Turkcell Iletisim Hizmetleri AS (TKC) 2005 Q2 法說會逐字稿

Welcome to the Q2 2005 results announcement on September 8, 2005. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. [OPERATOR INSTRUCTIONS]. I will now hand the conference over to Mr. Koray Ozturkler. Please go ahead, sir.

Thank you. Hello. I would like to welcome everyone on behalf of the whole management team here today.

Before we proceed with our presentation, I would like to point out the fact that any forward-looking statements in this presentation we are about to cover are not historic facts but rather represent Turkcell's future expectations. Turkcell believes that the expectations reflected in these forward-looking statements are based on reasonable assumptions. However, forward-looking statements involve inherent risks and uncertainties and there can be no insurance that Turkcell's actual results will not differ materially from those expressed or implied by any forward-looking statements in this presentation.

At this point, I would like to hand it over to Mr. Akpinar, our CEO, for an overview of Q2 results.

Thank you, Koray. For you all I would like to welcome you to our 2005 second quarter results conference call. In the second quarter of 2005, due to the stability in the macroeconomic environment, coupled with the continued sales and marketing efforts of the operators, our market growth grew above expectations.

We continued our staggered campaigns and segmented activities, which strengthened the loyalty of our subscriber base and helped us reach our target returns in line with our bottom line oriented play. All in all, the increase in minutes of usage, supported by the seasonality and growth in the subscriber base, led to an improved operational performance in the second quarter.

The leading phase of long awaited Turk Telecom privatization has been finalized and the sale process of Telsim has accelerated recently. As the leading player in the market, we are following these developments in our sector, while, as management, we are taking necessary measures to prepare ourselves for the changing market environment. Going forward, our intention remains to maintain our market leadership while sustaining the balance with our bottom line objectives.

Another important milestone recently achieved was the realization of the payment of $400m high yield Cellco bonds. With this payment, we have significantly improved our outstanding total debt as well as our weighted average cost of borrowing.

And as a final point on this slide, it is important to state that we remain focused on running our business effectively and, notwithstanding the dispute between our shareholders, we are able to take necessary operational and strategic decisions to ensure day to day management of our Company. We see no operational impact due to the ongoing structural discussions between our shareholders at this time.

Now, I would like to briefly talk about the market outlook, on the next slide. With regard to the macroeconomic environment, as stated earlier, key performance indicators signaling stability in the macroeconomic environment for some time, have positively impacted our operational performance. However, we also see that there is currently some slowdown in domestic demand, which may adversely affect our future business performance. Coupled with that trend, we believe that the developments towards the EU accession talks on October 3 and IMF's review process may have a certain impact on our business environment and are important milestones to be watched.

Before I touch on the two recently emerged legal issues, I would like to provide you with a brief review of the previous developments on the regulatory front. As previously communicated, telecommunication authority had issued its reference tariff structure back in September 2004, indicating the pricing terms.

During the periodical revision of the pricing terms of the interconnection agreements, we have not been able to agree on new termination rates. And that, as per the access or -- access and interconnect regulations, the issue has been escalated to the telecommunications authority by Turk Telecom and Telsim.

Consequently, in August, the telecommunications authority issued a temporary interconnection price schedule for the interconnection between Turk Telecom and Turkcell, which is currently being applied. While the telecommunications authority is continuing to process to set the terms regarding the revised pricing structure between us and Telsim and the process is yet to be finalized, Telsim has initiated a lawsuit against Turkcell, which we believe has no legal basis, for not applying the reference tariffs. We are now planning to take necessary counter legal actions against Telsim, while awaiting the resolution of the telecom authority on the matter, and in line with the access and interconnection regulations.

We were also notified in August that Turk Telecom has initiated a lawsuit against Turkcell, related to the interconnection agreement signed with Millenicom to carry international voice traffic, and is requesting a collection of its claimed damages, for which we do not know how they have been calculated. Regardless, as Turkcell conducted these operations based on the permissions received from the Ministry of Transportation at the time before ensuring international interconnection via Millenicom, we believe we have not violated any rights of Turk Telecom. And accordingly, we will take counter legal actions to reflect our position.

On a more positive note, the clarification of the gross revenue definition to be used for Treasury Share calculation was confirmed by law. Once this is approved by the Council of State and required revision in our license agreement is realized, we will be able to exclude the late payment interest charges and all indirect taxes, including VAT, from our revenue base while calculating 15% Treasury Shares.

As highlighted before, the finalization of the bidding process for the privatization of Turkish Telecom and the sale of Telsim are important structural changes in our industry and should further intensify our competitive environment. As always, we will continue to take measures to deal with the new environment.

So far in 2005, we are pleased with the pace of growth in our market and the positive impact of this growth on our subscriber base. Although we expect some deceleration in the growth during the second half of 2005, due to a slowdown in consumer demand already seen. In the longer term, we expect 70% penetration levels are more likely to be achieved, compared to our previous estimate of 65% levels by the end of 2007.

To give you a better feeling for some of the activities in the marketing during the second quarter, we may say that our competitors continued to offer community tariffs, especially for students and families, and flat rate tariffs, which included ultimate discounts to GSM calls. Our response to these aggressive price based offers was consistent with our ongoing philosophy of introducing campaigns and offers to better meet the needs and expectations of our customers via incentive programs, through a segment based approach.

The offers and campaigns that we highlighted during the quarter were focused on incentives to increase usage through campaigns providing certain usage benefits. We believe our 'better value for money' approach has proved successful in helping us effectively retain our subscriber base while increasing usage and penetration of our services.

I would like to make an extra effort during my presentation, later, to particularly highlight some of our very interesting current product portfolios and our futuristic thinking which we were presenting during CeBIT technology convention, as an example, this week, which we believe will play a key role in our developing competitive environment.

If we take a quick look at some of our key operational indicators, in line with the market growth in the first 2 quarters of the year, we see that our subscriber base grew increasingly to 25.6m level. Our intention is to maintain leadership in gross additions in our market, while keeping our acquisition costs at reasonable levels. Despite better than expected growth during the first half, I would like to note that we see no change in our subscriber growth expectations for the full year, mainly due to a general slowdown expectation in the demand, in line with macroeconomic indicators. Our guidance is still a slower pace of growth compared to that in 2004, when we had 4.4m net additions.

On the churn front, there were no material changes in the second quarter and the churn rate remained nearly stable at first quarter levels, thanks to our loyalty programs and campaigns aimed at subscriber retention. While our efforts will continue in this direction, again, we would like to reiterate our guidance for the full year, which foresees an increase compared to last year's average of 9.1%, but a decline comparing to year 2003 average of 14% level.

As for usage, the seasonal trends, coupled with the segmented incentives introduced during the quarter, resulted in an increase in average MOU for both post and prepaid subscribers, due to our efforts. Although we assume continuation of irrational play in our market, given our prior guidance to the market, we would also like to reiterate that we believe we will be able to increase our average MOU slightly this year, in comparison to last year. With this in mind, we introduced a number of campaigns and initiatives during the second quarter, which I would like to go over on the next slide, while also touching upon some of the new technologies that we are currently working on.

During the second quarter, we initiated loyalty programs for various segments of customers, resulting effectively in a slight discount on a staggered basis. While our competitors, to gain market share and create more of an active subscriber base, tend to promote campaigns that mainly provide direct price [adds], our emphasis rather to strengthen loyalty through such incentives, while keeping an eye on our margins, shall continue.

Other actions during the quarter, including service awareness activities through various media, radio campaigns and printed material. We emphasized the use of WAP, especially among young Turkcell community, which effectively leads to more than 5.5m subscribers [indiscernible].

Having led the technological innovation in the GSM market, we maintained our focus on adding more value added services after roll out of EDGE enhanced data rate for GSM evolution. For example, we observed that TurkcellConnect enhanced the internet usage substantially among professionals. We also introduced innovative new products such as mobile media - MobilMusik - for the first time in Turkey. Now, our subscribers can download full tracks from our website to their handsets. Another application is the ring back tones that we offered recently, which proved quite successful.

We are continuously introducing innovative products and user-friendly services to promote the mobile usage and penetration of our services. Currently, we are demonstrating our new products and technological capabilities at CeBIT. We introduced several new products and services with the slogan 'Our Future is Here', for the first time during CeBIT.

As you can see from the slide, the new products and services are categorized in line with our ongoing approach and touch our subscribers in every aspect of life in the area of mobile communication, mobile life, mobile information, mobile office, as well as mobile entertainment. Turkcell Mobitip, SMSAssitance service, MobilePayment and VisualRadio are some of the new introductions made, to name a few. In addition to these, we ran some demos of some applications such as SmartHouse concept on [indiscernible] and HSDPA / HSUPA demos in mobile, then introducing a flavor of 3.5G environment in Turkey for our subscribers and business partners.

These products and services are quite in line with our vision of enriching the private and professional lives of our subscribers by making life easier for them. And we believe we are just validating the strong emphasis we always placed on value added service side through our recent new offerings. Our efforts in this area will continue and we believe they will be one of the important factors of differentiation in an increasingly competitive environment.

Now I would like to talk about our international investments, starting with our business in Ukraine. Starting with Ukraine, currently having a penetration of around 45%, Ukraine is a challenging market, with 3 established operators. All operators introduced quite intensive acquisition campaigns, which include free on net usage, attractive on net tariffs and bonus programs.

That said, Turkcell's indirectly owned subsidiary, through Eurasia, which has been operational since February 2005 under the new brand Life, using GSM 1800 technology, is pleased to state that its number of subscribers reached 1.1m, signaling a stronger operational presence already. Just recently, Life has also started to add contract subscribers to its subscriber base, along with prepaid.

Life's financial performance, we believe, is reasonable at this point and in the right direction with an objective of establishing a sound business model for its shareholders. Life's operational objective is to differentiate itself in its competitive environment. With this direction, having introduced the first EDGE in Ukraine, Life continues its emphasis on high-speed data technology usage. Life has already launched innovative products and services, with 18 of the 16 -- 67 services launched being new to the Ukraine, and aims to become the preferred brand in its market.

We consolidate Ukrainian business through Eurasia. In the second quarter, Eurasia recorded net revenues of $9.5m. In the start up stage of operations, Eurasia's net loss was realized at $6.4m. As for EBITDA, it turned out to be positive, at $3.5m, mainly due to the translation gain of approximately $16m recorded during the quarter. Please note that EBITDA is non-US GAAP and not a financial measure.

The number of total subscribers reached 617,000 at the end of the second quarter and Eurasia generated an average ARPU of $8.1. Please note that all financials include our originally established TDMA business numbers and, in TDMA, currently 70,000 subscribers provide an approximate average revenue per user of $22, which happens to be a major contributor to the average $8.1 blended ARPU. Life's standalone prepaid ARPU, on the other hand, is around $4.9. Accordingly, we would like to remind you that the dilutive impact of the prepaid subscriber base may lead to a pressure on the average blended ARPU as our subscriber base continues to grow.

Life will continue to invest and expand its coverage in the country, building up on its current coverage of 69 cities, approximately 63% of population coverage. In order to provide additional funds to finance its working capital requirements and capital expenditures, [indiscernible] gave a mandate to ING Bank NV and Standard Bank London Ltd for around $300m syndicated loan in May 2005. And furthermore, arrangements for a long term bond of about $150m has been initiated. Our intention to build a fundamentally sound business in the Ukraine will continue, with the aim of creating value for its shareholders.

Speaking of the international investments, I would like to continue now briefly with Fintur and Iran. As for our international investments, we are pleased with the ongoing performance of Fintur companies, which gradually strengthened their strength in an under penetrated market with ample growth opportunities. Each company is self-sufficient and records positive net income. The total number of subscribers is 4.6m, a 55% year over year increase. And $202m revenues, along with a [55%] EBITDA margin, all reflect positive operational performance. The equity development suggests a net gain of $13.3m for our 41.45%] share in Fintur during the second quarter of the year.

As for Iran, as we have indicated before, we believe the Iranian market is still attractive and we are working towards the finalization of the Irancell project. Following the Guardian Council's approval of all of the amendments to the original license agreement, we stated our revision process regarding the proposed elements of the new structure and agreeing to our 49% stake in the Irancell consortium. The process for establishing an ownership structure of the consortium will be initiated. In line with our Board of Directors' recent decisions, we've made the necessary contacts with the Iranian officials recently and also provided the necessary documentation to the related ministry in Iran for the formation of the Irancell consortium.

Accordingly, the consortium stake has been reduced from 70% to 49% as per the new consortium structure and a 21% stake will be transferred to the national bank of Iran, Bank Melli. Our agreement is for the parties to make a public offering, in the third year following the initiation of the Iranian operations, of the 21% shares held by Iranian bank and for these terms and associated obligations to be reflected in all the agreements between the parties. The Iranian Telecommunication Ministry has set November 21, 2005 as the deadline and our intention is to work with our local partners, within the provided timeframe, to finalize all agreements.

Now, I would like to hand it over to Ekrem for further evaluation of our financial results.

Thank you very much. Good morning and good afternoon to everyone. I would like to start with a brief overview of the second quarter of 2005 financial results before getting to the details. Even though it is [to early] to make [a quick] assessment, I would like to remind you that [financial] provisions that were recorded in the second quarter of 2004 and also the effect of one time share investments make it difficult to make year on year comparisons on a quarterly basis.

Nevertheless, [indiscernible] second quarter result [indiscernible] first one [is just that] our operational [indiscernible] second quarter of the year includes [indiscernible] several [indiscernible] in respect of [indiscernible]. Accordingly, we recorded more than $1b revenues and our success in continuing our cost [indiscernible] plan improved operational performance, as implied by the 45% EBITDA margin. We also recorded a net income of $214m for the quarter.

Now, I would like to give more insight into our financial performance. In the second quarter of 2005, both post and prepaid ARPU improved, mainly due to the seasonally higher usage. 4.6% price adjustment on average on prepaid sector effective as of beginning of May, also contributed to the increase in blended ARPU. Accordingly, blended ARPU was realized at $13.4.

On the back of continuing favorable exchange rate, as well as improving usage, increasing value] services and data revenues, we expect ARPU to increase in 2005 compared to 2004, despite an expected decrease in interconnection revenue and [indiscernible] increases, which may impact ARPU negatively.

As for revenues, the seasonal increase in usage by 14%, the growth in our subscriber base and blended price adjustment of 2.4% on average [indiscernible] improvement in our revenues to more than $1b, despite the 3% depreciation of Turkish lira against the U.S. dollar on a monthly average basis during the second quarter of 2005.

The improvement in revenues, coupled with the proportional lower fixed operating cost in revenue base, led to an increase in gross margins, which in turn enabled us to report 45% EBITDA margin in quarter 2, 2005. Taking into account the favorable exchange rate in 2005, we believe EBITDA margin will be 3% better than that in year-end 2004. As far as [indiscernible] EBITDA is concerned, the decrease in our [indiscernible] debt position [can keep] our interest expenses, leading to an improved net income margin of 20% during the quarter. All in all, we think our margin expected $214m this quarter, despite the adverse effect of $9m [indiscernible] charge, which also includes the impact of settlement agreements.

Moving on to next slide, I would like give you a brief explanation of our costs. Direct cost of revenues increased by 10% in the second quarter, as opposed to the 16% increase in revenues. Meanwhile, [share of] direct cost to revenue decreased to 55%, mainly due to the improving revenue base as opposed to comparative costs.

[Indiscernible] sales and marketing expenses increased in advertising activities for introduced campaigns and higher subscriber evolution resulted in an increase in longer term. However, proportionally it remains stable at 12%.

Meanwhile, our subscriber acquisition cost decreased slightly to $23.2m from $23.9m back in first half of 2005. The proportion of general and administrative expenses in revenues slightly declined to 3% on the back of improving revenues, while remaining flat on nominal terms.

So far, our financial results are in line with our expectations, which state that stable costs as a percentage] of revenue are to ensure stable margins for the year.

As far as the balance sheet is concerned, due to payments related to dividends and corporate tax for 2004 [indiscernible] agreement with payment, our cash balance decreased to $681m from $870m last quarter. Despite the increase in short term debt, mainly due to our capital expenditure in Ukraine [to vendor] financing, our total debt decreased to $830m after having realized some debt repayment. However, due to the cash outflow during the quarter, our net debt position of $5m in the first quarter turned into a net debt position of $151m this quarter.

As for the income statement, having already discussed of our improved operational performance, which enabled us to record an EBITDA margin of 45%, I would like to briefly explain the impact of taxation on our bottom line. Net interest expenses decreased to $2m in the second quarter, mainly due to the level of interest charges related to the treasury shares [indiscernible] and a decrease in interest expenses related to Turk Telecom settlement as a result of decreasing outstanding balances in the second quarter of 2005.

The total net effect of the deferred tax, amounting to $63m during the quarter, was mainly due to the reversal of a portion of our deferred tax effect, in [final] with the amount of payments made related to the settlement agreement, which, after [indiscernible] for the corporate tax purposes as of 2005 [indiscernible]. Additionally, we booked a reported tax provision of $36m based on the projected taxable income for 2005 year end. The cash outflow impact of this tax provision is to be realized in May 2006.

In spite of the $9m tax charges during the quarter, our net income for the quarter was realized at $214m, with a net profit margin of 20%.

On the cash flow front, the total capital expenditures amounted to $234m and $86m out of this was for the network investment in Ukraine in the second quarter of 2005. The other item included [indiscernible] $100m corporate tax payment for 2004 and $140m principle payment, excluding taxes, related to the settlement with Turk Telecom during the second quarter. However, this was partially offset by the cash inflow items such as relief [indiscernible] and several other working capital items. All in all, despite $182m cash dividend payment to our successful cash management, our [indiscernible] and cash position was at $681m.

Moving on with this slide where is presented our payment schedule related to the settlement of our dispute. I would like to remind you that we already fulfilled all of our obligations related to the treasury share settlement during the first quarter of 2005. So then Turk Telecom [indiscernible], the [indiscernible] payment for our interconnection revenues starting from the fourth quarter of 2004, netting [indiscernible] amount from our total debt.

All in all, the remaining principle amount we pay in the second half of the year is $206m and the total outstanding balance for 2006 is $168m. The annual simple interest rate of the most recent Turkish lira denominated discount bond issued by the Turkish Treasury, which will be applied on outstanding balance [if] payments are realized, is currently around 1.2% per month.

Before closing my presentation, I would also like to briefly discuss our debt repayment schedule shortly. [Indiscernible] schedule, total payments realized in quarter 2, including principle and interest, was $94m out of the $721m total in 2005. In fact on August 1, we successfully realized the payment of $400m notional [indiscernible] 0.75% Cellco bonds with a total [indiscernible] of approximately $426m, including accrued interest from Turkcell under the [previous] agreement. This resulted in immediate improvement in Turkcell's average cost of borrowing, excluding subsidiaries which stands at 6.7%, down from almost 10% prior to the payment.

As part of our risk [indiscernible] strategy, we continuously monitor our net income to market and consider constantly to financial alternatives, in line with our business plan, in order to decrease our borrowing cost and extend the maturity of our loans on an unsecured basis.

[Indiscernible] we signed a loan agreement with WestLB London branch to provide an unsecured Turkish lira denominated 50m Turkcell facilities on August 26. This working capital and investment facility is of course for 6 months Turkish [indiscernible] [minus 15] basis points and a maturity of 3 years. The principle payment of the perpetuity we will make semi annually in 6 actual installments.

As previously stated, so far, we were able to meet our obligations related to capital expenditures, the payment of Cellco bonds and scheduled settlement payments. Similarly, our liabilities and possible equity injections to our international operations in the remainder of the year will be finance to our future positive free cash flow and our good cash balance. Thank you.

Thank you, Ekrem. At this point I would like to turn it over to the operator to start our training session please. Julie?.

Thank you. [OPERATOR INSTRUCTIONS]. The first question comes from Mr. Istvan Mate. Please state your company name followed by your question.

Hi, good evening gentlemen, this Istvan Mate-Toth from CSFB. I have two interrelated questions. The first is on CapEx. It seems to me that you're running very much ahead of your annualized target in the first half. You still stick to the old number, or do you think that any revision's needed? And if yes, where would this come from?

And related to this, I would really appreciate if you could talk a little bit about your views of the business economics in the Ukraine. It seems to me that you are going to deploy up to $0.5b capital over the next 2, 2.5 years. You are having below $5 marginal ARPU. Is this something you would already makes a positive investments for you, you think the business economics will improve? I would really appreciate a bit more elaboration on this.

Well, first of all, about the CapEx in Ukraine, we had these plans on our annual operating budget and the numbers that you are seeing here actually are not consistent of CapEx only. There are some other investments into it. And that is why we will stick to our total of $300m, around $300m, of CapEx for the first 2 years period. Ekrem is going to add some more points on this issue.

So if we look at the total increase in expenditure up to now, the figure aren't [indiscernible] basis to [last] over than $300m. [However], we should keep in mind that when we defer the Company [indiscernible], that was actually capital expenditure. It's the provision of the Company, which was around $81m. So in order to calculate the net CapEx to our business in Ukraine, we have to deduct this $81m from the total amount, which is made over the $300m.

On the second question, we do not have concrete numbers for the CapEx for the next 2 years coming. Yet our guidance of constructing a sound and reasonable business out of the Ukraine, although we will stick to the third rank for quite a long time, most probably, still seems to me valid and viable for ourselves, especially reaching 1.1m subscribers in almost -- a very short period of time of 6 months. We are currently in line with our expectations and annual operating plans. So we stick to our guidance of creating a reasonable and sound business for our shareholders out of the Ukraine.

Okay. Thank you very much. And so Group CapEx of $650m for full year still stands.

Could you please repeat the --

Group CapEx guidance of $650m for the full year, this still stands.

You mean for the Group including Turkcell?

Yes.

The numbers -- We gave, actually, two different numbers. For Turkey, we said $500m for this year. And when you look at the first half, you will see that it is not going proportionate, which was intended. So we have speeded up our investment in the first half-year. You will see that in the -- at the end of year, we will stick to the guidance of $500m. On the other hand, for Ukraine also, we have $300m, in line with our previous declarations at this point of time.

Okay. Thank you very much.

Thank you.

Thank you. The next question comes from Miss Anna Bossong. Please state your company name followed by your question.

Yes, hi. Anna Bossong from CA-IB. My first question was to do with your change in the license fee arrangements. I wondered if the new definition that the government is going to adopt -- have you asked for that to be backdated, so that perhaps at some point this year to start to have taken effect?

And secondly I wondered also about your SACs, if you can give me some idea of what they were in the second quarter.

Well, the first question, I think the law allows us to make an application to the telecommunication authority in order to change the definition of the gross revenue. And actually, how to change the gross revenue is also very exclusively stated in the law. So it will be a procedure until we change the license, which has to be approved by the Supreme Court as well. But we do not have a clear vision at this time if it can be a retro payment or collection expectation incorporated into it. At this point of time, at least, we do not have this expectation.

Okay, thanks.

After the approval from the Court, in our business plans we have the expectation to [decrease] the treasury share payments.

On the second question, Koray is going to help us.

And as for the [indiscernible] acquisition cost, $23.7 was the Q2 recorded SAC.

Okay, lovely. These figures that are consolidated, do they include Ukraine yet, or are they still just all Turkey?

The SAC figure doesn't include Ukraine.

Lovely. Thanks very much.

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

Yes, hi. It's Morgan Stanley. Just a follow up on your point earlier, you were mentioning that you're seeing demand getting weaker into the second half. Can you -- One, can you try to quantify that for us in terms of your subscriber performance for the third quarter? And maybe also what you expect to see on your ARPUs during the second half for Turkey?

Rather difficult to quantify unfortunately. But we gave some guidance on many key performance indicators, like the total subscribers, net subscribers will be slightly lower than the last year which was 4.4m on an annual basis. So looking at the first half performance, you can expect that the second half performance might be slightly lower than the first half. And why we are thinking like this, because there are many monitoring aspects, like the household goods, house starts, car sales and central banks consumer index showing some slowdown or cool down in the total economy. We do not expect a shrink in the economy but we are just stating that the growth rate is slowing down.

Sorry just to follow up on that, does that mean that you’ve already seen a slowdown in your own subscriber activity or are you just looking at general economic trends that are pointing towards a slowdown?

At this point of time we are looking at the macroeconomic indicators, and so far we have some experience that these indicators have a very high correlation with our industry.

Okay. Can I just follow up with one more question on Iran? You mentioned earlier the ownership of 49% does that include the ownership that Ericsson has in the Irancell consortium?

Correct.

Okay. And of the [VSE] what is your underlying ownership if it is around 42%?

Well it is 14/15% of 49% to be excluded.

15% of 49%?

Yes.

Thank you for that.

Thank you. Your next question comes from [Affinch] [indiscernible] please state your company name followed by your question.

This is Affinch from Global Securities.

Can you speak up a bit before you start, we couldn’t hear you?

Sure, this is [Affinch] from Global Securities. I hope you are hearing me well now? I have two questions please. Given your emphasis on data usage on new products on slide 7, would you please elaborate furthermore on the contribution of non SMS value added services and total value added services to your revenues?

And secondly, would you please provide some guidance on the ratio of your inter connection costs to your revenues in the second quarter? Thank you.

I will hand it over to Koray for your first question.

Two previous historical [indiscernible] last quarter in Q1 we as a percentage of revenue 14% of our revenues came from data not SMS. And this quarter it was 12%. The break up statistics I cannot provide, due to disclosure policy, but I can say that, by today’s majority the majority comes from SMS.

On the second question, the interconnection revenues on total revenue is around 11%, including the PSCN plus the other mobile operators. Out of this percentage I can clearly say that it is not very important part of our total revenues anymore like it used to be two years ago.

Thanks a lot. My second question was actually related of your interconnection costs?

Based on the second quarter figures, the reported costs for interconnection is around 9.8% level of the revenue.

That’s great. Thank you very much.

Thank you. The next question comes from Miss Aisha Morrow. Please state your company name followed by your question.

Hi, this is Aisha from Raymond James Securities. Two very quick questions on Iran. Could you tell us what sort of legal protection that you have created that would protect your investment from getting the similar treatment that the Turkish Airport operator has seen before?

And secondly, is there any news on the environment tax? What’s your expectation on that? Thank you.

For Iran so that we are not starting up the construction of the network and establishing full running operation yet, it is rather difficult to give you information on the legal grounds and legal environment. But I can roughly say that the license agreement is binding within the Iranian Laws, while the Shareholders Agreement and the Articles of Association can be open to arbitration with some preliminary conditions.

On the other hand, the environmental tax was at the preliminary group at the parliament, as a proposition to the general assembly, before the closing of the parliament for the summer vacations, and at that time it was not taken as a decision. After the summer holidays -- vacation and new period of working for the general assembly, it may come to the agenda again as an environmental tax on the industry.

Just a follow up. In Iran is this international arbitration or local arbitration? Thank you.

For the documents that I have mentioned, Shareholders Agreement and Articles of Association, we have the intention -– wish of making this international arbitration, with some local conditions precedent.

Thank you.

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

Hi. I have a question on the license fees actually. First of all, could you give us a percentage of the license fees to the revenues in the second quarter? Within the cost of [indiscernible].

Unfortunately we could not understand the question. License fees?

To the revenues, the percentage of license fees to the revenues in Q2?

In the second quarter the consequence of license fees which equate to the previous year, is reported to be 19.6% [indiscernible]. [indiscernible] because we pay actually from the gross revenue including some additional interest sales that we collect from subscribers.

So this might be a little too early to ask but if the agreement with telecom authority were to be revised, should we expect this to be 20% roughly ratio to go down to 15%? Or would it be too optimistic? Are we talking about a 5 percentage point swing in your cost basis?

Most probably there will be an improvement of around 3, 4%.

And did you guys give any thought as to whether you will pass this on to consumers in terms of lower prices, or flow it through your P&L, or are you going to mix up the two?

We haven’t given serious thought to this issue, but the thing is that the industry is making some campaigns, promotions and some price discounts and attractive offers to the customers, all the time on a consecutive basis. So I believe it is not going to be like one stop shopping transfer of this benefit to the marketplace right away. But it might ease or facilitate the competitive environment on the pricing.

And just one last question. Do you know if your competitors are basing their treasury share on gross revenues or net revenues at this moment? Are they going to see the same kind of benefit that you will, or do they already [indiscernible] offer their net revenues and they won’t see any incremental benefit?

As far as we are informed, they are on the same boat and they have the same calculation methodology and they have also applied to the telecommunication authority for this renewal of the addition of gross revenues, so we are all on the same boat on this issue.

Okay. Thank you very much.

Thank you. The next question comes from Mr. John Charles Marley. Please state your company name followed by your question.

John Charles Marley from JP Morgan. Just a couple of questions. First you mentioned interconnection revenues as a share of revenue in Turkey. How much of that is coming from mobile to mobile [indiscernible] as opposed from the PSCN?

And the second question is on Iran. Can you give an idea a little bit of what kind of regulatory framework you’re going to have over there? What kind of interconnection rules and rates you’ll have with the various other players? What kind of tariff setting mechanism you will have over there?

And also on Iran, what the rules are going to be in terms of cash flow repatriation and dividend claims out of the country? Do you have any idea of how you’re going to be able to operate over there?

As far as your first question, as we discussed 11, 12% are already [indiscernible] for the connection and I can only say the fact the majority of this comes from Turk Telecom.

Okay.

On the second question, basically speaking the interconnect regime and the pricing mechanisms are well worked on the license document. I think it would be too broad perspective to bring this at this discussion. But we already know these conditions and we are having all this information incorporated into our business plan going forward. And with all these realities we still say that it is an attractive market for us. This is why actually we’re trying to make it happen and we’re working very hard on it.

And what about your flexibility in terms of price setting you have, will there any gaps, will there be any control by the Government?

There are some controls, but still we believe they are doable and workable.

Okay. Do you have any in terms of coverage -- any coverage requirements you have to provide?

I don’t even recall if there is any coverage requirements. But our wish of having a large coverage and good network performance over there would precede that even if there is. Is there any? I’m looking at my colleagues now, we do not remember of such compulsory coverage.

Okay. And then finally the ability to repatriate cash in the form of the dividend going forward, how confident are you about that?

We do not see a major trouble with that. That was a thorough investigation issue for us. We are quite optimistic that there’ll be repatriation of dividends is common practice in Iran.

Thank you very much.

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

Hello it’s Stephen Pettifer from Merrill Lynch. Two questions please. First off, can you just give us what you think your share of net additions was in the second quarter in Turkey? And secondly, in the Ukraine, just to go back to an earlier question, how confident are you that with incremental ARPUs coming at below $5 that you can be making money. Or maybe another way of asking that question is what level do you think you will not be making money? Thanks.

Okay I’ll share them all, Ekrem will take the first question and then I will take the second.

[indiscernible] over 50% new additions in this market to having that figure, we are very successful to keep that promise in the second quarter.

Does that mean you’re about 50% you think?

Yes, in the net we are above 50%.

Just around 50% then is that right?

Not around basically, above 50%.

Okay.

The second question is in Ukraine obviously it’s a matter of a balance between SAC and ARPU. At our pre-paid environment SAC is a very negligible under control cost item for us. This is why $5 making us pleased at this time on the average revenue per user. We’ll always watch out the balance between the SAC and ARPU. I don’t know if we will have a major downturn going forwards, obviously the subscriber base going up, always decrease the uplifting effect of the PTP EMEA customers.

But on the other hand we have recently started the pre-paid subscriber’s acquisition. The contract subscribers acquisition in Ukraine which will also have some positive balancing effect, but as I said, the most important issue and the factor here is that pre-paid subscriber acquisition costs is very minimal at this time.

Can you tell us what that number is?

Unfortunately we did not prepare at this time the SAC, but we’re taking this request of yours into consideration for the next round if you please us.

I will try. Thanks.

[OPERATOR INSTRUCTIONS]. The next question comes from Miss Anna Bossong. Please go ahead.

Yes. Hello. Just on Iran, if I can have some follow up questions from previously. One is that you said you had agreement about the IPOI deal after 3 years. Has that actually been agreed with the government, or is that done as a proposal?

And secondly, can you perhaps just run through very quickly the license terms and value added tax arrangements in Iran for our models?

On the initial public offering trend, I understand that all parties are in common understanding at this time. Including the administration, the ministry and our partners over there. Yet this position of 21% of shares being placed to Bank Melli for 3 years, and for [IPO] after 3 years will have a different perspective on our major documents like Shareholders Agreements, Articles of Association, and License Contracts. This will take our time until November 21, so that we embed this mechanism into our major contracts as it should be over there.

On the other hand, on the tax environment in Iran.

Our Iran model, if you’ll allow me, model perspective and as you remember we have limited disclosure in terms of numbers for Iran other than the license fee of €300m. We haven’t disclosed the necessary investment levels, as the process that’s initiated has not been finalized and we have not finalized the vendor negotiations, given the environment. Therefore I think it’s too premature to discuss it, and we’ll make it available as we know more and come towards the end of the process.

So it’s going to be towards the end of the year. Could I ask a different question then? Is it possible perhaps to net out the Ukraine in the second quarter?

Is it possible to?

Have the net additions in Ukraine in the second quarter?

The figure that we have actually is around 655,000. It was at the end of Q2. So if you look at the progress we are at 1.1m subscribers now. That’s the difference of Q3 effect.

I can give you, as an indication, if you like if you are trying to take the second quarter total net additions. I do not have the precise number, but as a guidance I can say that the operations started February 24. So from first quarter there is only an initial 35 days above the second quarter.

Makes sense. Thank you very much, that’s brilliant.

Thank you. The last question comes from Mr. Emery Timmis. Please go ahead Sir.

Just a quick question on the selling and marketing expenses. Should we think of 12% is the new level for marketing expenses, or is this going to be easing off into the tail end of the year?

As you know the second quarter was the toughest period during the year, because of the competitive activities, and in that period we have just invested heavily to the market communication, and still it’s under control and it’s the same level. And I think it depends on the future market conditions, and it will be at the range, according to market climate.

So it is okay to model 2005 as 12% of revenues or would that be too optimistic?

It’s difficult to make a generalization but it can be -– we can say that it can be at that range.

Thank you very much.

We understand that there are no questions in the queue. So that this time, we’d like to thank you for participating to our conference call. Once again I would like to remind you that audio recording of the conference call is available for you for the next few weeks, and please call the IR team for any additional details that we can support you with. Thank you. Bye.

This concludes the conference call. Thank you for participating.