | Rp7,675B | 30.4% | 32.1% |
The story here is close to a mirror image of Q1's segment table. Last quarter, Personal was the segment dragging the consolidated margin down (33.1% to 27.7%) while Corporate and Home both expanded margin sharply. This quarter, Personal's margin actually improved year-over-year (32.7% to 33.6%) - the one-off Flexi impairment that hit it in Q1 has rolled off (see Beyond the Usual) - while Corporate is now the segment losing the most margin (38.1% to 29.3%), and Home's already-thin Q1 margin (28.1%) collapsed further to a near-zero 0.8% this quarter. Only Others, a small building-management bucket that doesn't move the consolidated numbers, improved sharply.
Personal
The largest segment by scale (69.9% of external revenue) had its best relative quarter of the two on record: revenue grew 13.5% and margin improved 0.9 percentage points, a reversal from Q1's 5.4-point decline. With the Flexi wind-down's impairment charge no longer distorting the segment's depreciation line, the underlying mobile franchise inside Personal - overwhelmingly Telkomsel - is visible on its own terms for the first time in this two-quarter comparison, and it looks healthy. The same strength is what's driving the owners-versus-non-controlling-interests split flagged in Key Financial Metrics above, since Telkomsel's outside 35% shareholder captures a proportional share of this segment's improvement.
Corporate
The enterprise/wholesale/international aggregate grew revenue a healthy 11.4% but posted the steepest margin decline of any segment this quarter (38.1% to 29.3%) - a sharp reversal from being the standout margin-expander in Q1 (35.2% to 44.5% that quarter). The segment footnote discloses total segment expenses but doesn't break out which specific cost lines rose within Corporate specifically, so the cause can't be pinned to a single item the way Q1's Personal-segment impairment could be - only that the swing is real and, at 22.3% of this quarter's revenue, large enough to matter for the consolidated picture.
Home
Fixed-line, pay TV, and household data revenue grew a strong 17.8%, the fastest of any material segment, but segment profit collapsed to near breakeven (Rp15 billion on Rp1,875 billion of revenue, a 0.8% margin) versus an already-weak 7.5% margin a year earlier. This is now two consecutive quarters where Home's second-quarter profitability has been dramatically weaker than its first-quarter profitability (Q1 2015's margin was 28.1%, and the same pattern held in the year-ago comparison too) - too short a run to call a confirmed seasonal pattern with only two years of data, but a trend worth testing against Q3 and Q4 once those quarters are covered.
Beyond the Usual
A Rp727 Billion Early-Retirement Charge Landed Almost Entirely in This Quarter
The personnel-expense footnote shows a new line that didn't exist in the year-ago period: an "Early retirement program" charge of Rp844 billion for the six months ended June 30, 2015, versus zero a year earlier. Q1 2015's own personnel footnote already showed Rp117 billion of this charge, meaning Rp727 billion of it landed specifically in Q2 - the largest single driver of personnel expenses growing 43.7% year-over-year this quarter (Rp2,485 billion to Rp3,570 billion), well ahead of the segment or consolidated revenue growth rate. The filing doesn't narrate what triggered the program or how many employees it covers, but headcount barely moved this quarter (see Key Operational Metrics), suggesting the charge is an upfront accrual for future departures rather than a bill already reflected in a smaller headcount. This is one of the two concrete, quantifiable items behind this quarter's Adjusted EBITDA» stall flagged in the opening section above.
A Cluster of Network and IT Cost Lines All Spiked Together
Inside operations, maintenance and telecommunication service expenses (the other cash-cost line behind this quarter's flat EBITDA), three specific sub-items grew far faster than the segment average: cost of phone, SIM and RUIM cards jumped from Rp125 billion to Rp542 billion (+333.6%), leased lines and CPE costs from Rp154 billion to Rp428 billion (+177.9%), and cost of IT services from Rp47 billion to Rp404 billion (+759.6%) - all figures derived the same way as elsewhere in this post, by subtracting the already-reported Q1 amount from each line's six-month total. Individually these are smaller line items than personnel or core operations and maintenance costs, but together they moved by hundreds of billions of rupiah in a single quarter, and the filing gives no narrative explanation for why. Worth watching whether this is a one-quarter spike or the start of a genuine step-change in the cost base.
The Legacy Flexi Network's Remaining Book Value Hit Zero This Quarter
The property-and-equipment footnote closes the loop on Q1's biggest flag: as of June 30, 2015, the fixed-wireless (Flexi) cash-generating unit's remaining book value - assessed at Rp549 billion as of December 31, 2014 after a Rp805 billion impairment that year - has now been fully depreciated to zero, accelerated ahead of the network's scheduled wind-down by December 14, 2015. This is consistent with why depreciation and amortization actually fell year-over-year this quarter (see the opening section) even as cash costs rose: the one-off write-down cycle flagged last quarter is now complete, not still running.
The SMS Cartel Case Flagged Last Quarter Just Went Telkom's Way - But It's Not Over
Q1's post flagged a 2008-vintage SMS cartel allegation against Telkom, Telkomsel and several other operators that had shown no court movement since 2011. That changed this quarter: on May 27, 2015, the Central Jakarta District Court ruled in favor of Telkom, Telkomsel and the seven other operators named in the case. It isn't resolved, though - a subsequent-events note discloses that on July 23, 2015, the KPPU (Indonesia's business competition regulator) filed a cassation appeal to the Supreme Court challenging that ruling. Seven years in, the case has now produced its first substantive court decision, but it moves to a higher court rather than closing.
A New Rp7 Trillion Bond Issuance Pushed Total Debt Up 56% Since December
Telkom issued four new bond series (A through D, totalling Rp7,000 billion) on the Indonesia Stock Exchange on June 16, 2015, with proceeds received a week later on June 23, 2015, tenors stretching out to 2045 (a 30-year Series D note), and coupons between 9.93% and 11.00% per annum - proceeds earmarked for capital expenditure and, notably, merger and acquisition activity. Combined with the bonds and notes already outstanding, this pushed total debt from Rp23,452 billion at December 31, 2014 to Rp36,650 billion at June 30, 2015, a 56.3% increase in six months, and total debt's share of the capital structure rose from 25.7% to 35.5%. The Company discloses it remains compliant with all debt-covenant ratios (debt-to-equity below 2:1, EBITDA-to-finance-costs above 4:1) on both the new and existing bond series, but a state-owned incumbent that had been running with modest leverage taking on a 30-year bond in the same quarter its Adjusted EBITDA» stalled is a combination worth tracking, not just noting in passing.
Telkomsel's iPhone Commitment, Flagged Last Quarter, Hit Its Deadline This Quarter
The commitments footnote repeats the same Telkomsel-Apple agreement flagged in Q1's post: Telkomsel's minimum commitment to order and take delivery of at least 500,000 iPhone units running from July 2012. This quarter's filing states the deadline as "up to June 2015" - meaning the commitment period closed within this very quarter. The filing doesn't disclose whether the minimum volume was actually met, so this is a closed-out watch item rather than a resolved one.
Target Valuation Range
Bottom line: roughly Rp2,310-Rp4,260 fair-value range (bear-to-bull, EV/EBITDA-based) against a Rp5,860 actual close - the stock got more expensive on every multiple this quarter even as the underlying quarter got weaker on the metric that matters most (Adjusted EBITDA), a combination that argues for more caution than Q1's numbers already did, not less.
Telkom's shares closed at a split-adjusted Rp2,930 on June 30, 2015 on a historical price basis - as noted in the prior post, Telkom completed a 2-for-1 stock split in October 2016, so this historical close is stated on a post-split basis. Multiplying by 2 recovers the actual nominal price quoted on the Indonesia Stock Exchange that day: Rp5,860, up a modest 1.4% from Rp5,780 at the end of Q1 2015.
| Market cap → enterprise value | Q2 2015 (period-end) |
|---|---|
| Share price (period-end, nominal) | Rp5,860 |
| Shares outstanding (Series B, ex-treasury, unchanged) | 98,175,853,600 |
| Market capitalization | ~Rp575,311 billion (~$43.1 billion) |
| Plus: total debt | Rp36,650 billion |
| Less: cash | Rp24,286 billion |
| Enterprise value | ~Rp587,675 billion |
| Peer-multiple sanity check | Q1 2015 | Q2 2015 | Change |
|---|---|---|---|
| EPS (annualized) | Rp155.40 (×4, single-quarter) | Rp151.70 (×2, six-month actual) | ⚠️ down |
| P/E | ~37.2x | ~38.6x | ⚠️ up |
| Book value per share | ~Rp729.4 | ~Rp677.8 | ⚠️ down |
| P/B | ~7.93x | ~8.65x | ⚠️ up |
| Adjusted EBITDA (annualized) | Rp50,184 billion | Rp47,832 billion | ⚠️ down |
| EV/EBITDA | ~11.4x | ~12.3x | ⚠️ up |
Q2's P/E is a more reliable base than Q1's single-quarter-×4 estimate, since two real quarters of earnings are now available rather than one - and the multiple moved slightly higher despite a weaker EBITDA quarter. P/B rose as the modest price increase was set against a book value that fell slightly (Telkom's equity actually declined from Rp67,816 billion at year-end 2014, as retained earnings distributions and the dividend approved in Q1 outpaced this quarter's profit). EV/EBITDA rose as both the numerator (enterprise value, inflated by the new bond issuance) and a flat-to-lower EBITDA base pushed this multiple higher, and it now sits further above the mid-single-digit-to-high-single-digit range mature telecom operators have historically traded at.
The share price itself hasn't moved dramatically since Q1 - up just 1.4% quarter-over-quarter, well inside the roughly 40% trough-to-peak swing already described in the prior post over the same trailing two-year window, so there's no new price move here to explain. What changed is the denominator side of every multiple: EBITDA stalled while debt and the resulting enterprise value both grew. A full DCF still isn't included here - only two quarters of this company's real results are on file, still short of what a multi-year free cash flow projection needs. As in Q1's post, the table below applies a mature-telecom EV/EBITDA range to this quarter's annualized Adjusted EBITDA and the same net-debt bridge to back out an implied price per scenario:
| Scenario | Key assumption | Multiple | Implied EV | Implied price |
|---|---|---|---|---|
| Current (Q2 2015 close) | actual market price, for reference | ~12.3x annualized Adjusted EBITDA | ~Rp587,675 billion | Rp5,860 |
| Bear | Multiple compresses to the low end of the mature-telecom range as flat EBITDA, rising cash costs, and the new bond-funded leverage are read as a genuine structural shift, not a one-quarter blip | ~5x | ~Rp239,160 billion | ~Rp2,310 |
| Base | Multiple settles at the midpoint of the mature-telecom range once this quarter's early-retirement charge and cost spikes are understood as largely one-off, but the market still discounts for the higher post-bond-issuance debt load | ~7x | ~Rp334,824 billion | ~Rp3,285 |
| Bull | Multiple compresses only to the high end of the mature-telecom range, on the view that Personal's margin recovery this quarter offsets the cash-cost and leverage concerns elsewhere | ~9x | ~Rp430,488 billion | ~Rp4,259 |
Every scenario still implies real downside from the actual Rp5,860 close, and the whole range moved lower than Q1's (see Q1's table) because higher net debt this quarter eats into the same EBITDA-multiple math - the peer-multiple read, now richer on every measure than it was last quarter while the underlying quarter was weaker on Adjusted EBITDA specifically, is the more trustworthy signal for now, and it points toward more caution than Q1 already argued for.
Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk's unaudited consolidated financial statements as of June 30, 2015 and for the six months period then ended, reflecting subsequent events through at least July 23, 2015.