Turkcell Iletisim Hizmetleri AS (TKC) 2004 Q3 法說會逐字稿

Welcome to the Turkcell Q3 2004 Results Announcement. [OPERATOR INSTRUCTIONS] I will now hand this conference over to Mr. Koray Ozturkler. Thank you, sir. Please go ahead.

Hi, this is Koray, Head of Investor Relations at Turkcell. I would like to once again, on behalf of the management team here, welcome you to our conference call. Before I hand it over to our CEO for his part of the presentation, let me remind you that the presentation is available on our web. That is www.turkcell.com.tr Investor Relations section.

Now Mr. Akpinar, if you could please give your presentation. Thank you.

Thank you, Koray. Hello. I would like to welcome you to our third quarter results conference call.

The stability in the macroeconomic environment prevailed throughout the third quarter. And the consumer sentiments were greatly improved. Meanwhile, Turkcell continued to lead subscriber acquisitions with 1.4m net new additions. And the declining churn rate also contributed to the growth in our subscriber base to 22.3m in third quarter 2004.

MoU increased to 73.6 minutes levels. And EBITDA margin was realized at 50%, exclusively pointing out our operational performance during the quarter.

Meanwhile, the GSM market continued its growth, and we believe the line penetration reached the approximately 48% levels as of Q3 end.

The structural transition in the sector continues with new target schemes and possible new players joining the sector through potential to Telekom privatization and Telsim sale. While we expect competition to further evolve in 2005, we will continue to carefully monitor change in conditions and continuously evaluate our services and offerings.

During the quarter we have made some progress and [inaudible – break in audio] to Telekom. The settlement process for our disputes related to the Treasury Share with Turkish Treasury, and interconnection with Turk Telekom continue, as I will further explain later in the presentation.

As you are aware, our Board of Directors recently approved our Corporate Governance Guidelines, including an Audit Committee and a Corporate Governance Charters, and a Dividend Policy. Through this step we believe we have further enhanced our Corporate Governance practice and intend to continue to set an example as management to our day-to-day practice complying both with New York and Istanbul Stock Exchanges.

On the next slide you will see some key financial figures of the third quarter of 2004, as well as their comparables. Here I would like to remind you once more that provisions, and particularly effects of one-time P&L adjustments in the second quarter of 2004 should be taken into account during analysis.

Revenues have increased pleasingly to $969m in Q3. You should note that if there was no one-time P&L adjustment of $229m, we would have recorded a revenue of $835m in the second quarter of 2004, versus $606m.

We are quite happy with all of our financial figures. Increasing revenues and actually keeping our cost structure under control, we have been able to reach, pleasingly, at 50% EBITDA margin levels. Just to note that for the year-end 2004, we keep our 40% plus guidance.

You may again note the improvements in our net income and ARPU figures. We will later in Finance section elaborate more on factors that impacted our net income level in the quarter.

At this point I would like to talk about our operational environment and some of the actions through which we believe we are leading the market place. We believe the positive sentiment in macroeconomic environment has its reflections on GSM industry, such that penetration has reached to approximately 48% levels. Given further stability in macroeconomic and operational environments, we expect GSM market to continue its growth, though at a slower pace.

Just to give you a feel of our expectations and planning, we expect line penetration to reach about 65% levels in 3 years from now. However, the telecommunication industry is still in transition stage, and convergence to liberalization will continue as Turkish Telekom's privatization and Telsim's sale are to be achieved and the long distance traffic carriers become operational. We do expect competition to get fiercer next year as the market becomes more established. So far we can still say that our competitors mainly continue with their focus of price-based competition. Turkish Telekom for example, also introduced its new tariff scheme, giving sizable discounts especially for long distance calls before long distance traffic carriers launch their operations in 2005.

All in all, we still see ONNET usage is being promoted while various community packages are being introduced. As new tariffs schemes and products are introduced, we believe subscribers are likely to remain price-sensitive. Turkish Telekom market is still in its growing phase and GNP per capita actually exceeded its pre-2001 price level. So we do expect price elasticity to affect the usage positively.

In this environment we continuously evaluate our tariff structures and offers to preserve our leading position in the market. While we keep our focus on our “Better Value for Money” approach, we offer periodical campaigns to suit the needs and users patterns of our subscribers.

As far as usage is concerned, our studies suggest that the recent campaigns and initiatives, such as our recently presented PSTN rates, are providing results in line with our expectations. Additionally, in an attempt to strike the right balance between our revenue goals and customer needs, we also made a slight 1.7% price adjustment, realizing the total 4.95% of adjustments for the year.

We preserve our leading stance in the market, continuing to emphasize innovative services and technologies, as well as our leadership position in terms of coverage, customer services and subscriber-base. At the same time, we try to further enhance the value of our offer to different subscriber segments and sub-segments through customized tariffs, value added services, and attractive promotional benefits. As Turkey's leading GSM operator, we also continue to expand and deepen our social responsibility programs, positioning ourselves as Turkey's flagship friend that reflects the nation's aspirations.

Having said that, I would like to move onto the next slide to mention how we managed to grow our subscriber base, also kept churn under control. As we previously announced, the number of subscribers posted a 7% quarter-on-quarter increase, and reached 22.3m at the end of the third quarter of 2004. We find with higher new subscriber acquisition and lower churn, net new additions were realized at 1,468,000 in the third quarter of 2004. For the year-end we expect net new additions in nominal terms to be significantly higher than in 2003. And to achieve similar subscriber growth rates in 2004 compared to that in 2003. As for 2005, the growth in subscriber base is expected to continue, though at a slower pace compared to that in 2004.

Churn rate continued its declining trend for the third consecutive quarter and was realized at 1.95%. Even lower levels than in second quarter of 2004. We enhanced loyalty of the large subscriber base with our mass retention programs that reward tenure and preferred usage package. For example, we designed a campaign where we provided free airtime spread over a time period for pre-paid subscribers who load high amount of counters in consecutive months during this summer -– during the summer. The results which point to higher MoU and lower churn were encouraging.

Our proactive and reactive retention programs mainly focus on staggered offers for longer loyalty. And they are designed not only to decrease the churn rate, but also to minimize the cost of churn by targeting higher value subscribers. Our proven retention efforts to our CRM capabilities is now going to be published in an international case study book prepared by Umedis, Euro-Mediterranean network for sharing IST learning sources, co-ordinated by France Academicians. By year-end 2004, we will have kept churn rate significantly lower than 2003 levels based on this sense. 2004 results so far, and with the repeated research on subscriber loyalty, show that Turkcell customer's loyalty levels is maintained at far above most competitors levels. As for 2005, we expect churn rate to go up with our increased competition assumption. But we think we are likely to keep it below 2003 levels of 14%.

In addition to the impressive churn levels, Minutes of Usage at 73.6 minutes reached its highest level since the 2001 crisis, thanks to seasonality factor, higher subscriber acquisitions and lower churn. In the third quarter, we launched several tariffs to best suit the needs and core behavior of our subscriber base. We introduced PSTN equals to all net pricing as an evolutional 50% discount on PSTN calls which had started in March. We also promoted mini-communities, offering different calling options at discounted price, as well as offering time-based discount options. In addition, following the TT international price discount we decreased the price of international calls.

All these pricing actions, coupled with the seasonality, helped further boost MoU, which are actually in line with the planned MoU and revenue levels. For the year-end average, together with the improvement in the macroeconomic indicators, and consumer sentiment, we expect MoU to improve compared to 2003.

In the same token, we also expect further improvements in MoU in 2005, compared to 2004. Given macroeconomic stability also persisting throughout 2005, we may expect further positive reflections in our market. Accordingly, we may expect our revenues to increase on the back of increasing usage and subscriber base. Even though ARPU in 2005 may decrease mainly due to diluting impact of increasing pre-paid subscriber base, and continuing -– continuous pricing activity which balance our revenue growth and customer satisfaction, we aim to keep the share of our costs in revenues at similar levels, thus maintain EBITDA margin above 40% levels.

Having provided an outlook for 2005, as well as 2004 year-end in terms of operational performance, I would like to talk about the settlement discussions which are still continuing.

On the legal disputes front, major items on our agenda is the amicable statement settlement of the legal disputes with Turk Telekom and the Turkish Treasury. During the quarter we have made some progress, and already solved the dispute related to the infrastructure usage directive with Turk Telekom. As for our interconnection dispute with Turk Telekom, we have concluded that the principals and procedures set by the Cabinet's Decree are acceptable by us, as the management terms of schemes of Turk Telekom and Turkcell, we have an agreement on the settlement terms. And currently the approval process is underway.

As per Treasury side, settlement process continues under the Law that was passed through the Parliament. As you know, both Minister of Finance and Minister responsible for Turkish Treasury on behalf of the Treasury, are authorized to carry out settlement discussions. Their authorization is subject to approval of the Cabinet of Ministers. During our negotiations with the Turkish Treasury, payments totaling to TL450t, have become a requirement to the settlement process. We have realized the payment of TL450t, which is equal to $300m as of September 30 2004 the Treasury of Turkey, which will be reflected in our financials during the fourth quarter of 2004.

We also provided a letter of guarantee for the remaining due amounts to Treasury, totaling to 6 – 565 -- TL66.5t, which is approximately $378m as of September 30, 2004, which already covers the TL150t payment that is part of the payment realized. The amount of payment which we made to Treasury may be subject to collection from Treasury with interest in case a final settlement agreement may not be reached through the deductions from our monthly ongoing Treasury Share payments.

One of the main developments regarding our provisioning logic in the quarter was the change in interest calculation related with the Treasury Share dispute, providing additional benefit on our financials. Aside from this, similar provisioning logic continued in third quarter.

At this time, before going into the details of our financials, I would like to give some update on our international investments. As for our international investments we can say that we are quite happy with Fintur's operational success. Each Company is in leading position in their own markets, having reached a total number of 3.5m subscribers. The total revenue was realized at $155m. And each Company generates positive net income.

While we believe the value of Fintur companies will continue to build steadily, the deflection of benefits to our financials will be limited due to our minority position of 41.5%.

In Ukraine, the rollout activities continue, and the launch of the operations will likely be in the first quarter of 2005. While investments in Ukraine continue at $250 to $300m for the next 2 years, we are currently evaluating further needs of the Company to determine the level of cash injection needed. However, we believe additional needs may not be significant for the near term.

As you know, we are awaiting Parliament's approval for Iranian GSM license. Our objective in Iranian subsidiary is to be able to ensure management control, and to be able to consolidate its financials into ours. We will obviously have to evaluate conditions, if any, that may be raised by -– after Parliament's review process against our objectives.

Before we go into financials, let me also provide some direction related to CapEx expectations in Turkey. Due to the improved subscriber base and profile which resulted in higher voice and data usage, we expect CapEx to realize at higher levels than 2004, up to $500m for 2005.

Now I will hand it over to Serkan Okandan from our Finance team. Our CFO is having some severe nasal congestion today. He is available for our conference call's Q&A session, but Serkan is going to help him on the presentation part. And I'm handing it over to Serkan. Thank you.

Thank you Mr. Ozturkler. First of all, good morning and good afternoon to everyone. I would like to start discussing how our legal provisions evolved during the third quarter of this year. The total legal provisions decreased to slightly above $1.1m as of third quarter, while $1.2b as of the previous quarters.

The provisioning methods for interconnection dispute with Turk Telecom remains the same as of third quarter, compared to the previous quarter. The provision allowed decreased by around $29m due to deductions of Turk Telekom from our interconnection areas in the third quarter.

As previously mentioned by Mr. Ozturkler, the settled infrastructure usage and Fund Share dispute is total coming October. And therefore the invoice of our provisions as per the settlement terms, and our total net provisioning changed to $40m. The respective payments will result in 10 equal monthly installments for the infrastructure settlement to Turk Telekom, on which 2 payments are already made in October and November, amounting to $10m.

On the Treasury side, based on the negotiations with Turkish Treasury, a decrease of our provisions for the Treasury Share dispute [indiscernible] $563m as of the third quarter. We speculate $65m reversal from previous infrastructure provisions since we expect more favorable conditions in terms of interest rates to the Group.

Finally, Turk Telekom continues to do a significant portion of our interconnection revenues in the third quarter. Total reduction, excluding taxes amount to $45m during the third quarter.

Despite additional legal provisions evolving at EBITDA level, and deduction from revenue due to interconnection disputes with Turk Telekom this year, the increase of our year-to-date revenue by 26% [share out] $2.6b, and kept our year-to-date EBITDA margin at 41%.

The Minister of Finance confirmed their Turkcell payments made to Turk Telekom and the Treasury, based on settlement agreement, with the tax deductibles whenever they are paid. Therefore, the reverse proportional [indiscernible] processed assets, assuming that a significant amount of payments have been made, and deducted from our tax rate in 2004.

As also mentioned in our press release, we have already paid $10m to the Treasury in October and November. Total effect in this context amounts to $215m, a tax provision expense during the third quarter. Additionally, we provided that this holding tax provision of $49m as of third quarter. You can expect to say, based on the project -– projected taxable income that year. Only this amount in the taxation line – will have a cash outflow impact on us in 2005. Despite the negative impact for taxation charges in the third quarter, net income increased to $161m, representing a 16% margin.

Our blended ARPU increased to $14.7 in the third quarter while $9.8m in the second quarter. Deductions from really in the second quarter, due to interconnection fee dispute with Turk Telekom, amounting to $229m, had a negative impact on ARPU in the second quarter. However, even after excluding this negative impact, we would still have improved our blended ARPU by 8%. The main reason in ARPU increases in the first -– in the third quarter compared to the previous quarter, are mainly due to increase in usage, and roaming revenues based on seasonality. And our continuous volume and second state campaigns. Accordingly, both post-paid and pre-paid ARPUs increased to $33.8 and $8.9 in the third quarter respectively.

Even after eliminating the negative impact of deduction amounting to $229m, from our second quarter revenues, our revenues would reflect an increase from $835m to US$969m, representing a 16% increase in the third quarter. The increase in our revenue is mainly due to 7% increase in subscriber base and seasonally higher Minutes of Usage per subscriber.

Relative to the improvement in revenues and maintained operational offers, EBITDA increased to $481m in the third quarter, representing a 50% margin. Despite the negative impact of taxation charges in the third quarter, net income increased to $373m, representing a 16% margin on a year-to-date basis.

Direct cost of revenues including depreciation, only increased by $8m to $549m in the third quarter from $541m second quarter, mainly due to one-time additional legal provisions recorded in the second quarter. And including Treasury Share and interconnection expenses in the third quarter.

Selling and marketing expenses increased by 16% to $89m in the third quarter from $77m in the second quarter, mainly due to business associates and corporate communication activities. As a percentage of revenue, sales and marketing expenses decreased to 9% in the third quarter, compared to 13% in the second quarter, mainly due to negative impact from additional legal provisions on revenues in the previous quarter.

Meanwhile, subscriber acquisition costs has kept around $21 which is the same as our year-to-date figure.

General expenses have increased to $27m in the third quarter, compared to $38m in the second quarter, mainly due to the one-time effect of costs related to the purchase of Cellco bonds for investment portfolio in the second quarter.

Although our operations in Ukraine are at early stages, we are starting to disclose our actual CapEx in that segment for Ukraine this quarter. The Ukrainian CapEx figure continues in the second and third quarters, represents mainly GSM economic licensing and new network investments respectively. $110m portion of the [on license] in the third quarter, represents first of all our initial cash flow commitment in Iran's [indiscernible].

This summer made a useful with capital contribution of Turkcell in Eurocell, after the final approval of the Iranian Parliament. As a result of strong operational cash generation [indiscernible] we increased our tax level by $131m in the third quarter, and close to $9.64m.

[Due to maturity based] of Cellco bonds in August 2005, we have record price, $335m of net Cellco bonds who have benefited the short term debt line in the third quarter. Our net debt provision is at the level of $163m at the end of third quarter, excluding the $1.1m of potential provisions on liabilities related to legal disputes.

Since the end of the third quarter, we paid $10m to the Treasury, as a requirement to the settlement process for the Treasury Share dispute. And $10m to Turk Telecom, according to the [informers committees] in the settlement agreement signed in October. After these payments, our churn cash bill is around $990m and we expect that we can finance our current legal and debt liabilities to our future operational cash flow and cash flow that we have.

During the third quarter we have made $90m of principal and interest payments. For the whole year of 2004, our total debt payments despite our sale in US dollars, including the purchase of Cellco bonds in the financial portfolio in the second quarter.

There are no new financings or restructures during the third quarter. Capital expenditures, possible accrued injections from our international operations, the payment of Cellco bonds, and the expected settlement payment [indiscernible] in 2005, made this finance to our future positive free cash flow and our current cash balance.

Currently there are no new finance term debts or debts to the market. However, as part of our risk and linking to management strategy, we continue to monitor debt on capital market and consider continuous financing alternatives in line with our business plan. In maintaining our focus on decreasing borrowing costs, as well as expanding the maturity of our loans on announced cyclic basis, while looking for opportunities to buy international [levels today]. Thank you.

Thank you Serkan. This actually is the end of the presentation section of our conference call. We will shortly begin the Q&A session. Let me just remind you that we will try to spend up to an hour or so for the Q&A. And let's again, we ask you to limit your questions to 2, for the sake of everyone who are wanting to ask questions. You can always come back to the queue for a third question if your question is not asked. And if we can, let's try to keep it at a strategic level as much as possible while we have the management team here. And later we will always have the IR team available. As I explained to Eva, our operator, I will turn it over to you. So you can please start the Q&A session.

[OPERATOR INSTRUCTIONS]. The first question comes from Mr. Rhys Summerton. Please state your company name followed by your question.

Yes hi, it's Rhys Summerton from Citigroup. I've just got 2 questions. The first 1 is on Minutes of Use. We continue to see Minutes of Use moving up very nicely, and I wondered if you could give us some guidance really on the long term trend that we could see in Minutes of Use. Where do you see it stabilizing? And secondly, where do you see it stabilizing on your existing subscriber base, so excluding the penetration into more of the market later on?

And then the second question, just on your -– I know you did speak briefly about it in the presentation -– we've waited quite a while for more information. Could you maybe flesh out for us just the shareholding structure of that arrangement? Or some of the issues that might need to be resolved to get the approval of Parliament? Thanks.

Good afternoon. As for your question about MoU. To give you a kind of guidance, we expect our MoU to increase next year comparable to our activities, continuous activities based on our “Value for Money” effort. In this number run, we believe that the increase in MoU and revenues will be depending on the macroeconomy, because when you look at the role of share of telecommunications in our Company -– country, it's more or less similar to some Mediterranean, European countries. So we believe that it's much more dependent on the macroeconomy.

And Bob, I believe the next question -– well, part of the first question was the potential of the subscriber base and what we expect in the longer term. Is it --? Did we understand it right?

Yes, I just wanted to eliminate the impacts of Minutes of Use on new subscribers that you add on from this point. Obviously there'll be lower spending subscribers, so I wanted to get a feel for the current base. What kind of numbers are they going to have? And then secondly your new base -– your new subscribers that you're going to be adding on, what kind of Minutes of Use can we expect from them?

All right--.

Yes, you are right. The new subscribers, they are getting our kind of lower funding when you compare it to our average. But they are not exceptional to be honest. And you may already know that we are keeping somehow better customers, or higher value customers in the market because of some natural varial efforts. So therefore we believe that the increasing MoU in coming years is because of our activities and the role of -- spontaneity of good sentiment in the market will be much more effective.

On the other hand, your second question was, I think, about the general growth potential of our subscriber base? We believe that we will continue to keep our leader's position in the market. And as for general growth of the market, we expect to grow in coming years, but at a slower pace. And to give you an indication, we expect to reach penetration, line penetration levels, of 65% in the coming 3 years. But of course we should also continue -– we shall all concentrate on penetration of people I believe.

I will take the second part of your question about the international operations. For Ukraine I may say that our network rollout process is underway. We gave a guidance of being up and running by the New Year. At this time we see some weeks of delay. That is why we are giving you guidance of the first part of the first quarter 2005 for being up and running in that environment. On the other hand, we have done all our preliminary work for marketing, sales activities, distribution channels, etc. So we are anxiously getting to the launching date.

On Iranian uptake, we all know that Turkcell was the provisional licensee and we had all the steps of the process earlier stated with the Government passed through. And at the last moment we had the news from the Parliament, with a new law passed, saying that they have to have a say for this more than 50.1% for indirect investment in Iran.

We also know that Iranian Parliament took a decision saying that this agenda item is one of the tough priority items and they have this prioritized. This is why we expect not that long of a waiting time for news to be heard. So we expect the news as soon as possible so that we have already deployed some labor force or brain power to Iran at this time. But on the other hand, we haven't done any investment so far, so we are waiting for that stage. The Committee which was nominated by the Parliament prepared a report, assessment report to the Parliament, and on an upcoming date which is not known at this time, but hopefully not far away, we expect a session in which this report will be discussed and a decision will be taken.

Thank you.

Thank you.

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

Good afternoon, it's Stephen Pettifer from Merrill Lynch. 2 questions please. The first 1 is on your cost of revenues. I note that it was -– if you stripped out the provision in the second quarter, the quarter-on-quarter rise was some 27%. And I wonder if you could expand a bit on why that was the case in the third quarter? And the second question please is on your subscriber acquisition costs. I wonder if you could tell us what they were in the third quarter, and how you see that trending into the fourth quarter? Thank you.

Regarding the first question. Why didn’t it impact to additional legal provisions on the second quarter? We should expect around $35m to the operational expense in the second quarter, because the additional proportional legal additional provisions are late into the third quarter. Therefore, the eliminated impact, after eliminating the impact of the legal process in the second quarter, the actual operational expense there is $360m. When we make the same hypothetical elimination in the third quarter, we have about $24m additional legal provisions for the infrastructure provision. And also due to the increase in the revenue, our revenue expenses like Treasury Share interconnect expenses, increased in the third quarter. So if they eliminate those effects in both quarters, actual operational expenses are around 43% of revenues in both quarters.

As for the subscriber acquisition costs, it has been stable since last [August]. However, we expect increasing our costs, due to increasing competition in coming years.

What was the figure in the third quarter please?

It is more or less the same –- 20.8.

Thank you.

Next question?

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

Good afternoon, it's Benitta Mikolayovich here from ING. I have 2 questions if I may. First one on market share of Turkcell as well as competition. How do you see it developing quite simply?

And my other question is of course -– there is more and more talks about -– on EU accession by Turkey. And my question is how do you see it in terms of potential impact on telecommunication law? And is it, do you think, opportunity also for Turkcell? And potentially if you look at regulations we may see some kind of change, or more favorable treatment of smaller operators. So maybe if you can comment on that.

As to our knowledge, our market share is around 65% on a cumulative basis. And we have got all 50% market share in terms of near position.

And do you have breakdown of competitors' market shares as well?

Benitta, given the fact that we are the only public company in Turkey, we rely on our numbers. But it is quite difficult to collect numbers from the rest of the market.

Sure.

But as far as media reports it's almost equally shared between [Calsom] and [Overt]. On the other hand, quarter by quarter there are some changes in that balance. So pretty much equally sharing position.

Sure. Thank you.

Coming to your second question about the telecommunication environment. Will it be more challenging for Turkcell if we go into EU and if the regulations are aligned with the Turkish environment?

Our understanding today is not on a negative side but we can even think about it on a positive side maybe. In Turkey telecommunication environment is 1 of the most aligned industries sectors, compared to many others. We had 1 conference that we sponsored end of April, with some executives from EU and also GSM Association in Turkey, in order to find out some differences or alignments between Turkish and EU practices. We didn't realize that the telecommunication industry is 1 of the most aligned environments.

And on the other hand we should really note that in Turkey today, the smaller companies are not disfavored, and more we can easily say that they are favored. We should also note that the asymmetrical termination charges is already effecting in Turkey, because of significant market power announcement of Turkcell, for example. We are paying more termination charges to [Overt] per minutes compared to ours.

So these things are already in the agenda and implication, application of the Turkish environment. I hope this is a satisfactory answer.

Sure. Thank you very much.

Thank you.

Thank you. The next question comes from Mr. Bob Creamer. Please state your company name followed by your question.

Hello. This is Bob Creamer from UBM. My question really is the taxation. As far as I can understand you have confirmed that the payments on provision you'll be making will be tax deductible. And yet at the same time you've increased your deferred tax liability. I don't understand that. Surely you should be reducing your deferred tax liability?

Ekrem, if you could respond to that?

Basically our deferred tax assets and the liability they have generated based on 3 basic differences in U.S. GAAP and tax books. And the current difference as you mentioned is the provision is that we expensed in U.S. GAAP and that we cannot expense in the tax books. And since we confirmed that little provisions can be tax deductible when they are print, the result benefit coming from those legal provision payments in the third quarter. And the other 2 differences in the deferred taxes. The first 1 is the temporary differences, basically coming from the amortization period of 6% and the other 1 is coming from investment incentives that we previously granted and that enabled us to benefit from future tax initiatives.

Therefore we reversed the deferred tax asset that we have recognized mostly in 2003 during the third quarter, because we are based on the projected taxable income for the 2004. We do believe that those amounts will be recognized.

I still don't quite understand. How was it that you won't have deferred tax assets then at the end of Q2, which you now feel are not appropriate? What has changed?

During the second quarter, we make additional legal provisions amounting $312m.

Yes.

And those additional legal provisions were expensed in U.S. GAAP but cannot expense in our tax books because as per Turkish legislation, you cannot expense provision. Therefore, the benefit that we will recognize in future due to those additional legal provisions in the second quarter, we recognized some tax benefits in the second quarter.

And during the third quarter, we started to pay those legal provisions to the counterpart and also based on the settlement discussions we can make projections for payment until the year end. Therefore, those paid, or to be paid legal provisions, with tax deductible on our tax books also, until the end of the year. Therefore, in the third quarter we reversed the portion that we will pay until the year-end.

I still don't understand I'm afraid. I still don't quite understand why your total tax bill should be higher now than it was at the end of second quarter given that it's now easier to reclaim the tax.

During the second quarter we made additional legal provisions that we expensed in U.S. GAAP but we cannot expense those provisions in the tax books. Therefore, when, during the second quarter, we know that we pay those legal provisions, we will benefit from a tax relief in the tax books. That's why we recognized the deferred tax assets during the second quarter and credited our taxation line during the second quarter.

However during this quarter, during the third quarter, we have started to pay those legal provisions. And we know that we will pay additional legal provisions until the year end.

And when we pay those legal provisions, those payments will also be taxed to that in the tax books. That's why we reversed previously recognized deferred tax assets during this quarter, which impacts our taxation line negatively.

I still don't understand why, in your Profit & Loss, you are in a worse situation and while in U.S. GAAP you're showing higher tax, both term and deferred, than you were at the end of second quarter, given that your situation is actually more certain.

If I can make a general comment on this practice. I think there are 2 different issues and 3 different steps.

First of all the deferred taxation was at our agenda when we had clarity going forward for our profitability. The auditors said that the Company had come to regular profit making stage. And the company has incentives for its investments, which really prevents the Company to pay the corporate tax, but still the Company is applicable to stoppage to some withholding tax. And the difference is about 12. -- 13.2%, because the corporate tax in Turkey is still 33%, while the withholding tax is 19.8%. So because of that transparency, and looking toward the future of the clarity of the profitability of the Company, this tax asset was incorporated into our statements. And at this time, the Company, in the second quarter has another clarity in the provisions, with Treasury and the Turkish Telecom.

And we restated our provisions based on our best understanding and we feel that it was a wise move, because today we can still stand behind those numbers. It looks like the settlements are very much in line with those numbers.

And on top of it there are some concrete actions of payment, which turn into P&L items and cost items from all perspectives, from U.S. GAAP perspectives with its common accepted practices, and on the other hand based on the letter that we have received from the Ministry of Finance in Turkey. They are becoming tax deductible based on the paid terms. This is why they are becoming cost items, decreasing our bottom line profitability for taxable income. Is this any clearer?

No. I mean there seems to me 2 things. 1 is that everything you have just said suggests that the deferred tax assets that you effectively have, given that you've shown at least in U.S. GAAP the provisions, are more certain than they were a quarter earlier. Not necessary. So I can see no reason for changing the amount of deferred tax.

Secondly, unfortunately, it looks, given the enormous coincidence that there was when the deferred tax at the end of last year came out at the same time you increased provisions enormously, this time you've had an excellent quarter and you've increased tax enormously. It looks rather coincidence and it doesn't seem to be explained very well at all, I'm afraid.

Well actually all these have its own reasons and the common practice alignments with the statements and the auditors. And we tried to explain to our best performance. But if you like we can have a separate session on this with our IR team after the conference call.

Okay. Thank you.

Thank you very much.

Thank you. The next question comes from Mr. Emre Tanis. Please state your company name followed by your question. Mr. Emre Tanis please go ahead with your question.

[OPERATOR INSTRUCTIONS]. Thank you. The next question comes from Mr. Alex Wright. Please state your company name followed by your question.

Thank you. It's Alex Wright from UBS. Just wondering if I can ask a question on the competitive environment? When we spoke a couple of months or so ago, it seemed that Telsim was being the more aggressive player in the market in terms of advertising spending and promoting their brand, bringing lower on net tariffs and so forth.

And I wondered if you've witnessed any significant change in the competitive structure of the market? Are there any signs that Avis' brand is becoming more widely recognized or are they spending more heavily on advertising, from what you can see in the market? And have there been any changes in terms of tariff policies from either of the 2 competitors that you feel are significant in the last couple of months or so? Thanks very much.

Thank you very much, Alex. I think in the last few months there hasn't been a major change from the strategies of the competition. Yes, the other operators, Telsim and Aycell are there. They are heavily investing and advertising on some attractive ONNET prices. And I think Telsim's 2 steps ahead of the competitiveness on the price structures, but obviously we all know that the name of the game is not only price, but it's also offers a strategic proposal to the customers, to win the game.

And the total advertisement budget is obviously helping the share of the industry against other industries. And it helps the environment to be boosted and the consumption and new entry into the industry goes up. That has been 1 of the factors to my perception, helping our success in the third quarter, as well. Because once everybody is active on the advertisement, the market speeds up and everybody, based on their own merits, get the share out of the expanded market place.

We still hang on to our strategies on value play, and total value chain proposed to the customer. And I think we will keep on doing that. We haven't seen a major change at the competition lately and in the dynamics and total numbers of the market either.

Okay. Well your strategy certainly seems to be working well for you. I mean, just on a related question, really. Have you, do you have any perception of how Avi's consolidation of the 2 previously existing, separate networks is going? Is that a process that you think is complete at this stage, or do they still have a lot of work to do on that side?

Well we know that they are working on the consolidation and optimization of the 2 networks. I don't know if the total process is already finished. It may be coming to an end. But they are working heavily on that. Most probably it is either finished or very close to the end.

Thanks very much for that.

Thank you.

Thank you. The next question comes from Miss. Aisha Morov. Please go ahead with your question.

Good evening. I just wanted to see how you feel about Turk Telekom tenders now that you have had time to possibly review the tender document?

And on the ongoing Interconnect talks, how is that progressing? Will there be a new agreement by the end of the year?

And do you think the rates will be as low as the rates published by Telecom Authority? Thank you.

On Turkish Telekom we do not have our clear minds yet, because we need to see some numbers and understand the business model of the company. And we have to create a strategy at the management level of the company. We do not have that tollgate pass through yet. So I do not have any guidance. And obviously, even if we have that tollgate pass through, we will have to take this decision to our Board, in order to approve any strategy. So these steps will be passed through first and then obviously we will make the necessary announcements.

On the other hand, we note the ruling of the Competition Board as well, which puts some constraints on Turkcell and the partners of Turkcell. All the participants of this tender. Or rather than participation to this tender, a pre-condition or a post condition of closing the deal, like selling the assets of Turkcell in order to own Turkish Telekom.

For Interconnect, we are having talks, discussions with Turk Telekom in order to have a new agreement for 2005. The existing contract will come to an end by end of December 2004.

I don't know if it will be as low as the reference targets of the National Regulatory Authority. We question if they are really cost based prices. But our habit last time has been on mutual negotiations and commercial agreements. We have a track record and good past performance on that, so we want to build up more on this relationship with Turk Telekom going forwards.

Could you give the figure for the third quarter as to how much Interconnect revenues was?

Interconnect revenue from Turk Telekom was $48m.

Thank you.

Thank you. The next question comes from [indiscernible]. Please state your company name followed by your question.

Good afternoon. This is [indiscernible]. 2 questions. Do you expect the introduction of [indiscernible] or do you have any information whether this on the agenda of Telekom's watchdog in the near future. That's the first question.

And second, would you please explain Invotel. The letter of guarantee submitted to the Treasury, which is around TRL566t, why it covers only one-third of the actual payments made to the Treasury? Thank you.

For [indiscernible], we know that it is in the full list of actions of Turkish Telecommunications Authority. I don't think that it is in the nearsighted, passive agenda of the Authority. So I don't think that it will happen in the near future. But in the long run it is obviously in the agenda of the Authority.

The letter of guarantee that we have submitted to Treasury, which is TRL566t, that covers TRL150t of 450 payment as well. So if you deduct that 450 and put together 566, plus 300, you will get to TRL866t. So that which is very much in line with our total provision on this issue.

Okay. Perfect. Thank you.

Thank you very much [indiscernible].

Thank you. The next question comes from Mr. Emre Tanis. Please state your company name followed by your question, sir.

Hello. This is H C Istanbul. Sorry about the mishap earlier. The question is regarding the market share and the competitive environment.

In the last conference call you guys mentioned that you were expecting the competitive environment to deteriorate. And you're saying pretty much the same thing this quarter's conference call. But during the third quarter we saw all your operational metrics improve quite significantly from churn rate to your ARPUs went up. You hit a really strong market share, subscriber additions and your market share was still 65%. Do you think the seasonal strength is hiding some of the deterioration that you, in the competitive environment, or do you think it is still too early to see the impact of that?

And secondly, when you do start seeing it, if you do start seeing it, do you expect to see the bigger deterioration to come in the churn line or on the ARPU side?

If I haven't misunderstood the question, I don't think that seasonality has any shadow or cloud effect on the performance, because it is all relative, and everybody is in the same boat. So all the operators have the same effect of seasonality. Sometimes better paced and sometimes at a lower. So I don't think that that has any effect. Is this the correct understanding of the question?

No my question was kind of the right way to understand it. What I was wondering was, I mean the churn rate being as low as it is and you talking about competition getting, intensifying right now from Telsim and Avia. Is the churn right, would it have been lower than even where it is today, if the competition was the same as 6 months ago, or is it too early to start seeing the impacts of increased competition from the increased aggressive marketing campaigns coming from Telsim and Avia?

It is a reality that when you launch a campaign you need an accumulation in order to have a full impact of it. Still I don't think that the launch of Avia's strategies and launch of Avia's pricing strategy are too new. They've been at the marketplace for a while now. So I think they've already come to an accumulation of impact. Still we do not underestimate the competition and be aware of what is happening around us. But really the lower churn is a very important performance indicator for us.

So your cautious comments regarding the competition in 2005 is really have to do with the situation getting even worse than what it is today, or do you just see the fall outs of current campaigns could still continue in to 2005?

Well for 2005 there are other things that may or will happen as well, besides the existing players and the company governance structures, ownership structures. There will, there might be some change on Telsim, for example.

Right.

There might be a change on the fixed incumbent for example. So these realities, or foreseeable discontinuities make us cautious about what will happen at the market place.

And if there were to, if Turkcell were to get a hit on the operational metrics, do you think you would see the bigger impact on the churn level, or on the ARPUs, next year? If it were to happen, let's say?

I don't mind if 1 of them is an earlier impacted priority or indicator than the other. So if anything happens, if any major function is against Turkcell, both of them will be impacted. And churn will go up and ARPU will go down. So I cannot make any major distinction between both of them.

And just a second very quick question on operating expenses? Would it be, is there any reason to assume the operating expenses as a percentage of revenues would change dramatically next year?

As of today's understanding, we do not expect a major change in the major breakdowns of the cost structure, no.

Okay. Thank you.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS]. We have a follow up question from Mr. Rhys Summerton. Please go ahead with your question, sir.

Yes, hi. I just have another question. I know you gave some guidance on CapEx, I think $500m. Could you maybe flesh that out as well? Why are we having more CapEx? My understanding is that the geographic rollout is virtually complete. So adding capacity should be a fairly low cost.

And then the second point on the Ukraine. Could you just also explain a bit further why there has been a delay even though it's going to be a few weeks? Is it political or is it just logistics?

Thank you. With the CapEx question, our Chief Technical Officer will respond to that.

Turkcell is always planned and invested according to the market requirements and profile of the subscriber, and also according to the new services. As you know Turkcell always have quite extensive coverage. So most of our investments are based on either quality or capacity and also the new technologies and new services. So in all of these aspects we expect quite positive development. Not only the usage, airtime, but also the data services are used and are increasing satisfactorily. So we are making our CapEx expenses accordingly.

Turkcell's investment and infrastructure is already planned since a couple of years. So what we are doing now, we are maintaining according to the market environment. So since the usage of our network will go up and profile will go up, of course we will arrange our CapEx accordingly.

For Ukraine, I may see that the few weeks of delay has nothing to do with the political environment of the country. It is just because of pure operational reasons.

Thanks very much.

Is that satisfactory?

Yes, thank you.

Thank you.

Thank you. The next question comes from [Renee Ata]. Please go ahead with your question.

Thank you very much. I have a question to Mr. Akpinar. It's related to Ukraine again. What would be the repercussions of the upcoming elections in Ukraine in terms of who will win the elections? Are you totally indifferent with the, who will be the winning candidate or maybe more specific, given the feedback that your existing partner is more closer to the existing government, do you see a threat if Mr. Yushchenko is in charge?

Frankly speaking, as a business entrepreneurial soul, what we are looking for is pure political stability. Wherever we go, wherever we operate, we look for economic and political stability. We just hope that whatever happens, happens for the good and future of Ukraine. We do not have any political choice, which is very natural and obvious. We just hope for stability on economic and political perspectives. Our partner’s choice or direction is not obviously that well pursued by ourselves as you have committed or as you have commented and it is not a relevant point for us.

Okay. Thank you.

Thank you.

Thank you. The next question comes from Mr. [Franz Ube]. Please state your company name followed by your question.

Hi. Sorry. It's actually Paulina [Korgez]. I'm calling from Franz's line, from UBS. The question which I had was on your debt strategy for 2005, as I understand you've mentioned you're constantly monitoring the capital markets, on your call. At the same time I understand that your current cash position and your cash flow generation ability allows you with no difficulty to repay the outstanding bonds due next year. Could you just please expand a little bit on your debt strategy? Are you planning to raise any debt? If yes, then for what? And what debt level would you be comfortable with for next year?

Excuse me. Very clearly the Company does not need any additional funding if one is looking at our 2005 annual plan. We are confident of paying all legal disputes together with debt scheduled repayment [financing] variables. But there is no concrete plan yet in order to increase our financial indemnities.

However, on the other hand, we are continuously looking at different financial markets in order to somehow expand our maturities. So [indiscernible] but focus with cost reduction for us. We may cut into the market. But there is no increased stake in a concrete plan for additional financial indemnities.

Thank you. Could you just expand apart from this 500m, sorry 400m maturing next year, what is the rest of the debt? You have about roughly 800 right now. What is the 400 remaining?

By the year end if you're just talking about Turkcell stand alone, because we have [indiscernible] from Ukraine operational results. If we just talk about Turkcell standalone, by the year end Turkcell will have around $714m of outstanding debt. So debt will decrease to $227m by year-end 2005.

If we look at Turkcell 2005 repayment stated on the presentation [indiscernible] $325m coming from our [indiscernible] which there make sure in the beginning of August next year. Around $96m from [Osbank], $66m from Istanbul Development Bank, together with [IDB] and HSBC and $25m by Deutsche Bank.

Sir could you just repeat? The $66m that was from---?

International Istanbul Development Bank and HSBC have arranged Islamic funding to the Company. The amount was $100m, but the portion of it back to $66m in 2005.

Alright. Thank you.

Thank you. [OPERATOR INSTRUCTIONS]. The next question comes from Mr. Daniel [Avigad]. Please state your company name, followed by your question.

Hi it's Daniel Avigad here, from Dresdner Bank. 2 very simple questions. I just wanted to confirm what the CapEx guidance of $500m in '05 relates to? That is Turkey standalone? Is that correct?

And then secondly, is there any guidance you can give us with regards to revenue projections for the Ukrainian operations when they, when you start to ramp them up next year? Thank you.

CapEx for the estimated $500m in the forthcoming year is related to only Turkcell and it is related to capacity and quality development in the radio network especially.

In the service radio network, implementing the new service-based technology. And in the core level implementing both switching capacity and at the same time, adding the new technology. That is new software technology, at software levels. This is the context of our CapEx.

Daniel this is Koray. As far as the Ukraine operation and future projections. Actually, neither for Ukraine [indiscernible] at this point we are not providing any projections. Our projections were limited to CapEx object of Ukraine for the next 2 years, which we said, $250m, to $300m.

I think as a general strategy, management would like to see the established management team there in operation a quarter or 2 and then guiding the market through them. We believe that's the best way to do it next time. Thank you.

thank you.

Thank you.

Yes. Is there another question around---?

No sir. There are no further questions at this time.

Right. That's what we felt that we had exhausted the questions. At this time then we thank you again. On behalf of the management team here I thank you for participating to the call. Please remember that our video recording of the conference call will be available next 2 weeks or so. And please call the team members of IR for any future questions or references you might have. Thanks again and bye, bye.

Thank you ladies and gentlemen. This concludes the Turkcell Q3 2004 Results. Thank you for participating.