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Edited Transcript of TLKM.JK earnings conference call or presentation 5-Nov-19 8:00am GMT

Q3 2019 Telekomunikasi Indonesia (Persero) Tbk PT Earnings Call

Bandung Nov 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Telekomunikasi Indonesia (Persero) Tbk PT earnings conference call or presentation Tuesday, November 5, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andi Setiawan

Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk - VP of IR & Corporate Secretary

* Harry Mozarta Zen

Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk - Director of Finance, CFO & Director

* Heri Supriadi

PT Telekomunikasi Selular - Director of Finance and Director

* Rachel Goh

Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk - CMO

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Conference Call Participants

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* Arthur Pineda

Citigroup Inc, Research Division - Director and Head of Pan-Asian Telecommunications Research

* Choong Chen Foong

CIMB Research - Analyst

* Colin McCallum

Crédit Suisse AG, Research Division - MD

* Kresna P. Hutabarat

PT Mandiri Sekuritas, Research Division - Analyst

* Piyush Choudhary

HSBC, Research Division - Telecoms Analyst, South East Asia

* Ranjan Sharma

JP Morgan Chase & Co, Research Division - Analyst

* Siward Ludin

Goldman Sachs Group Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Telkom's 9 Months of 2019 Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker for today, Mr. Andi Setiawan. Thank you. Please go ahead.

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Andi Setiawan, Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk - VP of IR & Corporate Secretary [2]

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Thank you. Ladies and gentlemen, welcome to PT Telkom Indonesia Conference Call for the 9 months of 2019 results. We released our 9 months 2019 results on 30th of October 2019, and the reports are available on our website at www.telkom.co.id. Today's presentation is available on the webcast and an audio recording will be provided after the call for the next 7 days. There will be an overview from our CFO. And after that, all participants are given an opportunity to participate in the Q&A session.

Before we start, let me remind you that today's call and the response to questions may contain forward-looking statements within the meaning of safe harbor. Actual results could differ materially from projections, estimations or expectations voiced during today's call. This may involve risk and uncertainty and may cause actual results to differ substantially from what we discussed in this call. Telkom Indonesia does not guarantee to any actions which may have been taken in reliance of the discussion held today.

Ladies and gentlemen, it's my pleasure to introduce the Telkom's Board of Directors who are joining with us today. Mr. Harry M. Zen as Finance Director; Mr. Zulhelfi Abidin as Network & IT Solutions Director; Mr. Edwin Aristiawan as Wholesale and International Service Director. Ms. Siti Choiriana as Consumer Service Director; and Mr. Edi Witjara as Human Capital Management Director. Also present are the Board of Directors of Telkomsel; Ms. Emma Sri Martini as President Director; Mr. Heri Supriadi as Finance Director; and Ms. Rachel Goh as Marketing Director.

I now hand over the call to our CFO, Mr. Harry M. Zen, for his overview. Mr. Harry.

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Harry Mozarta Zen, Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk - Director of Finance, CFO & Director [3]

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Thanks, Andi. Good afternoon, everybody. Welcome to our conference call for the 9 months of 2019 results. We really appreciate your participation in this call. For the 9 months of 2019, our fixed broadband product, IndiHome became a stronger engine of growth as its profitability improved whilst mobile industry continues to grow positively, reflecting more sustainable and higher quality revenue on the back of strong growth in data traffic in line with 4G network quality and coverage expansion.

In the meantime, our enterprise business experienced a slowdown as we deliberately reduce our exposure on low-margin products, coupled with seasonality characteristic of the business.

For the 9 months of 2019, Telkom managed to book 3.5% year-on-year growth in revenue to IDR 102.6 trillion, while EBITDA grew by 11.4% as the result of declining operating expenses by 3.1% year-on-year.

Net income increased by 15.6% year-on-year. Fixed broadband business through IndiHome became the growth driver, continuing its strong performance with revenue growth of 52.1% year-on-year. While in the mobile business, Telkomsel's digital business growth successfully compensates legacy business decline so that in 9 months of 2019, Telkomsel's revenue still increased by 3.9% year-on-year.

Ladies and gentlemen, during 9 months of 2019, our fixed broadband, IndiHome, posted a remarkable performance. IndiHome added 511,000 new subscribers during third quarter of 2019 to reach 6.51 million subscribers by the end of September this year.

IndiHome's ARPU in third quarter of 2019 was IDR 256,000, slightly lower from IDR 260,000 in the previous quarter due to a larger proportion of Dual Play customer compared to Triple Play customers.

At the end of September 2019, IndiHome's Dual Play customers represented around 53% of total subscribers. In the 9 months of 2019, IndiHome contributed IDR 13.7 trillion of revenue or jumped 52.1% year-on-year. In line with bigger scale and better operating efficiency, IndiHome's EBITDA margin have reached above 30% and getting closer to global standard of around 35%.

In an effort to further lift revenue from IndiHome, we continue to encourage our customers to purchase various add-on services, such as speed upgrade, upsell to Triple Play service, subscribe to Minipack's packages and add additional set-top box. These add-ons contributed to around 12.1% of total IndiHome revenue in 9 months of 2019 as compared to 10.5% in the 9 months of 2018.

Ladies and gentlemen, on the mobile side, digital business through provision of high-quality broadband connectivity and a variety of digital services became the main growth engines. We successfully grew revenue from digital business significantly by 27.9% to IDR 43.1 trillion, driven by 27.4% increase in data to IDR 37.4 trillion and 31.2% increase in digital services to IDR 5.7 trillion.

Digital business accounted for 63.1% of total Telkomsel's revenue, increased significantly from 51.3% for the same period a year ago.

Telkomsel's legacy business still declined due to the natural transition from legacy towards data together with OTT service cannibalization impact. Telkomsel's voice revenue declined by 19.1%, while SMS revenue dropped by 38.6% year-on-year.

Personalized marketing initiatives, which offer better value packages and attractive combo of voice and data packages have been successful to alleviate the downtrend of legacy business.

Overall, Telkomsel's financial and business performance in 9 months of 2019 were solid, recorded revenues, EBITDA and net income growth of 3.9%, 6.2% and 5% to IDR 68.3 trillion, IDR 36.8 trillion and IDR 19.2 trillion, respectively.

EBITDA margin improved by 1.1 percentage point to 53.8% as operating expenses only grew by 1.4% to IDR 31.5 trillion. Effective marketing campaign along with customer retention initiatives and successful prepaid SIM card registration program have lowered churn to around 6% to 7% from around 11% to 12% last year and shifted customers' behavior towards top-up oriented. Telkomsel recorded 170.9 million subscribers at the end of September 2019, a modest 1.9% increase year-on-year.

Telkomsel expects ongoing natural cleansing to continue in response to prepaid registration -- SIM registration policy. The policy, however, has brought positive results in terms of better quality customer base, higher numbers of active subscribers, increased ARPU as well as more efficient SIM card production cost and marketing programs. It will continue to have a long-term positive impact and support the emergence of healthier competition in the industry.

To maintain and strengthen our network quality and coverage to grow our digital business, we deployed more than 20,800 new BTSs during 9 months of 2019. All were 4G-based. By end of September 2019, Telkomsel's on-air BTS totaled around 210,000 units, 76% of which were 3G and 4G BTSs. Our data traffic increased by 55.2% year-on-year with 112.1 million of data users and monthly data consumption of more than 5 gigabytes.

Ladies and gentlemen, in line with our strategy, shifting to focus on more profitable products. Our enterprise segment experienced a slowdown. It decreased by IDR 3.8 trillion or 20.7% year-on-year to IDR 14.9 trillion in revenue.

Enterprise legacy voice IT service device handset declined by IDR 5.3 trillion or 44% decrease, but this were compensated by the increase of broadband connectivity, data center and cloud and digital platform, which increased by 5 -- by IDR 1.5 trillion, or 77% year-on-year increase. We deliberately reduced our exposure in IT services, which mostly consists of hardware with low margins. We shifted our focus on more profitable products, such as connectivity as well as data center and cloud. The decline in the enterprise business was also attributable to seasonality, whereby a number of projects, including those with relatively high margins, no longer contributing as high as last year and less projects that we can realize up to this point in this year.

In the fourth quarter of 2019, however, we expect enterprise performance to improve on the back of recognized revenue from some projects that are still in the pipeline. The positive impact was on the cost side as we significantly cut hardware-related costs. As a result, leased line and CPE costs declined by 40.6% to IDR 3.5 trillion and handset costs declined by 35.9% to IDR 1 trillion, respectively.

Ladies and gentlemen, our wholesale and international business recorded IDR 8.2 trillion in the 9 -- of revenue in the 9 months of 2019 or grew by 16.6% year-on-year. The growth was attributable to strong international wholesale force and growing tower business coming from co-location and asset acquisition.

Ladies and gentlemen, within the 3 quarters of 2019, Telkom Group spent IDR 22.2 trillion in CapEx or 21.6% of revenue. CapEx absorption was primarily utilized to enhance our mobile and fixed line network infrastructure.

In mobile services, CapEx was utilized to further improve 4G network quality and capacity as well as IT system enhancement. While in the nonmobile or fixed line businesses, CapEx was primarily utilized to develop fiber-based access and backbone infrastructures to support fixed as well as mobile broadband businesses. A small portion of CapEx was assigned to other projects such as towers.

Lastly, through our subsidiary, Mitratel, we recently signed an agreement to acquire 2,100 towers from Indosat. When the acquisition is fully completed, the total number of Mitratel's tower will be more than 15,800 towers and reach MNC ratio of 1.45x, improved from 1.34x.

To conclude my remark, let me share our main guidance for the full year of 2019. Considering the recent development, in particular, strategy changes in our enterprise business, we expect consolidated revenue to grow by low to mid-single digit with better consolidated EBITDA margin comparing to the one in 2018, whilst Telkom sales revenue to grow by low to mid-single digit with stable EBITDA margin. Capital expenditure for the group are rated at around 27% of revenue. That's the end of my remarks. Thank you. I'm now handing back to Andi.

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Andi Setiawan, Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk - VP of IR & Corporate Secretary [4]

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Thank you, Harry. We will now begin the Q&A session. In the next 20 minutes or so, we will only discuss about mobile business and then after that, we will discuss nonmobile businesses. When raising your questions, please speak clearly and state your name and your company.

Operator, may we have the first question, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Siward Ludin of Goldman Sachs.

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Siward Ludin, Goldman Sachs Group Inc., Research Division - Research Analyst [2]

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So probably just on mobile competition. So we've heard some comments from your competitors that they are seeing an uptick in competition. Can you give us some thoughts on this and how you view competition going forward?

And also, could you give some color on your priorities? Let's say, if competition picks up, is maintaining market share or maintaining profitability a higher priority?

And last question is on the growth in mobile, where do you see the pockets of growth here in terms of region and data packages? Are you focused on the Java or ex-Java region? Or any sort of -- basically, what's driving the growth in mobile going forward from your view?

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Rachel Goh, Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk - CMO [3]

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Rachel speaking. So I'll just start with one of your first questions, which is the focus. I think, in our view, both revenue and market share are important in order to secure. And we do this through various rational product pricing and market activity. I think what we are seeing here is that we need to continue to calibrate our price premiums relative to the network expansion of our competitors, right? However, what we are doing is that we are focusing on a few strategies. One is we are looking at longer-term plan, sustainability, a high-quality customer base and securing this kind of growth in terms of customer productivity levels. Number two, we also continuing to leverage on our strong network and new digital businesses and intensify our position in the digital savvy and millennial segment, if you can see how we are putting in effort into areas of video and games in addition to connectivity.

Three, we are looking at structural and strategic upgrades of our customer value management platforms and processes to improve ARPUs and customer retention and value. And as I mentioned earlier, we're continuing to maintain a premium price position. However, calibrating it to remain relevant. And this is important because we need to continue to invest in a good quality network.

Something else to highlight in terms of -- you see, how we're looking at competition. With this focus on growing a healthy and strong high-quality customer base, you will see that Telkomsel's payload per data customer has already grown by 57.1% year-on-year versus another competitor that's only grown by about 30.9% year-on-year.

In terms of Telkomsel's ARPU in data, we've grown year-on-year by 45%, right? It has grown from 21,000 to 30,000 versus another competitor whose share has only grown by 28% year-on-year, with an ARPU data up of only 28,000 and Telkomsel at 30,000. So you can see, we're coming up strong because this is the future. It's a sustainable business we're focusing on.

We also have proved that we are stronger and have more productive data users, although we only have 66% of data user penetration. This base is giving us a payload per user growth of 57% year-on-year versus competition whose data user penetration is about 88% with a growth of only 30.9% year-on-year. So with that, it's basically reinforcing our strategy of focusing on high-quality customers, premium pricing and very strong network. So I hope that answers your 3 questions.

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Siward Ludin, Goldman Sachs Group Inc., Research Division - Research Analyst [4]

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Okay. Got it. Just 1 follow-up, actually. So since you mentioned about the price premium, are you comfortable with your current level of price premium, especially since your competitors are aggressively expanding them and upgrading their networks in Java and outside Java?

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Rachel Goh, Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk - CMO [5]

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Yes. We are seeing competition, especially from the smaller peers as others pushing out -- continuing to pushing out unlimited products and campaigns. From our perspective, I don't think this is sustainable. They are running a PPMB of about 1,000 to 2,000 per gig. We are still maintaining ours at about 7. Although, like we said, we'll continue to calibrate this premium to ensure we remain relevant to our customer base, especially ex-Java.

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Operator [6]

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(Operator Instructions) Next question is from the line of Piyush Choudhary of HSBC.

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Piyush Choudhary, HSBC, Research Division - Telecoms Analyst, South East Asia [7]

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Two questions on mobile. Firstly, if you could share some more color on the mix of your revenue growths between Java and outside Java during the first 9 months and what's the color of competition between these regions. Secondly, if you could share what's your peak network utilization both in Java and outside Java? And the reason I'm asking is, how are you expecting to manage your network cost increases as data revenue -- data usage continues to grow at a rapid pace, while revenue growth is low- to mid-single digits. Any color over there will be helpful.

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Heri Supriadi, PT Telekomunikasi Selular - Director of Finance and Director [8]

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Okay. Piyush, Heri here. I think on your first question on the color of mixed revenues of that in Java and non-Java during 9 months of this year. Actually the -- what we can say, the growth is the same, especially when we talk about the data segment. We are suffering a bit in the legacy side because outside Java, their legacy is a bit higher compared to what we have in Java. So the growth of the data consumption's still about the same. We -- as mentioned by Rachel previously, we continue to focus on the high-quality subscriber base for the long run of the perspective. So there's intense competition coming from smaller operators, but we do know that it is coming from -- to the low segment of the customer base in which we are not really -- want to have any, as I say, intense or trigger any price war on that one. So you also can see from the writing, the margin that we have. Although the legacy continues to decline, basically the margin that we have is about the same.

And then how -- we do expect the network cost increase Java and outside of Java. I think since many years back, we always try to maintain the margin that we have. So far, we can say that we have successfully managed this one. The utilization, still very much, I think, in the level of the -- in which we can maximize the use of that one. So the priority of our expansion today, mostly coming to the increased capacity and the quality, as we already reached 95% of 4G penetration as today. So you can see, beside the number of BTS that we are adding this 21,000 but the cost, operation and maintenance, very much well managed because we mostly -- I think the cost incremental on the -- as we already reached most of the population. So I think we carefully manage this one to bring the value in before the balance between the market sale and also revenue profitability.

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Operator [9]

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Our next question comes from the line of -- yes, from the line of Arthur Pineda of Citigroup.

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Arthur Pineda, Citigroup Inc, Research Division - Director and Head of Pan-Asian Telecommunications Research [10]

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Three questions from me on mobile, please. Firstly, what's driving the much slower mobile growth versus peers in the third quarter? If you look at the revenue growth in Java versus non-Java, is there a material divergence? And what can be done to address its disparity versus peers?

Second question is on the revenue per megabyte trends. That seems to be declining for you as compared to an uptick on -- from your competitor. I'm wondering what's driving that. Isn't it better to see slower payload growth with better pricing as compared to what's happening at the moment? And as what's going to happen with regard to the towers, can I just get what the average rate is for your towers rentals? Is there any opportunity for you to reprice this downwards?

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Rachel Goh, Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk - CMO [11]

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Arthur, so on revenue per meg speed compared to competitors. I think our PMB has always been the highest amongst the operators in Indonesia. And from what we are seeing with -- especially with our competitors' expansion of their network, the premium cannot be sustained. And hence, that's why we mentioned we are calibrating the level of premium-ness relative to zones where we are seeing competition, okay? I hope that answers your question. And hence, it's a natural -- correct.

And in terms of what's driving lower mobile growth compared to our competitors. I think it comes from several directions. One will be competition continues to expand their network; and as with new network expansion, they will gain market share, especially with them pushing up unlimited plan, right? So there's a lower end segment that will be switching over for this offers. And we'll continue to focus our efforts on the higher quality, more premium and healthier customer base and that's where we are looking at for continuous mobile growth.

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Heri Supriadi, PT Telekomunikasi Selular - Director of Finance and Director [12]

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On the third question, on the price tower rent. Most of our towers are going to be, I think, having anniversary for first 10 years in 2022. This year, some towers, hundreds of towers, actually already also having anniversary on that one. What we can inform to you basically, whenever the tower already coming to the anniversary, we have the new price plan that -- what happened in the market today, actually, we are having the competitive leasing rate for this one. I think this also can be quite transparent. I think that our list that we have compared to our competitor later on. So definitely, this is part of the natural, I think, market happen to the tower price rental.

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Arthur Pineda, Citigroup Inc, Research Division - Director and Head of Pan-Asian Telecommunications Research [13]

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And just to clarify on the ones expiring 2022? Are you seeing this alongside IDR 15 million, IDR 20 million a month? Or...

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Heri Supriadi, PT Telekomunikasi Selular - Director of Finance and Director [14]

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I will -- I will give to you with what is exactly the number on this one. I think we will contact on how much is this number going to be.

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Operator [15]

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(Operator Instructions) Next question is from the line of Colin McCallum of Crédit Suisse.

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Colin McCallum, Crédit Suisse AG, Research Division - MD [16]

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So just following on from the questions previously. A question for Rachel, really. I just wanted to understand the chronology data. The calibration that you're talking about in terms of reducing the premium, I get that. Have you done a large proportion of that during the third quarter? And therefore, as it were, the damage to the growth rate and the price per megabyte, it is more or less behind you? Or you're halfway through by the end of the quarter, and there's more to come? Or you're only just starting towards the end of the quarter? How would you -- because, of course, the premium, as it was highlighted a second ago, has already reduced, right? So is it now a more sustainable level? Or is there a lot more to go in terms of that premium evaporating? I hope that makes sense.

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Rachel Goh, Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk - CMO [17]

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Colin, yes. So we did -- chronological order, we did several price adjustments this year. We attempted to lift the prices in the market. The -- towards (inaudible) first of all, and try to maintain it. However, we noticed that our competition continued to be giving pressure in terms of unlimited packages and sachet packages. Hence, in the third quarter, we did not adjust pricing for the ATL packages, but we did go into BTL packages that personalized campaigns. So we went BTL to retain our customer base. So there were some pricing adjustments done BTL in Q3.

In terms of ATL pricing adjustments, we started at our OMG campaign in the first week of October. That's when we -- instead of dropping prices, what we've done is we have included YouTube, Facebook and Instagram excess into the data volume for ATL core packages. So if you calculate -- we didn't drop the prices, but in terms of PPMB that would have reduced because we've given more value in the existing bonuses.

Looking forward for the next few months, we see that we will continue to maintain that because we're seeing the habits of our customers increased, the payroll has increased. We are seeing a positive payroll increase network-wide as well as with our customer base, and that's very encouraging. So what we'll do is that we'll continue to provide more value. And in certain packages and certain zones, we will also be adjusting the prices upwards and measure the PPMB targets. I hope that addresses your questions.

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Colin McCallum, Crédit Suisse AG, Research Division - MD [18]

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It does. If I may come back with 1 little follow up, though, everything you said made sense and was helpful. I guess, same has happened in some areas, the kind of response has been to the very small players as it were. And as I think Arthur highlighted a minute ago, and it looks as if XL was relative -- or at least the average number suggests they're relatively well behaved in the third quarter. Is there a danger that by addressing and reducing the premium in some areas to the smaller players, you end up pushing XL to then respond as well, and therefore, everybody has to take a further leg down? Is that a consideration? XL, just for your information, had -- a lot have suggested it stayed above this behavior on their conference call the other week. I'm not sure if that's true, but if it is true, is it a risk that you may trigger a reaction from them, and therefore, a further reaction going from everybody else? What's your view on that point?

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Rachel Goh, Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk - CMO [19]

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I think there shouldn't be too much concern on that because we still maintain a very healthy 20% to 40% price premium above the competitor that you've just mentioned, I think there's enough room for them to maneuver. The reason they would trigger price war is not from Telkomsel, but it would be from the lower-tier players continuing to push ahead with acquisitions on the SIM push on unlimited programs.

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Operator [20]

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Our next question is from the Kresna Hutabarat of Mandiri.

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Kresna P. Hutabarat, PT Mandiri Sekuritas, Research Division - Analyst [21]

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I have 2 questions. One on revenues and also the other one on cost. My first question on the 4G user penetration at Telkomsel. Can I just check what the latest effort to migrate more customers to 4G subscriptions? I understand there are some discrepancies with mobile subscribers with 4G handsets and a number of customers with live 4G subscriptions on the network, and I'm just wondering if there's any ARPU uplift opportunity from that front. That's my first question.

My second question on the OpEx structure. If you look at your personnel costs, your personnel cost has taken greater portion of your cash OpEx structure in third quarter '19 relative to marketing, IT and G&A. I just want to check, is there any ERP ongoing right now? Or is there any driver to the pick up in personnel expense as in proportion to the total cost structure? And secondly, how much more decline in marketing costs and IT costs can be expected in the fourth quarter '20 and also in 2020?

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Rachel Goh, Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk - CMO [22]

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Hi, Kresna. Yes, I'll just address your one on penetration. So our total 4G users has a year-on-year growth of 49% and the consumption rate is more than 9 gig per month, which is extremely encouraging because it's more than double of non-4G users. So I hope that addresses the question.

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Kresna P. Hutabarat, PT Mandiri Sekuritas, Research Division - Analyst [23]

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Okay. But is there anything that you can share in terms of like the total 4G customers on your network, where it is today, let's say compared to last year, let's say?

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Rachel Goh, Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk - CMO [24]

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It's a 49% -- yes, 49% year-on-year growth. Yes, it was just the 55 million...

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Kresna P. Hutabarat, PT Mandiri Sekuritas, Research Division - Analyst [25]

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55 million. Okay.

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Heri Supriadi, PT Telekomunikasi Selular - Director of Finance and Director [26]

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Okay. I guess now on the second question on the OpEx structure. If you see our cost mainly coming from operation and maintenance, it's around 60%. This is related to the network we expand and also adding capacity and so on.

I think, as I previously mentioned to you, we are working on this cost, expect that with a bigger scale, with the, I think, more productive usage of data, we're going to able to maintain this cost becoming still healthy.

In the personnel expenses, yes, we do kind of adjustment in the personnel's pay last year. With the impact happened this year with the expectation mainly to increase the productivity and also encourage some, let's say, performance and livened behavior with the expectation with the new business mostly coming from digital, we can adjust the skill set and readiness of our employee in this one.

We don't have the ERP going on right now, but we try to convert as much as possible, the skill set that our HR processed today. And then in the marketing costs, we do actually quite good managing the cost on this one. What we do actually, the rate of the marketing expenses going to be the same. Again, we want to give a better experience to the customer. And also, the market becoming more dynamic because we also are providing the, I think, superior product. Of course, this require superior support on this one. So the trend that we have today, we do expect going to continue up to the fourth quarter.

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Operator [27]

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You have 5 more minutes for mobile. And our question is from the line of Ranjan Sharma of JP Morgan, our next question for Mobile.

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Ranjan Sharma, JP Morgan Chase & Co, Research Division - Analyst [28]

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Two questions from my side. Firstly, on competition. I mean, a lot has been said about the smaller players in the market and the price aggression. But I see -- if I see the price points, such as on the website. I find that unlimited plans are beginning at IDR 50,000 or even IDR 75,000. So are you seeing something else on the ground which is more aggressive? Because at this price point, it seems it's quite expensive and ARPU accretive for the telcos to provide plans at these levels.

Secondly, you have a new cabinet in Indonesia. Anything can share on how policy or regulation might change and how that might affect the wireless industry?

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Rachel Goh, Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk - CMO [29]

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Ranjan. So I'll just address question #1. In terms of unlimited plans, they're still -- if you go onto the acquisition packages, meaning in the market, you still see that there are smaller sachet unlimited plans being offered by competition for acquisition purposes. And because they are fluids, so their -- I don't know if the competition is publishing them on their website.

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Ranjan Sharma, JP Morgan Chase & Co, Research Division - Analyst [30]

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Okay. So it's more for new SIMs. Got it.

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Rachel Goh, Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk - CMO [31]

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Yes.

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Unidentified Company Representative, [32]

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The new cabinet, particularly on the Ministry of ICT, especially from telco Silver, we haven't met with the Minister in -- in formal way, in such a way whereby the Minister directly give directions for the telco player. But again, this is quite optimist that we do expect that they will -- he will support for the healthy industry growth in this case. And there would be some planning also for the association for telco Silver to meeting him to get their direction and how that we can collaborate together to promoting more healthy industry in this case. So we haven't met him in terms of clear directions on the substance. So we do expect a positive and collaborative policy provided by the new cabinet in this telco industry.

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Operator [33]

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We will now go to the nonmobile segment. And our first question is from the line of Siward Ludin of Goldman Sachs.

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Siward Ludin, Goldman Sachs Group Inc., Research Division - Research Analyst [34]

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So first is on IndiHome. So as you mentioned earlier that this continued customer down trade to Dual Play. Should we expect this trend to continue? Or do you expect it to reverse sometime soon?

And my second question is on the enterprise segment. To what extent do you plan to decrease your IT services business? And how much growth do you expect could come from the other segments of the enterprise business.

And lastly, on the enterprise, again. Are there any bulky contracts that we should be aware of this quarter or the next quarter?

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Harry Mozarta Zen, Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk - Director of Finance, CFO & Director [35]

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Thank you, Siward. I think if you are looking at the trend in the last couple of quarters, yes, Dual Play product contribute about 60% to 65% of the new subscribers. I believe that the main reason is the more attractive prices. So we still expect that the Dual Play product will continue this trend that I think it will continue still -- that the consensus is still about 60% of the new customers. I think prices are still the main reasons. For us, it's okay because -- and then we can encourage Dual Play customers to upgrade to the Triple Play as part of our add-ons program, yes. I think on top of that, we also encourage them to upgrade speed or other areas add-ons. Now I think add-ons contribute relatively significant to IndiHome's revenue of around 12%, yes.

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Heri Supriadi, PT Telekomunikasi Selular - Director of Finance and Director [36]

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Okay. So on your questions about our enterprise business. Pretty much for this third quarters, we can say that we pretty much has -- have hit the bottom in terms of our revenue decline from the lower margin enterprise services or products. In fact, as you probably still remember my earlier remarks, we saw an encouraging increase of 77% from data center, cloud and digital platform, which something represents higher margin services. So as per the full year result, our estimation is the decline of revenue would be slightly better. So we expect decline to hit around 10% on year-on-year on a full year basis in terms of our enterprise revenue.

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Siward Ludin, Goldman Sachs Group Inc., Research Division - Research Analyst [37]

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Okay. And about the question about the bulky contracts. Anything we should be aware of?

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Heri Supriadi, PT Telekomunikasi Selular - Director of Finance and Director [38]

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There are some contracts, we don't call it bulky contracts. But let me give you an illustration, right? Once -- I think I have checked this with some of you on our previous meetings. So let's say, a client installed ERP. So at the beginning, they would buy license from us. License itself represents higher margin, right? But -- and then following the installation of the ERP, they would hire us to manage service -- the service, the system for, let's say, 3 years. So for the next 3 years, the higher-margin debt came from license won't be there anymore. So that only happens in the first year. So there is 1 source of seasonality or cyclicality of the enterprise business. So I hope that illustrates -- gives you some illustration about the nature of the contract.

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Operator [39]

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(Operator Instructions) We are now at the nonmobile segment. Our next question is from Arthur Pineda of Citigroup.

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Arthur Pineda, Citigroup Inc, Research Division - Director and Head of Pan-Asian Telecommunications Research [40]

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Just a question on enterprise, please. How should we see the changes in EBITDA margins going forward now that you've changed your strategy to focus on these higher-margin segments, as you've mentioned? How does this compare versus your prior blended margins and enterprise?

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Harry Mozarta Zen, Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk - Director of Finance, CFO & Director [41]

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Okay. The way we see the changing plan in enterprise business. Maybe you can -- there's some similarity with what have happened on mobile. So a few years ago, when we started to see the decline of our legacy business in mobile. It still -- in the beginning periods, it still could not be compensated with the increase of data revenue, right? So this is what's happening. But the other way around what is being declined is the lower-margin business, which is gradually will be changed or replaced by more profitable business coming from data center, cloud and connectivity. So the -- this year, likely, the EBITDA margin would still be lower than last year. But for starting next year, we hope that we are going to see a slightly better margin in the range of low to mid-teens in terms of EBITA margin.

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Arthur Pineda, Citigroup Inc, Research Division - Director and Head of Pan-Asian Telecommunications Research [42]

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So just to clarify, some of the businesses that you walked away from, were they actually profitable? Or were they loss-making to begin with?

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Harry Mozarta Zen, Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk - Director of Finance, CFO & Director [43]

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Maybe some of the contracts, maybe if you -- if we -- if you take into account the funding cost, for instance, they might have been loss-making, to be honest. Some of -- only some of the contract rates.

But we need to see the offer all package in because sometimes, let's say, we sell more than 1 contracts or we sign more than 1 contracts to a customer at one point. We see it as 1 package. Maybe we need to -- we have to lower some of the pricing but compensated by another contract at the same time.

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Operator [44]

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Our next question is from the line of Piyush Choudhary of HSBC.

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Piyush Choudhary, HSBC, Research Division - Telecoms Analyst, South East Asia [45]

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Two questions on mobile segment. Firstly, the acquisition which Mitratel has done. Could you kind of give color on the annual run rate of revenue, which would be added once that acquisition is completed?

Secondly, similar question to -- what was asked earlier, but more on entire nonmobile segment portfolio, what is likely margin outlook because you have changed your enterprise strategy, plus your margin profile and IndiHome is also rising. So structurally, where should we see nonmobile segment EBITDA margin, which has already increased to around 39% in 9 months?

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Heri Supriadi, PT Telekomunikasi Selular - Director of Finance and Director [46]

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Okay. For your first question, Piyush. The tower acquisition is likely to be fully closed by end of this month. So at the most, we would recognize the revenue for 4 weeks or maybe 5 weeks only for this year, which would be slightly smaller, somewhere around IDR 40 billion to IDR 50 billion for this 1-month period. So in terms of the -- your question is with nonmobile EBITDA margin, right?

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Piyush Choudhary, HSBC, Research Division - Telecoms Analyst, South East Asia [47]

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Yes.

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Heri Supriadi, PT Telekomunikasi Selular - Director of Finance and Director [48]

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Or consolidated EBITDA?

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Piyush Choudhary, HSBC, Research Division - Telecoms Analyst, South East Asia [49]

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Nonmobile segment EBITDA margin.

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Heri Supriadi, PT Telekomunikasi Selular - Director of Finance and Director [50]

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Okay. The nonmobile EBITDA margin would be around mid-30%. Mid to high 30%.

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Operator [51]

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Our next question is from the line of Choong Chen Foong of CIMB.

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Choong Chen Foong, CIMB Research - Analyst [52]

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Two questions from me. Firstly, on the provisions for trade receivables in the quarter. Noticed that it has actually gone up further in the quarter. Is that largely due to the enterprise business?

And given the change in the enterprise business mix, are we sort of expecting that (inaudible)? For some of these hardware sales and the less profitable segments, could that still yield more provisions for trade receivables going forward? That's my first question.

Second question, coming back to the Mitratel acquisition of the Indosat towers. I just wanted to understand whether that's the first time Mitratel has gone up to the market to acquire towers from other telcos? And going forward, do we expect to see more acquisitions once some of these other towers from your telco competitors come up for tenders?

And what is the end game here? Is this just merely an expansion of the portfolio for business growth? Or are we sort of looking at potentially monetizing this as large portfolio sometime down the road? Yes, those are my 2 questions.

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Harry Mozarta Zen, Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk - Director of Finance, CFO & Director [53]

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Thank you, Foong. On the provision side, yes, enterprise is contributing to the higher provision in the 9 months, but not all because of the enterprise. Because if you are looking at the proportion, the provision was contributed by around IDR 850 billion from enterprise and then about IDR 450 billion from consumer and another IDR 460 billion from the mobile as well. So it's quite spread.

So the provision was attributable to, first, the implementation of IFRS 9, in particular, in the mobile side that make the provision is getting higher. And also because, you see in the enterprise side, the government projects, normally, the government pays only once. That is in the -- at the end of the year. So normally, towards the end of the year, the receivables from the government project is getting higher. So we have to provide some provision as well. So that makes the provision is getting higher in the 9 months period.

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Heri Supriadi, PT Telekomunikasi Selular - Director of Finance and Director [54]

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Yes. On the tower side, yes, indeed, it was the first time for Mitratel to acquire towers from a telco, but it wasn't the first time for Mitratel to do asset acquisition. We obviously remain open to look forward for more acquisitions. But rest assured that we've been very, very selective, and we've been very, very careful in terms of the -- choosing our acquisition target.

For instance, the last couple of transactions that Mitratel has done, which is earlier this year, if you remember, we acquired a small tower company consisting around 1,000 towers and the recent Indosat towers. They've been contributing quite healthily to the financial performance of Mitratel. And we obviously are open for any possible monetization of the tower business sometime in the future.

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Choong Chen Foong, CIMB Research - Analyst [55]

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Okay. And just a quick follow-up again on the Mitratel acquisition of the Indosat towers. Can I just sort of clarify that the towers that you were able to win, 2,000 towers. Was that...

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Heri Supriadi, PT Telekomunikasi Selular - Director of Finance and Director [56]

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It was at 100.

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Choong Chen Foong, CIMB Research - Analyst [57]

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That's around 100, yes. Is that a result of Mitratel beating the highest price? Is that -- was that the main criteria for winning that?

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Heri Supriadi, PT Telekomunikasi Selular - Director of Finance and Director [58]

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I think that question is better directed to Indosat as the seller, yes?

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Operator [59]

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Our next question is from the line of Ranjan Sharma of JP Morgan.

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Ranjan Sharma, JP Morgan Chase & Co, Research Division - Analyst [60]

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So 2 more questions. Firstly, on the CapEx side. You've seen a pretty strong expansion of your fixed broadband network. Should we expect this to now -- this expansion to now moderate? And can that lead to CapEx savings for the company? So if I adjust for the data center expansion that you have, could the underlying CapEx trend lower? If you could share thoughts on that.

And secondly, like you are -- if I understand correctly, you are building a big data center. When do we start seeing the revenues contribution from that? And how big or how material could the revenues be?

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Harry Mozarta Zen, Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk - Director of Finance, CFO & Director [61]

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Yes. This is something that we are planning to achieve next year with regards to the CapEx efficiency. So for next year, our plan is to reach a lower CapEx to revenue ratio of 26%, which is slightly lower than 27% that we are likely going to have by end of this year. And most of this would come from fixed broadband business, for which we would be -- we think that we can be more efficient -- and given the economic of scale of the business. And sorry, what was your second question again?

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Heri Supriadi, PT Telekomunikasi Selular - Director of Finance and Director [62]

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Data center.

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Harry Mozarta Zen, Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk - Director of Finance, CFO & Director [63]

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Oh, data center. Yes. Data center, we are in the earlier stage of the process. The target is for this to be fully completed for the first stage by end of next year. So revenue won't be coming until the earlier part of 2021. But this would not -- in terms of CapEx amount, this will not be high. And the way we are going to build this is by stages.

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Ranjan Sharma, JP Morgan Chase & Co, Research Division - Analyst [64]

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Okay. Can I just say like what should the revenues expectations from the data center?

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Harry Mozarta Zen, Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk - Director of Finance, CFO & Director [65]

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Can I -- can we get back to you on the one-on-one call that we're going to have tomorrow?

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Ranjan Sharma, JP Morgan Chase & Co, Research Division - Analyst [66]

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Okay. Sure.

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Operator [67]

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Our next question is from the line of Kresna Hutabarat of Mandiri. Oh, okay. I believe he disconnected from the Q&A lane. Can I -- all right, we have now Mr. Colin McCallum, Credit Suisse.

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Colin McCallum, Crédit Suisse AG, Research Division - MD [68]

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Just 2 quick ones from me. First one, actually, for Pak Harry, just back to the enterprise business again. I was just interested what triggered the change in direction. Is it that you have better management information systems now that we're able to -- you began to look into the life cycle of some of these contracts and really build all together and therefore, come to a better decision on what was worth doing, what wasn't. Is that the key thing that changed?

And I'm assuming now that the project sales teams and enterprise, et cetera, they now have better information as well as to how to sell projects and are rewarded on a basis that's more aligned with your overall P&L. If you could just talk a little bit about these issues, that would be helpful.

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Harry Mozarta Zen, Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk - Director of Finance, CFO & Director [69]

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Operator?

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Operator [70]

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Yes. Go ahead.

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Harry Mozarta Zen, Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk - Director of Finance, CFO & Director [71]

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Can we continue with the Q&A on the nonmobile segment?

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Operator [72]

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Yes, go ahead, sir.

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Harry Mozarta Zen, Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk - Director of Finance, CFO & Director [73]

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We are waiting for the question.

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Colin McCallum, Crédit Suisse AG, Research Division - MD [74]

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Yes. Sorry, I think I did ask the question, but obviously, it didn't get through. Let me ask again. My question was just on -- back to the enterprise, and in particular, what had triggered the change in strategy. Is it because you improved the management information on how the contracts were working if you included equipment sales and everything else and therefore concluded that across the whole project, some things weren't worth doing? Is it -- better information that triggered that? And if it was, are your sales team and your enterprise employees now better incentivized to be selling projects in the right way with the right parts? I mean what steps have been taken with the information you have to improve the profitability going forward?

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Harry Mozarta Zen, Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk - Director of Finance, CFO & Director [75]

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Yes. Colin. I think your voice was a bit unclear. But if I can repeat your question? The question is more towards finding out the rationale of the change in strategy in enterprise, right?

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Colin McCallum, Crédit Suisse AG, Research Division - MD [76]

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Yes. What is that triggered you to do this? Is it you found out that some contracts that have been done before weren't profitable? Or what caused you to change strategy? And how are you then using that information to, if you like, improve things going forward? I hope that makes sense.

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Harry Mozarta Zen, Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk - Director of Finance, CFO & Director [77]

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Yes. Yes, you were right. I think the main reason is because we simply would like to see a more profitable business coming out from this segment. And I think the way we realized that sometimes the way we sell the products, particularly in terms of, let's say, our bundled products. Sometimes we give discount to products that actually were more profitable, especially connectivity, data center, and cloud and those kind of things. So this is something that we have been working very hard to in terms of making it better in terms of pricing and focus more on the higher-margin products.

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Operator [78]

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No questions as of this time. I would like to hand the conference back to our presenters.

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Andi Setiawan, Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk - VP of IR & Corporate Secretary [79]

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Thank you, everyone, for participating in today's call. We apologize for those whose questions could not be addressed yet. Should you have any further questions, please don't hesitate to contact us directly. Thank you, everyone.

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Operator [80]

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Thank you. Ladies and gentlemen, that does conclude the conference for today, and thank you for participating. You may now all disconnect.