Turkcell Iletisim Hizmetleri AS (TKC) 2004 Q2 法說會逐字稿

Thank you for standing by, ladies and gentlemen. Welcome to the Turkcell Q2 2004 Results Announcement conference call on September 7, 2004. [OPERATOR INSTRUCTIONS]. I will now hand the conference over to Mr. Koray Ozturkler. Please go ahead, sir.

Hello, thank you. Good morning and good afternoon, everyone. I’d like to welcome you on behalf of the management team here to our conference call [aspect]. I’d like to remind you that we have already directly emailed our presentation to you, also you can access our presentation from Turkcell.com.tr web address. Having said that, I would like to hand it over to Mr. Akpinar for his section of the presentation. Thank you.

Thank you, Koray. Dear all, I would like to welcome you to our second quarter, first half results conference call. The improvement in macro-economic conditions in Turkey continued in the second quarter of 2004, which was evidenced by rating agencies upgrades on Turkey’s long-term foreign currency rating.

The continuing decline in inflation, and improved consumer sentiment, had positive reflections on our business. Turkcell had 1.2 million in net additions during the quarter. While our subscriber base grew to 20.9 million on the back of lower churn rates, our increased MoU mainly resulted from seasonality, and led to strong operational performance.

Competitors’ visibility, we believe, has increased, and as a result, we have seen a number of tariff schemes introduced by the operators. We will make further comments on our reported responsiveness on the next few slides. Long distance traffic carriers’ efforts to ensure necessary interconnection agreements with fixed network continue.

While we believe it will take more time to see how this part of the market will evolve, we plan to participate in the market as a carrier through one of our substitutes. We have engaged in discussions to settle two main legal disputes with Turk Telekom and the Turkish Treasury. We believe this effort is in the best interests of the company and our shareholders.

We have revised our legal conditions this quarter, based on the settlement discussions and the recent decree approved by the President of the Turkish Republic.

At this point, let me provide you with some more background information on the process of the settlement framework. A key development in the second quarter was the law that passed through the parliament, enabling government entities to settle their disputes with Turk parties through negotiation.

Turk Telekom and the Ministry of Transportation have become authorized to carry out such discussions after recent approval of the President of the decree, defining the rules and procedures for settlement discussions as suggested by the cabinet. We have used the assumptions and rules as defined by the decree in our current calculation methodology of our legal provisions.

As for the Treasury, both the Ministry of Finance, and the Turkish Treasury are in charge of settlement discussions, for prior parliament approval. We are currently engaged in discussions with related authorities, and although it is still too early to estimate the final outcome of these discussions, we have reflected our current risk assessment in our financial statements.

We recorded an additional $312m legal provision this quarter. However, after the effect of adjustments, our total legal provision decreased to $1.206b, from $1.278b, as of the first quarter of 2004. We will provide further information regarding specific assumptions set out by the recently issued decree, and our revision of legal provisions later in the presentation.

The next slide points out key figures from the second quarter 2004 results, with comparables of second quarter of 2003, and first quarter of 2004 results. We may say that we have kept our operational and financial performance strong during the quarter. However, due to the $312m additional provisions, recorded this quarter, our financials were adversely affected. $229m of this amount was reduced from our revenues.

Related key figures can be found on this slide, for your information, which I will not repeat at this time. The first half comparison of 2004, versus 2003, which is mentioned later in the financial section of this presentation, also points out a clear improvement in the first half 2004 in our performance, despite the additional legal provision.

In summary, we are pleased with our progress and ability to deal with the changing competitive environment. We are also pleased to have achieved certain progress in our settlement discussions. While these discussions are ongoing, we believe the rules and procedures regarding the settlement of outstanding disputes between TT and its third parties also provide a clearer [environment].

We believe our focus on developing new services, tailored to the satisfaction of our customer needs, pricing strategies and retention effort, kept churn at its lowest levels since 2001, further improving the growth in our subscriber base during the quarter. We think the current line penetration in Turkey is around 40% to 45%, providing further room for growth, although at a slower pace.

However, double [indiscernible] usage in our market is a reality, and currently, we neither can point out the level of activity, nor its potential future impact on subscriber or MoU churn. Taking into account the growth in our subscriber base, and lower churn levels in the first half of the year, we actually expect to add similar numbers of subscribers, in nominal terms, in the second half of 2004, as the first half, and we aim to keep yearly churn at lower levels compared to 2003, which was 14.4%, despite the changing competitive environment.

The pace of competition is accelerating, as players like the new merged entity of Aria and Aycell are there, and Telsim, whose management is still under control by the SDIF, became more visible. These players are introducing various tariff schemes, and have relative acquisition campaigns, while the mainly priced focused communication effort is continuing.

Although Turk Telekom’s privatization is still on the agenda, the Turkish government has not yet established a detailed time plan or plan for this privatization. Liberalization in our market is under way, and we are monitoring these developments closely. Although we believe that competition is expected to get more rational a three operator environment in the future, we are still yet to see strong signs of action in this regard.

In order to achieve long-term loyalty of our subscribers, our motto, “Value for Money” is that every bit of money spent by our subscribers for a service is really working. We do not only aim to maintain service quality and variety we offer to our customers, but also we aim to keep the right balance between customer satisfaction and our revenue goals, of course coupled with our desire to adopt new technologies and various advancements.

Parallel to this aim, we introduced a new range of products through the CeBIT Eurasia, which is a large telecommunications fair that we sponsored in Turkey at the end of August, for the seventh consecutive year. Some examples of the new services include offers through improved sim cards, mobile functionality to enable subscribers to make tax payments, reservations in movie theaters and foreign chat-groups on their mobile phones through a functionality better known as Push-to-Talk.

While Push-to-Talk is yet not available for commercial use, we are working on the placement of this product. We also have implemented several additional user friendly functionalities, such as a single push access to GPRS rate functionality through our brand Shubuo.

All in all, we believe we can, and will deal with competition in our market quite effectively, given our comparative understanding of our customer base and telephone business in general.

As for usage, a 16% increase to 65.7 minutes was mainly due to seasonality in comparison to previous quarters. Our campaigns and new offers, coupled with our growing subscriber base and positive consumer sentiment, were the other factors that stimulated usage and led to a pleasing improvement in MoU. On August 21, we applied a price adjustment in which PSTN prices became equal to On-Net prices, after having evaluated our 50% discount campaign to fixed lines that was initiated back in March, which resulted actually with an increase in minutes of usage, and resulted in stable revenue levels.

On June 23, we also launched an optional campaign where subscribers who choose a PSTN number as one of their calling options, could call this PSTN number below On-Net prices. Through evolution of such pricing adjustments, beginning back early in 2004, we believe we have provided offers with excellent advantages for our customers where 40 million or so Turkcell and fixed line subscribers can be called at On-Net prices.

On this slide, we have provided previous information on pricing of calls to PSTN, for your information, which I will not repeat. Although we may say now that we expect an increase in minutes of usage through our recent introductions of PSTN callings at a discount, we will have to monitor the traffic patterns, and volumes for some time before we should then make comment on the future revenue impact of such introductions.

Having said that, we should also highlight the fact that our aim is to keep the right balance between the customer satisfaction and our revenue goals, remaining always sensitive to our bottom-line. Needless to say, Turkcell will also continue to invest in technology, and monitor the developments in the global telecom sector, to provide products and services that serve the best interests of both Turkcell and its customers.

Before I hand it over to Ekrem for further explanation of the provisions impact on our financial statement, and general discussion on our financial results, I would like to talk about some of the assumptions that led to the revision in our provisions.

Net provision of $531m remains for the dispute regarding pricing terms of the interconnection agreement with Turk Telekom, and total cash impact of TT remains at $565m. As part of the provisioning logic, and as stated by the recent decree, pricing terms of the current interconnection agreement, which was signed back in September 2003, is applied retroactively for calculation of interconnections revenues for the dispute period, which was between April 1998, and September 2003.

Interest rates have decreased, and applies only for the period after November 2000, which was a legal milestone taken in favor of Turkcell. Installment plans of up to eighteen months are also a plan. On the Treasury side, the total net provision of $633m remains, which reflects a positive cash impact. The total net provisions include calculations related to all telecommunications related service revenues and taxes, except for interest charge calculations for customers, due to late payments.

Reducing [collection] revenues assumed from Turk Telekom is also applied in the calculation of the provisions for the Treasury share payment dispute. Interest rate reduction is applied, and installment plans are being considered.

I hope these assumptions I have reviewed are helpful, as these points are major factors affecting our provision calculation methodology, based on the decree and settlement discussions we are carrying out currently. Now Ekrem will further talk about second quarter results, and changes in provisions based on major assumptions that I have reviewed. Ekrem?

Thank you. Good morning and good afternoon. I would like to start with discussing how the company legal provision evolved. If you look at the total of our total legal provisions since the end of Q1, legal provisions decreased by $72m, from $1.278b, of Q1, to $1.206b as of Q2.

During the second quarter, we paid $210m to the Telecommunications Authority for various disputes provisions as of Q1. Additionally, the Turk Telekom cash payment deduction from our quarterly revenue during this quarter amounts to $34m, which is also recorded as our payment relating to [indiscernible] with Turk Telekom.

On the other hand, Turkcell depreciated by 13% against the US dollar, during the second quarter, leading to a decrease of $134m in our Turkcell base Q1 provisions and second quarter payments, and a similar amount of translation gain in our P&L.

Finally, based on the settlement assumption previously given by Mr. Akpinar, we recorded an additional legal provision of $312m during the second quarter. We increased our provisions for the dispute with Turk Telekom by $190m, and with the Turkish Treasury by $122m in the second quarter.

It [boosted] our cumulative legal exposure, and averted payment until the end of the second quarter. The total dispute amount, including accrued interest on [indiscernible] related to the Treasury paid amounts to $891m. After deducting the already paid amount of [$206m], our net risk in total remains $633m for the Treasury share dispute.

This amount covers Treasury share on all revenues and VAT on except late payment interest charges. According to the federal principle, approved by the President, our cumulative liability to Turk Telekom on these interconnect dispute fees was $727m, of which $196m is already deducted by Turk Telekom from interest payments to us since May 2003.

We recorded a net provision of $565m for all Turk Telekom disputes, Turk Telekom related disputes as of the second quarter. Total dispute amounts with the Telecommunications Authority were $271m, and after the payment of $271m, there is no need for additional provisions in the second quarter, while we have escalated issues to [go to course].

As we explained in the previous slide, we recorded $312m additional legal provisions in the second quarter. The total provision for the interconnection dispute with Turk Telekom is [$724m] as of the second quarter, and, $131m has been additionally provided for the second quarter based on the ongoing discussions with Turk Telekom. The principal amount of $229m has been deducted from revenue related to calls [indiscernible] of our network and $27m has been reversed from the interconnect costs for calls over the nation from our network.

We also recorded net interest income of $72m for the interconnection dispute since, but expect the interest amount decreasing in line with lower interest rates when compared with the assumptions in the prior periods.

Total provisions related to the Treasury dispute is $633m, and resulting in an increase of $122m in the second quarter. In line with the additional provisions we increased our Treasury ahare and interest expenses in the second quarter by $99m, and $23m respectively. We provided a provision of $59m, related to the infrastructure usage dispute with Turk Telekom as of the second quarter. According to [them] we are almost in settlement negotiations.

In this slide, the problem related to the full legal provisions in the second quarter, which is without the effect of $312m of additional legal provisions, is shared with you only to illustrate how the company P&L statement in the second quarter would look like if we had not had such provisions.

However, in this case, please note that we would have provisions for the legal cases based on our previous methodology, which we had used for the first quarter of financial statements. Please also carefully note that additional provisions of $312m, which negatively impacted in the quarter the P&L statement of the company, introduced a retroactive impact for the legal disputes that are mostly related with the previous period.

Therefore, the [caution] on the slide preventing the full revised legal provision in the second quarter should not be used for comparing the second quarter adjusted P&L figures to the previous quarters and not taken as an indicator of financial performance material to the company for the two previous commissions.

If these one-time adjustments did not occur, the company’s P&L statement would be recorded differently. Revenue would be $825m, while EBITDA would increase to $471m, and net income to $408m. Our [indiscernible] outlook decreased from $12.7 in the first quarter to $9.8. In the second quarter, despite the increase in MoU and upward target revision [this was] mainly due to $229m reduction from revenues related to interconnection disputes which we highlighted above.

One of these [items] is $13.6 when the legal impact in the second quarter is excluded. That is a 7% rise when compared to the first quarter of 2004. Post-paid and pre-paid ARPU decreased to $25 and $4.9 in the second quarter from $28.8 and $7.4 in the first quarter respectively. Post-paid and pre-paid ARPU, excluding the legal impact in the second quarter are $31.3 and $7.9 respectively.

So if you look at this comparison for the first half 2003 versus 2004, we clearly see an improvement in ARPU, despite the impact of provisions, highlighting, we believe, the improved macro condition in Turkey, better cost [quantum] sentiment and our operational strength.

Our revenues decreased to $606m in the second quarter from $746m in the first quarter, mainly due to $229m of reduction, related again to [indiscernible]. EBITDA was a decrease from $337m in the first quarter to $136m in the second quarter, in line with the impact of additional legal provisions.

Whilst the company’s net income in the second quarter was $96m, this was compared to $126m in the first quarter of 2004. Overall, again if we look at the first half of 2003 versus 2004 comparable, we recorded improvement in all areas, despite the impact of additional legal provisions.

Direct cost of revenues, including the depreciation, increased to $541m in the second quarter, from $433m in the first quarter. Sales and marketing expenses remained almost stable at $77m in the second quarter, compared to $76m in the first quarter of 2004. The cost of adding new subscribers is kept under control throughout the second quarter, and decreased to $20.9m in the second quarter, compared to $22.5m in the first quarter.

And, finally, G&A, G&A expenses, on the other hand, increased to $38m in the second quarter, compared to $29m in the first quarter of this year. [Indiscernible], we do not tell we expect an increase in our overall cost base as person per revenue, in comparison with last year and looking at operational performance, we may say that if macro-economic developments continue to evolve, in line with our expectations, we believe that an EBITDA margin of 40% is quite sustainable.

As a result of continuing solid operational performance of the company, despite total payments of $210m to the Telecommunications Authority, and certain deductions, our cash position was $823m, as of the second quarter of this year. Despite the [indiscernible], we strongly believe that we will be able to cover expected payments which may arise due to legal disputes with our [indiscernible] of free cash-flow and our strong cash position.

Our net debt position is at around at a level of $3m in the second quarter, excluding the provisions for legal risk and margin to $1.206b as of Q2 of this year.

With respect to our financing abilities, we have repaid $96m [indiscernible] and interest during the second quarter of this year, with $26m remaining to be paid during the second half of the year. For the full year of 2004, [indiscernible] $160m total debt, including [initial] interest. As of the second quarter of 2004, on a consolidated basis, we had total indebtedness of $826m.

During the second quarter of this year, we maintained our focus on decreasing our [indiscernible] costs, extending the maturity of our loans. The two year $100m [indiscernible] maturity [that was given to HSTC] in the year 2004 and this has been fully drawn down as of the second quarter of this year.

Our aim, with this facility was to divest to our international investment base, and roll out volume costs on an unsecured basis. There were no new financings or restructuring during the second quarter of this year. There were [a couple] of expenditures, including the injections to international operations and expected pay-outs due to legal disputes which will be financed through our positive free cash-flow and our strong cash balance. As part of our risk management strategy, we continue to monitor the debt and capital market, and consider competing financing alternatives in line with our business plan. Thank you.

Thank you, Ekrem. That concludes the presentation session actually. Now, as usual, we will go over the Q&A session and I’d like to remind you that we like to take questions, two questions per person for those who would like to ask questions on the waiting on the queue to ask questions. Also, what we try to do in our press release and the presentation is that to provide as much detail as possible, particularly regarding the legal provisions, and try to make it clear, so we hope that was useful.

Of course, we are ready to respond to all your questions, but just a reminder, just for the sake of the discussion, if you don’t necessarily think that it is required to ask particular details, we would appreciate that if you actually postpone that for after the call, for IR discussions, and try to keep it at a strategic level for everyone’s sake, this discussion, that would be much appreciated. On the other hand, we are going to try to be obviously as useful and helpful as possible here. So I will turn it over to Antonia to open the discussion up to Q&A session, and we’ll take the questions. Thank you.

[OPERATOR INSTRUCTIONS]. Thank you. The first question comes from Mr. Herve Troue (ph). Please state your company name, followed by your question.

Yes, good afternoon, this is Herve Troue from HSBC. Two questions – the first one is regarding your profitability, and specially, EBITDA margin. If we clean the provision out of your cost structure, for instance, it looks like your direct costs, for instance, haven’t increased compared with Q1 at all, despite revenue came 12%. Is there any particular reason for that? Were there some one-off elements there that may have explained that, or do you think it’s an underlying improvement of the margins looking forward? That is my first question.

The second question please is again on the P&L in terms of the interest. I mean, I’ve noticed that in terms of interest, you have received interest income that was much larger than interest payment, despite that you still have a net debt position, i.e. more debt than cash. Is there any reason why interest income was higher than interest payment? Thank you.

Thank you, Herve. Herve, we apologize for the quick silence, because I believe there was a little bit of technical problem on our end. I don’t know if you felt that, but we thought that the question is as follows. Please verify, you are asking about the direct cost of revenues, and the underlying reasons for having that not as high as expected in comparison to Q1?

That’s correct. Yes, it looks like it’s clean from the provision. I think you will, if we clean from the $109m provision taken on the direct cost of revenue, roughly speaking, you will come with the direct cost in the region of $432m, which was almost exactly the same number as Q1 in terms of direct costs. What we’ve seen on the revenue side, you know, $835m increase, I was wondering why, basically, direct costs of revenue came flat compared with Q1 while the revenue, you know, was sharply up compared with Q1? Is there any particular reason that may explain from your side in terms of operationally?

Okay, let us try that one, and then we will go to the next question.

Okay, if you look at the cost structure of operational expenses, only 47% of the operational expenses are dependent on the revenue. Those viable expenses are our Treasury share, and interconnect costs, and the rest of the total of that, which, and I’ve put down 53%, is mostly fixed expenses. Therefore, if the revenue increases, this is the OpEx and the gross margin, OpEx is not increasingly parallel to the revenue. That’s why our gross margin and EBITDA margin is increasing when you exclude this settlement effect.

Okay, and looking forward, I mean, where do you see the level, I mean, a sustainable level of gross margins?

Let me make a comment – this is Muzaffer – let me make a comment on that going forward, if you like. The essence of the question is obviously embedded into where we will settle, especially on the Treasury side.

Yes.

On the Turkish Telekom, the accumulation is only on the interest side, while on the Treasury, we are [extrapolating] on different capitals as well, plus some interest based on a quarterly basis. We are not clear as of yet on which item we are going to shake hands for and against of Turkcell. Once that is known, I think we can make a clear guidance going forward, but it is too early to make an estimation on that yet.

Okay.

So let’s take the second part of the question, on the interest rate.

So, for the interest rate, if we compare the second quarter to the first quarter, in the second quarter, because of the nil decrease from the present, so we have revised our interest calculation for the legal disputes related to previous payments. So it means that in the second quarter we have, because of this reversal, we have plus interest meaning there was interest expense. This resulted in a plus to our P&L.

In the first quarter, because of the total accruals, we continued to allocate costs on the basis into the expense, which was approximately, for the legal cases, $43m, so the net difference between $43m first quarter interest expense, that we have recorded for the total provisions, which in the second quarter interest expense was a reversal which ended up between $4m was [indiscernible] approximately $77m net interest expense change between the second quarter and first quarter.

And that’s purely accounting, it’s not cash, it’s purely accounting, isn’t it?

It is, yes, there’s no cash attached to this movement.

Okay, thank you.

Thank you. The next question comes from Mr. Alex Wright. Please state your company name, followed by your question.

Hello, it’s Alex Wright from UBS. Two questions from me, the first is on your effective pricing, or revenue per minute. If we adjust for the provisions at the revenue level in the second quarter, it appears as though your effective revenue per minute was basically flat in the second quarter versus the first quarter, which to me appears impressive, given the weakness of the lira, and some of the pricing promotions that you’ve highlighted.

So I wonder if you could give your views on how you managed to sustain the revenue per minute in dollar terms, and also on how sustainable do you think that is going into the second half, and indeed, with the stabilization of the lira that we’ve seen over the last couple of months, could we even see revenue per minute increase? So that was the first question.

The second question is just on your tax charges, or indeed, tax benefits in the second quarter. Could you just explain the reasoning for the tax benefits? Is this a cash tax benefit, and could you give us sort of estimate of what you expect to see in terms of tax charges or benefits in the second half of the year? Thanks a lot.

Good afternoon, this is Tulin Karabuk. Regarding your first question, when we compare the results with the previous quarter, you know, we had an increase in MoU above 16%, and this has of course impacted our revenue per minute and ARPU result figures. In the meantime, we had a price increase which has affected as well. Despite the devaluation of the Turkish lira against the US dollar, those two factors impacted our revenue per minute, and also ARPU.

Sorry, can I just follow up on that one? I mean, the price increase in May was about 3.2%, whereas obviously the devaluation, the depreciation of the lira, on average, was about 9%, I think, over the course of the –

Yes, and we had an increase in MoU above 16%. The impact of this was about 14% [sales], so in total, it goes up to, [in terms of] of ARPU about 7%, but this is the combined effect of these three criteria, these three [inaudible]. Is that clear for you?

From what I’m seeing here, I mean, maybe I’ve got the numbers incorrect here, but just dividing your normalized ARPU by the minutes of use, I’m getting to about 20c, just under 21 US cents of revenue per minute in both the first quarter and the second quarter of the year, and you know, that therefore suggesting that adjusted ARPU, or normalized ARPU has basically risen as much as MoU, or pretty much the same amount as MoU over the quarter?

I mean, according to our figures, maybe there is a –- I don’t know what you are talking about, but – I mean, which figures you are talking about, but the ARPU figure is increased by 7%. It’s not equal to MoU increase. MoU increase is about 10%, and ARPU increase is 7%, which was kind of met off by 8% devaluation, I mean, the impact of devaluation is 8% to [indiscernible].

Okay, sorry, I just wanted to check that there’s nothing else in there apart from obviously the calculation of the deprecation of the lira and the price increases, nothing else that would have impacted the revenue per minute other than the factors that you’ve mentioned.

Well, these actually [are the impacts].

Okay, thanks.

Thank you. The next question comes from Mr. Stephen Pettifer. Please state your company name, followed by your question.

Antonia, actually, we come back to respond to Alex’s first question which was regarding the tax assets, the deferred asset scheme, and Ekrem will respond to that.

It is our general practice that we do calculate the deferred tax [on a quarterly] basis. You remember that we have explained the logic behind calculating deferred tax for the previous period, so one of the important items that create the deferred tax assets was the change in their clause, and this quarter, we have accrued an additional $312m, on top of the existing provisioning amount.

This $312m refers to deferred tax assets, meaning deferred tax credit at the company’s P&L, so the $64m deferred tax assets which occurred in the second quarter is purely coming from increased accrued expenses of this quarter, of the company in this quarter. So it’s definitely not a cash tax benefit. There is no cash attached to this deferred tax calculation.

And we can, if Alex, that is satisfactory, we can go to the next question.

Thank you. I’ll reintroduce Mr. Stephen Pettifer. Please state your company name, followed by your question.

Yes, hello, it’s Stephen Pettifer from Merrill Lynch. I have two questions, please. Firstly, I wanted to back up, just a little bit, if you could share with us a little bit more on your overall thinking about the settlement, as best you can? Would it be prudent to assume that when and if a settlement occurs, it will be all those issues bundled as one package, or could it be that they will be dealt with on a case-per-case basis?

And my second question please is, you referred earlier to part of the calculation behind your provisioning referring to the reduced interconnection revenues from Turk Telekom. I wondered if you could quantify for us for those may have been in the second quarter? Thank you.

Let me take the first part of your question, Stephen. About this settlement process, obviously there are mainly two parties, and three processes, let’s say. First of all we have the Turkish Telekom’s interconnect dispute, and on that dispute, we do not have any further capital evolving and accumulating, because of our new agreement on April 23, 2003, and on the other hand, we have the second dispute with Turkish Telekom on the infrastructure usage.

Thirdly, we have a dispute with the Treasury, and with the Treasury we do not have a common understanding at least as yet on which part of the revenue we should be paying the Treasury share, so the capital, plus the interest rate is accumulating. I think the disputes will be solved, if they are solved, firstly on the Turkish Telekom, because the Turkish Telekom’s dispute settlement, especially on the interconnect, will be an input into the Treasury share, because we are going to be receiving invoices if we pay something to Turkish Telekom, which will really affect our base for the Treasury share on the interconnect revenues.

This is why that should be solved first, and then the Treasury part of the dispute, but still, we look at them as a whole while we dispute on different disputes with different parties. In our minds, we try to solve all of them if we can.

And the second part of your question?

It is related to the company’s total interconnection revenue, which [includes] a percentage for that, by excluding this $229m revenue adjustment for the second quarter, which is a one-time impact to the company [by provisions]. The total interconnect revenue, including Turk Telekom and other mobile operators is approximately 13% of the total revenue of the company, which is an amount around $112m.

That’s very useful, thank you.

Thank you, the next question comes from Mr. Ishben Matakov (ph). Please state your company name, followed by your location.

Good afternoon, this is Ishben Matakov from London. I have a follow-up question on Stephen’s provisioning enquiries. Could you give us a bit more heads-up on the modalities of the settlement? You do mention that you are likely to pay in installments. Is it a good assumption for, let’s say, a monthly installment for the Treasury shares, and will it be the same, because [Telekom Aria] is actually going money. Are you going to pay money to them, or you will just let them withdrawn some interconnect revenue as they have been doing beforehand?

Secondly, a somewhat [strange] question but does the settlement mean that you acknowledge that you lost your dispute with the Treasury, or the fact that you are paying some fees retroactively will not prejudice your case, because I think you still disagree on the revenue message?

While we have noted the first part, let me really understand the second part of your question, excuse me.

Okay, Koray, what I meant is that in order, if you settle with the Treasury, because obviously they have some claim, does it mean that you acknowledge that the Treasury will prevail in its definition of the Treasury share of the revenues, or you’re just paying, but you will continue your challenge against this definition?

Well, first of all on the installments, on the Turkish Telekom side, the decree really states that there is a horizon of eighteen months of installments, given as an allowance to the general management, or the management team of the Turkish Telekom. So there is an open door for us to negotiate on deferred payments, and obviously, if we shake hands on the settlement environment, the legal cases will be stopped with mutual actions, positive actions, against the Court receiving the Court cases. Until the Court cases are retrieved, then obviously the injunctions and the cuts from Turk Telekom will continue, and some cuts, some payments, based on the mutually agreed deferred payments, the payments will be done. This is at least our understanding as of today.

On the other hand, on the Treasury, as I’ve said, the discussions are on the board’s perspectives, won, the retroactive payments or settlement of the dispute in the history, and obviously the description of the gross revenue and on which revenues we should be paying Treasury share going forward is another part, and an important part of the settlement negotiations of which I cannot give any concrete guidance at this point of time. Once it is known to us, we will be sharing it.

Okay, thank you, so this means that the [different definition] of the gross revenues will be subject to settlement, and we may have some further news on that, right?

Correct.

And on Turk Telekom, just to repeat, do I understand you correctly? If you have a settlement with them, then Turkcell is going to pay money to Turk Telekom and Turk Telekom will not net this off from the interconnect payments, i.e. going forward, after the settlement, your revenues – Turk Telekom will pay the full interconnect revenues due to Turkcell and you are going to pay them money for the [interconnect] dispute. Is this correct?

It is partly correct, let’s say. As I’ve said, at one point of time, the legal disputes will be cancelled. The legal ground will be eliminated by both sides’ written consents to the legal environment. Until then, obviously the management will have to cut the payments, and after that, obviously they will have to make the payments, but in other words, we will have to make the payments for this new settled environment.

Thank you very much. That’s very helpful.

Thank you.

Thank you. The next question comes from Mr. Sharon Chagozi (ph). Please state your company name, followed by your question.

Yes, hi, this is Sharon Chagozi from Ultra Capital. Firstly, let me congratulate you on your brilliant set of results. I have two questions. My first question relates with your calculation of your license royalty that you pay out. Could you give us an idea of how you calculated your license fee for the second quarter in terms of percentage of the reported revenues, so [about] $6m. How much of that did you pay out with license fees, and just continuing with the same question, what will be your definition for revenue for future license fee calculations?

My second question is to do with any update on your Irancell? Thank you.

Let me give you the update on the Irancell, if you like, while my colleagues are working on the numbers of the first part. On Iran, as you know, in February we were declared as the provisional licensee of the tender, and there were clear signs that we won the tender on all aspects. And then, there have been some confusions at the market place putting some different piles together and even some files, some subjects between the governments, and countries, but at this point, after some major positive announcements from the Iranian authorities at very high rank levels, and also based on some improvements in our relationship, we still have very positive expectations going forward.

We believe the process is rather slow, but continuing. The process is like forming up the company, establishing the company, signing the license and paying €300m are on the track, and we believe that it is still a positive deal for us. So when we come to the second part of the question.

Actually, the second part of the question, the methodology that we discussed earlier, which includes the calculation of 15% revenue for the Q2 results, that is, value added services, interconnection revenues, and roaming revenues, plus taxes, except for those interest charges that we calculate for the subscribers. So the methodology is based on the above, that is again, value added services, interconnection revenues and roaming revenues, plus taxes, and as Mr. Akpinar has said, the discussions are continuing, so from that point of view, we can guide you on the methodology aspect, or settlement resolution in terms of how the charges will be booked for the next quarter at this time.

Right, so they will just stay on a normalized basis, hopefully this is the last we see of provisions, but we never know, but can we assume 15% of the revenues you mentioned going forward, or do you think they will be a few more months before we can go back to that definition? I mean, if you could give us any sort of timeline, because it seemed like, for Q2 2004, you had something like $200m paid out in license fee, which is about 35% of your reported revenues. Now, I know that’s not a good benchmark going forward, but can we, for the next few quarters, expect a lower percentage of your reported revenues paid out as license fee?

Frankly, speaking on this settlement environment, I don’t think that it is going to last several quarters. It can be a matter of a few months rather than quarters. Can it be done in a few weeks? I really doubt it, but I think the horizon can be put like a few months rather than quarters.

Okay, thank you.

Thank you.

Thank you. The next question comes from Miss Aisha Morov (ph). Please state your company name, followed by your question.

Hi, this Aisha from Raymond James Securities. Again, congratulations on the really outstanding second quarter results. My question is regarding CapEx. We are seeing that there’s a huge jump in the second quarter. You have actually increased your CapEx plans for 2004, but I’m just wondering whether this would be the going rate for 2005 to 2006 period?

And the second one is regarding the impact of the [Cellco] planned purchase and the G&A expenses. Could you please explain the relationship there? Thank you.

Well, for the CapEx, we have revised our guidance from $200m to $300m, because the traffic is going up because of the macro. We’ve seen that in MoUs, and the new subscriber additions have been pretty successful in the first half, and we give the guidance that in the second half, nominally, we expect almost the same number of subscribers on our network. Based on this, on these realities, we operated our expectation of investments, so that we carry our quality, the service quality, and the satisfaction of customers, level on our network as high as before.

Going forward we can say in the next years, before coming into Edge of new horizons, like 3G, for example, the same levels of capital expenditures will be satisfactory for us to maintain the quality of service. So for the second part of your question, Ekrem, can we have the second part?

Well, of course, we have [told you] $65m [sales of bond]. We were, of course, in the market, one of the bond [indiscernible] purchase was more than that. So there is that, the premium that we had to pay in order to buy this $65m Cellco bonds. Plus, there were some, when we purchased the Cellco bonds, amounted to $65m, there were also some accrued interest [credits] so this premium price, plus interest costs, it was a very important [indiscernible] to the company that we have to book when we purchase to do company G&A.

So this $8m total costs in Q2, has arisen from this Telco, Cellco bonds purchase. However, the wording behind buying our Cellco bonds is mainly the reason that the interest income, net interest income on the Cellco is much higher than the market interest rate for our market month or yearly deposits. So by purchasing these actually, we have now some net interest gain, which is going to be realized in the previous quarter, from the maturity which is the first day of August 2005.

Thank you very much.

Thank you. The next question comes from Bettina Mikolayovich (ph). Please state your company name, followed by your question.

Yes, good afternoon, it’s Bettina Mikolayovich from ING. I have a question regarding your translation gain provision. It was up to $29m for the quarter, but looking essentially from gain coming from the revaluation of your legal provision, this gain is at over $100m, so apparently you had also some loss in this position, so if you could please break it down?

My second question is regarding market share. Essentially maybe you can give us a little bit more detail regarding your assessment of share of net additions between you and competition for the beginning of the year?

There are several items that we can associate with the company’s second quarter translation amount, which is $28m, so the first one is, as mentioned earlier, the legal provision, because of the reason that the total amount of the legal provisions are in [here] and because of the 30% depreciation of the Turkish lira, there is a gain on the total legal provisions.

However, on the other hand, there are some other [indiscernible] based amounts that we have recorded translation loss, which are the company’s [clear] cash balance account. We recorded some translation loss on that, and plus, the deferred tax amount, which is also in Turkish [lira] basis, and we have recorded some translation loss on the total amount of deferred tax calculated in the company’s financial statement.

So by getting the summary of these three items, in fact, we are ending up with $28m translation gain for the second quarter that we have recorded.

Sure, thank you.

As to the market share, we have estimations about the share, as we are the only public company in announcing our figures. As to our knowledge, we are still leading the new acquisitions in the market, and it has been stable for the last quarter, and it’s over 50%, I must say. On the other hand, we believe that it’s around 60% to 65% on a cumulative basis.

Thank you.

You’re welcome.

Thank you. Are you ready for the next question? The next question comes from Mr. Emret Anis (ph). Please state your company name, followed by your question.

Hi, this is Emret Anis from HC Istanbul. I had a question on the churn rates. You guys did a great job in reducing the churn rates this quarter. First, is this rate a sustainable level for the balance of the year, and given the comment that you made on the increased competition?

My second question will be on the gross margins. If you guys were to see revenues flattish next quarter, or maybe up in single digits, would it be fair to assume that the gross margins could remain in the 48%+ levels for the third quarter? Thank you.

We will aim to keep churn levels low, mainly because of our [PLM] capabilities and segmented activities, I must say. We are also running some mass loyalty programs, which we have explained for quarters. On the other hand, market sentiment, business market sentiment also contributes to churn levels.

As to the future guidance, I can give you a yearly guidance, which we expect to keep churn level of this year’s, lower when you compare to last year’s.

I mean, even if I assume the churn level at 3% for the balance of the year, you would still be below the previous year, just for a mathematical perspective? So you know, being below previous year could mean that you could either go up or down, you would still be below the previous year, but can you give a little bit more specific guidance as to how the rest of the year, you would think would shape out?

Yes, actually, you know, for pre-paid, the service period is seven months, so we can, you know, estimate the churn rate of the coming months is quite healthy, I must say. So according to that, we can say that this year, we will end up with lower figures when compared to last year, but after some quarters, of course, it might change because of increased competition.

Okay.

Churn levels may go up definitely, according to competition.

Okay, and the second part?

This 48% gross margin is, well, it is a hypothetical calculation. I mean, the adjusted figures are by thinking that if there were no, this $320m additional provisions, so that’s why that gross margin in the second quarter should not be used as being a kind of indicative item for the future quarter of the company. On the other hand, it’s another item that should be kept in mind which is just coming from the legal cases, $137m translation impact. So by considering this [indiscernible], to stand gross margin, you have to [develop] this one-time impact of translation gain, coming from the legal dispute. That’s very important.

Right, I mean, I was trying to get to the 48% by taking out both – by adding the revenue and taking out the $109.7m from costs of goods sold. But you’re saying that even when I do the reverse calculation, the 48% would not be a meaningful number to look at from an out-patient’s perspective for the second quarter, even after doing the adjustments both on the top-line and also on the gross profit line?

Well, mostly, yes, I agree with yourself. The reason behind it is that this $312m includes the adjustment on the legal cases. That is related to the previous quarter, so we are not talking about a single quarter impact. In the second quarter, this additional provision in the second quarter, which is $312m, also includes the company’s previous periods in terms of legal impact.

Right.

So it has to be eliminated if you would like to look at the second quarter, it should be kind of indicative for the future quarters.

I see, so what kind of numbers should we expect from a similar revenue run-rate in the third quarter, assuming there are no legal provisions for the gross margins?

From a future guidance perspective, what we must say, Emret, is that the second quarter should not be taken as a guidance. Obviously the company is going through the settlement discussions, and therefore, depending on the resolution of these discussions, or extension of these discussions, we have not been able to give a timeline. The current methodology may continue, or based on discussions, change. That’s why we can only speak on a quarterly basis.

Okay.

Overall, I think the management has already guided the market on the overall expectations of the revenues, and overall performance. We do expect a better year this year, as Ekrem said in his presentation. We believe that the 40% level of EBITDA is quite sustainable. We talked about subscriber numbers, so overall, despite these discussions on the settlement side, and its impact, our yearly actually guidance has not changed.

Okay, thank you.

Thank you.

Thank you. The next question comes from Miss Diana Cortena (ph). Please state your company name, followed by your question.

Hi, this is Diana Cortena from Ox Securities. My first question is related with the provisions again. In order to make a healthy quarter-on-quarter comparison for operational performance, could you please provide a breakdown of legal provisions on the P&L accounts for the first quarter, such as direct costs, interest expenses and translation gain or loss?

My second question is related with the discount campaign for mobile to fixed lines, fixed calls initiated in March. You have stated that related revenue levels remain the same after the campaign, and what effect did it make on interconnection expenses to [Q2]. Could you please give a before and after comparison? Thank you.

Diana, we do appreciate the question. On the other hand, we find it difficult to respond to both of the questions. The reason being is that from a Q1, Q2 comparison perspective, what was Q1 [indiscernible] without the provisions, we have applied certain methodology in Q1, at that time, and since then, the management is saying that the methodology has changed. We talked about the decree, and based on that number guidance that applied to Q2, that did not apply to Q1.

So from a provisions perspective, they are not quite comparable, and we do not have numbers that are stripped off of these assumptions for Q1. And as for the minutes of usage, we do not break down the minutes of usage from a competitive point of view, as part of the disclosure policy. We have not changed that policy. That’s why we cannot selectively share that either. So that’s probably not a good response to you, but that’s how we look at the issues at [inaudible].

Thank you anyway.

Thank you.

Thank you, we have a follow-up question from Mr. Stephen Pettifer. Please go ahead.

Thank you, two questions, please, simply, firstly, what was the percentage of revenues that came from value added services? And my second question relates to your comments about entering the long distance business. I wondered – I’m assuming here that you’d be using your own network for this purpose, and I wondered if your current CapEx thinking has incorporated that, or if, indeed, we should maybe expect a need to spend a little more in network if you embark on that. Thanks.

Well, as to your first question, the percentage is 11.3%.

11.3%, did you say, sorry?

Yes, 11.3%.

Thanks.

For the second question, our CapEx guidance revision does not have an impact because of our long distance telephony services decision, and first of all, the long distance telephony services company will be owned by Turkcell, so it will be a totally different incorporation, and the CapEx that we have given is for Turkcell only.

And on the other hand, on in Turkey, at least at this time, for the long distance telephony services, there are 38 license holder companies, and the investments that they’ve done so far are not, in no way, significant comparable numbers in Turkcell’s numbers, so it is a rather small number, maybe [a few six] digits investment type of approach of business. And the reason why we are in there is because we are a major telephone operator company in Turkey, and this is a new segment of the fixed environment opened up for competition and liberalization, and in the converse environment in the total industry going forward, this is a part of the industry that we cannot neglect, so we will be there with one player in arm’s length conditions with the others.

Thanks very much.

I also would like to add that the ratio I gave you, you know, is the ratio of the figure before provisioning. You see, at last, provisioning the ratio will be 16%.

Thank you.

You’re welcome.

Thank you, sir, would you like to take another question?

Well, if there is one more question, let’s go ahead and take that.

Thank you. The final question, in that case, comes from Miss Anna Basson. Please state your company name, followed by your question.

Yes, hi, Anna Basson from CAIB. I have two questions. The first is on your reduction in your prices of your calls to fixed line networks, and I wondered if you can tell us if the liberalization of the market has somehow allowed the interconnection rates you paid to drop substantially, and therefore, if that’s actually led the decision to cut those rates?

Secondly, from looking at your net interest income in the second quarter, stripping out the $27m write-back of provisions, it looks as if you had an underlying $12m or so net cash revenue income. Is it possible to sort of push that forward and assume that’s a rough figure for the third and fourth quarter?

Let me take your first question on that. The first question’s answer is, you know we have signed a new interconnect agreement with Turkish Telekom on April 23, 2003, and in that agreement, the interconnect costs in this industry, in this country, have gone down. In March, actually, we started the first campaign towards the PSTN environment, out of which we could gather some data on how the habits can change, based on pricing differences.

Following that, we started our optional campaign, in which there are four models, and one of them contains three favorite pricing numbers, to be selected, and one of those numbers could be and can be a PSTN number. So we had two actions, one after the other, out of which we could gather some information, and at the end of the evaluation of those changing habits, based on price elasticity, we started this new campaign, which is giving the same price On-Net on Turkcell and Turkcell to Turkcell calls, which is giving us a total community of 40 million ends, almost half mobile, half fixed environment.

This doesn’t have any impact on the long distance telephony services. Long distance telephony services helped our international calls pricing in the sense that Turkish Telekom made a move of cutting the prices of international calls, and our cold pricing methodology to international calls is primarily based on Turk Telekom’s prices, as our costs in that pricing methodology, so when they lowered the prices, that meant that they lowered our costs, which helped us making a different pricing on the international, and it did not have any impact on our pricing to PSTN environment.

Excellent, thank you.

And the second question?

The second question, in respect to interest income, it is directly linked to the company’s cash now at hand, so for the second quarter, the interest income that we have recorded, around $38.5m, it has been actually generated with the level of cash balance that has been presented, it’s been the $820m by the end of the second quarter.

So for the future, this is, as I said, very much dependent on the cash level at hand. If we will be able to get a lot of money as the company’s cash levels, so the interest income of the second quarter can be maintained.

So you would use the $38.5m as a suitable base for going, calculating the future quarters’ interest income?

Well, as I said, it is pretty much dependent on the cash level.

Yes, sure, but in relation to that.

This might change, depending on the cash out of the legal provisions.

Okay, lovely, thank you.

This will be taken [in total] which is not to do yet.

Excellent, thank you.

Well, thank you. I’d like to say thank you before we close the conference call on behalf of the management team here. Please let us remind you that the audio recording of the conference call will be available in the next few days, and you may call and listen also. Please do call the IR team for ongoing discussions that you’d like to have on these issues. Again, thank you, and goodbye.

This concludes the Turkcell conference call. Thank you for participating.