UPDATE 2-Indonesia's Telkom Q2 net profit drops 13.7 pct

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By Muhamad Al Azhari and Andreas Ismar

JAKARTA, July 31 (Reuters) - PT Telekomunikasi Indonesia Tbk (TLKM.JK), Indonesia's top telecoms firm, had a bigger-than-expected 13.7 percent drop in second-quarter net profit, as costs rose and revenue per user fell.

But Telkom's president director, Rinaldi Firmansyah, said he expected revenue to grow more than 10 percent this year, driven by the firm's broadband internet and cellular businesses, implying a stronger performance in the second half of 2008.

State-controlled Telkom, Indonesia's largest listed company with a market value of $17.5 billion, had a net profit of 3.09 trillion rupiah ($338.9 million) in April-June, calculated from the published first-half and first-quarter results.

That was down from 3.58 trillion rupiah a year ago, and below analysts' expectations of 3.45 trillion rupiah.

A sharp increase in the company's depreciation, maintenance and marketing costs drove Telkom's operating profit down 13.75 percent in the second quarter, based on Reuters calculations.

Raymond Kosasih, an analyst at Deutsche Bank, said that the firm's weak first-half result was due to competition in the cellular business and the strategy of Telkom's mobile phone arm, PT Telekomunikasi Selular (Telkomsel), which resulted in loss of share in new customers.

"Costs continue to surge to reflect larger network base. We also attribute the weak result to an ineffective advertising and promotion campaign despite increased spending on this front," Kosasih said in a report.

The results sent Telkom's shares 2.5 percent lower on Thursday to close at 7,700 rupiah, after rising to as much as 8,100 rupiah before the announcement. The broader market .JKSE rose 1.13 percent.

The number of mobile phone subscribers in Indonesia is expected to soar to 120 million by the end of 2008 from some 90 million last year, according to industry analysts and executives.

The fast-growing mobile sector has attracted several new players, putting pressure on margins and revenue per user.

Telkomsel's president director, Kiskenda Suriahardja, said the company had 52.4 million cellular subscribers as of the end on June, up from 42.8 million a year earlier.

The latest data showed that the number increased to around 55 million users in July.

Despite the increase in subscribers, Telkomsel said in a statement that its first-half revenue grew 9 percent, while net profit slipped 0.1 percent to 6.35 trillion rupiah. Average revenue per user (ARPU) dropped 15 percent from a year ago.

Before the announcement of the results, analysts expected Telkom to book a net profit of 14 trillion rupiah for 2008, according to Reuters Estimates, up from 12.86 trillion in 2007.

"Telkom will stage an earnings recovery in the second half given its improving network quality and recent launch of aggressively priced packages," said Navin Killa, analyst at Morgan Stanley, said in a research report.

Telkom controls 65 percent of Telkomsel, which has more than 50 percent of Indonesia's mobile phone market, while Singapore Telecommunications Ltd (STEL.SI) owns the remaining 35 percent.

Other top mobile players such as PT Indosat Tbk (ISAT.JK) and PT Excelcomindo Pratama Tbk (EXCL.JK) have been slashing tariffs in recent months, prompting Telkomsel to retaliate and lowering the industry's ARPU and operating margins.

Some operators have brought in cheaper CDMA technology enabling them to offer lower tariffs but with limited mobility since customers can only get a signal in certain areas.

Other smaller players, mostly backed by international names, have been trying to enter the Indonesian market in recent years.

Natrindo Telepon Selular, backed by Saudi Telecom Co 7010.SE, and Malaysia's Maxis, launched a joint operation under the brand name Axis in April, targeting 1 million users this year.

Bakrie Group, controlled by the family of Indonesia's chief social welfare minister Aburizal Bakrie, controls PT Bakrie Telecom Tbk (BTEL.JK) which is the largest CDMA-based operator in the country. (Additional reporting by Harry Suhartono, editing by Sara Webb, Paul Bolding)