Turkcell Iletisim Hizmetleri AS (TKC) 2005 Q3 法說會逐字稿

Thank you for holding, ladies and gentlemen, and welcome to the Turkcell Q3 2005 results announcement. [OPERATOR INSTRUCTIONS]. I will now hand the conference over to Mr. Koray Ozturkler. Thank you, sir. Please go ahead.

Thank you, Yvonne. I would like to welcome everyone to our conference call on behalf of the management team here. We had a modest slight change in the time for the conference call, and that was related to some of the questions that we have received from some of you. I hope that the time change was accommodating to most of you.

Having said that, I would like to make two reminders and then proceed with the presentation. Please note that all financial data are consolidated in this presentation, whereas non-financial data are unconsolidated unless otherwise specified in the presentation.

Any forward-looking statements in this presentation are not historical 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 statement involve inherent risks and uncertainties, and there can be no assurance that Turkcell's actual results will not differ materially from those expressed or implied by any forward-looking statements in this presentation.

At this time, I would like to hand it over to Mr. Akpinar for his section of the presentation.

Thank you, Koray. To you all, I would like to welcome you to our 2005 third quarter results conference call. This quarter we are pleased to announce that our efforts to satisfy our growing subscriber base, coupled with a seasonal increase in minutes used, led to the impressive operational performance in a stable macroeconomic environment. Accordingly, we continually posted growth in key financial indicators throughout 2005.

In addition to that, we also successfully managed our cash position and realized a payment of approximately $2b cash outlay year to date, mainly without having to receive additional funding.

As for the subscriber market, after the acceleration in the first half of the year, the pace of growth slowed down in the third quarter, as we expected. Nevertheless, we managed to lead the new additions market in an environment where aggressive competition continued in the market, with the other operators' emphasis on price advantages of community tariffs.

Throughout the year, we preserved our bottom line oriented play in domestic markets, introduced or renewed our retention and loyalty campaigns on a segmented basis, in line with our Better Value for Money approach.

Speaking of operational performance, we are also pleased with the growth trends of our operations in Ukraine and Fintur, as we will elaborate further during the presentation.

Before moving on, I would like to touch upon two developments in our market, which we closely monitor. After the transfer of 55% Turk Telecom shares to Oger Group, the privatization of Turk Telecom has officially been completed. SDIF has already announced the list of companies that applied for Telsim's pre-qualification stage. The deadline for opening of the bids was set at December 13.

Along with the change in shareholdings, shareholder structure of two other operate -- competitors, the telecommunication industry will go through a transition phase, which may reshape the market dynamics play -- group going forward. As the leading GSM operator, our intention remains to preserve our stance in the market, whilst upstanding a balance with our bottom line objectives and customer expectations.

Now I would like to go through the third quarter results and our growth prospects. The number of subscribers in the third quarter reached 26.7m. We attracted more than 1m new additions during the third quarter, in line with our expectations, despite the slowdown in market growth. Of the total gross new subscribers acquired, 90% were pre-paid and the remainder, 10%, were post-paid.

In 2005 we will see overall comparatively lower growth rates in our subscriber base compared to 2004, as we've previously guided the market. As for 2006, we expect to achieve continued double-digit subscriber growth or subscriber base, but at a slower pace compared to that in 2005.

Speaking of subscribers, we are glad to announce that the number of Turkcell Group subscribers, including those of our subsidiaries, reached 29.5m in the third quarter. The growth in the subscriber base at the Ukrainian operation surpassed 100% levels compared to the second quarter, bringing the total number of subscribers to 1.3m. Fintur, on the other hand, grew its subscriber base to 5.5m during the period.

Moving on with MOU, the increase in minutes used this quarter was mainly due to seasonal trends, as well as our efforts to promote usage through segmented and volume-based incentives that I will talk about more in detail on the next slide. Our segmented offers have helped us improve our MOU in 2005 so far, compared to that in 2004. We expect further improvement in 2006, along with continuing initiatives, which will strengthen loyalty as well as promote usage.

Additionally, our proactive and reactive churn prevention programs enabled us to keep churn rates under control, while maximizing retention of our higher value subscribers. All in all, the churn rate in the third quarter remained flat compared to second quarter levels. The average churn rate in 2005 is increasing slightly compared to 2004, due to competition, in line with our guidance. We expect a slight increase in 2006 on the top of that in 2005, under our churn assumptions.

The increase in SAC is also mainly due to competition, as well as seasonal dealer activities and campaigns. We believe SAC may further increase in 2006, in line with developing competitive environment. However, we would also like to remind you that we expect the proportion of sales and marketing expenses as a percentage of revenues to remain stable in 2006.

Having touched on some operational performance indicators, I would now like to brief you on our recent actions, which helped drive our positive operational results.

On this slide, we have provided information on new campaigns that were recently introduced, in addition to the already existing activities, which will place strong emphasis with our customers. The table provides a summary of the concept behind each activity. However, I would like to talk about our approach in designing and introducing such activities, starting with discount packages that we recently introduced for the post-paid and the renewed selective discount options for the pre-paid subscribers. These offers, we believe, are quite in line with our Better Value for Money approach, which aims to strengthen loyalty, increase usage, while satisfying our subscribers' needs.

These actions that we previously introduced, such as enhanced loyalty programs, targeting certain segmental subscribers, generating certain level of usage, overall resulted in an increase of usage and also serving as a retention tool. We may say that we expect similar results from the new campaigns, though it is yet too early to clearly see impacts of these actions.

Our strong emphasis on products and services side continues. In addition to our popular existing Logo Melody & Chat services, Ringback Tone has become one of our most popular services in the last months. Since its launch in March, more than 4.3m contents were downloaded. In August, for the first time in the world, we launched customized contents for Ringback Tone, which includes subscribers only.

Mobile Payment and Blackberry applications, which were recently introduced, are likely to appeal to subscribers in time. To name a few new additions to our portfolio of services, we can mention in October Turkcell [indiscernible], which is Turkcell main address, which provides email addresses to our subscribers with a @Turkcell.com extension. And in November, Turkcell [indiscernible], Turkcell mailman, mobile email service that delivers real time push email. Our aim to continue positioning of our innovative services and service -- products and services, to promote mobile usage and penetration of our services, will continue while easing the daily life of our subscribers.

Moving on to the next slide, there are some other actions that I would like to talk about. As far as our segmented activities are concerned, we are glad to see that our efforts for the youth segment have also started to pay off. Young Turkcell community, which now has 6.4m members who benefit from daily, weekly or monthly offers, which are introduced to strengthen loyalty and increase the satisfaction of young Turkcell members. 3,000 SMS were provided for the community and back to school campaign under Kampuscell, designed for -- both for high school -- for high school students, also include music package of those who made use of these offers.

Our actions for the corporate segment continued throughout this year. In addition to the "win as you go" campaign that we introduced during the summer, providing some music incentives for this segment, we've made account visits to get a better feel for the needs and improvement areas. We also ran media campaigns to attract new subscribers. Our specific focus for this segment, including industry specific solutions, will follow.

All in all, we believe all of these activities combined help us strengthen loyalty and therefore improve the usage of our subscribers.

In each of our offers, designed to suit specific needs and expectations of our subscribers, we pay attention to our bottom line objectives while seeking satisfaction of our customers. We expect our leadership, whether in designing specific offers or shaping the future needs and expectations of our subscribers, will continue.

At this time, I would like to talk about our international investments. Starting with Ukraine. We are pleased that the Life brand is making good progress and that the number of subscribers has reached nearly 1.3m at the end of the third quarter of 2005, representing quarter-on-quarter growth of 107%. Having only been introduced since February, Life has achieved this growth despite intensive acquisition campaigns in Ukraine markets, which is currently dominated by two established players.

We believe the market has welcomed Life as an innovative service provider with a client-oriented approach and network coverage that is building strongly. Of the 100 new products Life introduced, 39 are new to the market. Since its launch Astelit has constructed approximately 2,400 GSM base stations, extending its coverage to 100 biggest cities and all major highways in Ukraine. Astelit also offers its subscribers roaming services in 180 countries through 462 roaming partners. Today the company offers the largest roaming in the Ukraine, due to implementation of the roaming replicator.

Currently the penetration in the Ukraine is at around 50% and it's quite challenging. The possible entry of fourth operator in telecom, as we are aware, to the market through the acquisition of a smaller player may further intensify the competition. However, we believe the market potential remains live for us, that is Life. And that -- and we are quite hopeful of the future.

As for financial performance, we consolidate the Ukrainian business through Euroasia. In the third quarter, Euroasia reported net revenues of $11.6m, a loss of $17.2m on the EBITDA level. Please note that in the previous quarter Euroasia's EBITDA was positive due to the translation gain. Net loss in the third quarter was realized at $25.3m.

As far as performance indicators are concerned, blended ARPU of Euroasia decreased to $4.09 from $8.10, mainly due to the diluting effect of the pre-paid subscribers base, as well as intensive acquisition campaigns in the third quarter of 2005.

I would like to remind you that all financials include our original established TDMA business numbers. In TDMA we are currently having around 70,000 subscribers, providing an ARPU of $21.49 average, which remains still a major contributor to the average $4.09 blended ARPU. Life's standalone pre-paid ARPU is around $2.69. Currently SAC is not a major item for the market in the Ukraine and at [few dollar] levels for us. However, in line with increasing competition, SAC may increase compared to its current levels.

Here I would also like to remind you that we have just recently started to add contract subscribers to Astelit's subscriber base, along with pre-paid. And we expect contract subscribers to provide better ARPU levels, therefore help improve the current blended average. We believe Life [indiscernible] reasonable performance and is moving in the right direction to achieving its objective of establishing a sound business model for its shareholders.

On the financing side, Astelit launched a $360m long-term syndicated facility in November 2005. The facility is arranged and underwritten by two mandated banks. Furthermore, arrangements for a long-term junior loan of about $150m has also been initiated. Closing of all of these facilities is expected to be in the fourth quarter of 2005.

The proceeds from these facilities will be used to refinance Astelit's existing vendor loans and local bank loans, additional capital expenditures and working capital requirements. Astelit plans to spend up to $200m in 2006 for capital expenditures. Following the finalization of the financing package, the Ukrainian operation is expected to become fully funded for the next couple of years.

Speaking of international investments, I would like to continue now briefly with Fintur. The value-generating companies are still operating in comparatively low penetrated markets, and thus still have growth potential. As we show on this slide, the year-on-year and quarter-on-quarter growth in operational performance of the Fintur operations are very satisfactory.

The combined subscriber base of Fintur increased to 5.5m in the third quarter. Combined revenues and EBITDA were realized at $236m and $134m respectively. While the net profit was $93.4m, the income we recorded using the equity method coming from Fintur was $18.9m for the quarter.

Now I would like to touch upon our expectations going forward.

In 2006 our competitive environment is likely to change, mainly due to new entrants as a result of the Turk Telecom privatization and consequent change in Avea's shareholding structure, as well as potential Telsim sale. Although these changes will likely have an impact in our market, currently we do not know the extent and whether they will play a volume or rather a value-oriented play. However, irrational price-based competition we faced in the last couple of years is a major fact and likely improvement in the approach by competition, we believe, may help our industry and all players.

In 2006 we expect our market to continue growth at a double-digit pace but at a slower pace compared to this year, and we believe we may see 70% penetration levels some time in 2007. We will keep monitoring the market and may adapt to changing conditions in the future.

The major focus area for us will be the churn prevention and retention of our value subscribers. As part of our ongoing emphasis, our aim will remain to control the level of our expenses, while ensuring necessary efficiency in our operational performance. We will continue to focus on customer satisfaction and further emphasize the value of our brands.

We intend to keep our leading position in the market and to maintain our target of acquiring 50% of new gross additions, while keeping our bottom line focus. We also aim for revenue growth, though at a slower pace. The main drivers of growth are expected to be usage increase, subscriber growth, as well as stable macroeconomic environment.

ARPU, however, is likely to decrease, mainly due to the dilutive effect of pre-paid subscribers and campaigns. All in all, we believe we can maintain EBITDA levels of 2005.

On the regulatory front, the revision of our license fee for the gross revenue definition to be used for the 15% treasury share calculation continues. Yet we do not have definite time plan for the completion of the process. Besides, 3G licenses, MNP and MVNOs will be on the agenda item of telecom authority in 2006.

As far as capital expenditures are concerned, we would like to remind you that we invested in the domestic market in 2005 quite sufficiently and increased the number of our base stations to about 10,000. Accordingly, in 2006 we may state that we expect less capital expenditures compared to this year, not taking 3G implementation into account.

Although our efforts to finalize an acceptable structure among the consortium members of Irancell continue, the issue still remains unsettled as of this date. We have currently not been notified by the authorities regarding any resolution of the first private GSM operator tender in Iran, which was won by Irancell consortium. Therefore, at this time we are not able to comment on likeliness of achieving this opportunity.

In October our Board of Directors' resolution was communicated. We permitted management to conduct a due diligence review with independent parties to purchase 50% of A-Tel shares owned by Yapi ve Kredi Bankasi at a value of $150m. Since '99, the business cooperation between Turkcell and A-Tel has provided important support to Turkcell's sales and marketing activities. And in case of a possible purchase, the acquisition, we believe, may enable us to optimize our sales and marketing efforts and help us to better position ourselves in a developing competitive environment. If the valuation comes in above $150m, we will proceed with this purchase.

On the international front, Turkcell's international goal to become a regional player remains. We are very pleased with our involvement in the growing Fintur operations and as said before, Ukraine is on the right track. Our efforts to seek new investment opportunities will selectively continue, although at this point we cannot identify any concrete near-term opportunities.

Now I will hand this over to Ekrem for the financial review.

Thank you. Good morning and welcome, everyone. I would like to start with a brief overview of the third quarter 2005 financial results, just to provide you a quick assessment before getting into the details.

Our operation [indiscernible] amounts in the third quarter improved in a stable macroeconomic environment, mainly due to favorable seasonal trends, customer growth incentives, value and segment-based retention efforts, as well as favorable exchange rates compared to the previous quarter.

We recorded more than $1.2b revenue and managed to control our costs as a percentage of revenue. Accordingly, our operational performance is proved by a 49% EBITDA margin. Net income for the quarter was realized at $327m.

Speaking of the year-to-date nine-month performance, our total revenues reached to $3.2b. EBITDA recorded during the same period was $1.5b, along with a 46% EBITDA margin.

Now I would like to give you more insight regarding our financial performance.

In the third quarter of 2005, the average revenue per user increased by 13% comparing to previous quarter. This was mainly due to favorable seasonal trends, which resulted in an 8% increase in blended usage. 2.3% appreciation of Turkish lira against the U.S. dollar was another factor contributing to this increase.

Pre-paid ARPU has increased by 18%, while post-paid ARPU has increased only 13% in the third quarter. A 4.6% average price adjustment on pre-paid scratch cards and the campaigns were the main reasons of the contribution to the relatively higher increase in pre-paid ARPU.

We expect ARPU to increase in 2005 compared to 2004, despite an expected decrease in inter-connection revenue and price discount incentives. In 2006, ARPU is likely to decrease, mainly due to greater impact of pre-paid subscribers and campaigns.

We recorded more than $1.2b in revenues in the third quarter. The seasonal increase in usage was 8%. The growth in our subscriber base and 2.3% appreciation of Turkish lira against U.S. dollar, on a monthly average basis, led to the improvement in our revenues during the third quarter of 2005.

This improvement in revenue, by 19% in quarter three 2005, coupled with the proportionally lower fixed operational costs, led to an increase in the gross margin. This [indiscernible] maintain [does not equal the] cost levels enabled us to record 49% EBITDA margin in the third quarter.

We believe in 2005 EBITDA margin will be a few percent better than that in year-end 2004. As for 2006, we are expecting to maintain EBITDA margin levels of 2005.

As far as the EBITDA line is concerned, the improved operational performance enabled us to record a net income margin of 26% during the quarter. Our net income was realized at $327m this quarter, despite the adverse effect of a $142m taxation charge, which also includes the impact of several agreements. Our year-to-date nine-month net income has increased to $670m.

Moving onto next slide, I will now give you a brief explanation on our costs. Direct cost of revenues increased by 13% in the third quarter. The proportion of direct cost of revenue during the period shrank to 52%. This was mainly due to the 19% improvement in revenues, which more than offset the increasing cost due to the contained fixed cost base in total costs.

Sales and marketing expenses, in nominal terms, decreased by 7% in the third quarter, while its proportion of revenues remained at 9%, as opposed to second quarter's 12% levels. This was mainly due to seasonally lower advertising activities compared to the second quarter of 2005, in line with seasonally lower media expenses in the market.

Both in proportional and nominal terms, general and administrative expenses remained flat in the third quarter compared to second quarter. The share of general and administrative expenses in revenues was realized at 3% levels.

Our operational result came to [indiscernible] margin at previous year's levels, if not better. The improvement in the third quarter of 2005 in gross margin compared to a year ago is mainly due to improving revenue, as opposed to operational fixed cost base, which remained almost stable.

As far as the margin is concerned, despite the redemption of $400m high-yield tracker bonds on August 1, our cash balance has slightly deteriorated, down to $642m from $681m levels a quarter ago.

The redemption of high-yield bonds also resulted in a decrease in our indebtedness, to $536m in the third quarter, down from $832m levels in the second quarter, despite the increase in short-term debt of the Ukrainian business, mainly due to Asitel's capital expenses. All in all, our net debt position of $151m in the second quarter improved to the net debt position of $106m during the quarter.

As for the income statement, we have always underlined the reasons which led us to recording an improved EBITDA margin of 49% in the third quarter. Now, I would like to touch upon the performance on the unique EBITDA line and acquisition impact for our bottom line.

Both interest income and expense during the quarter decreased and net interest expense was realized at $3m, remaining flat at the second quarter levels. The decline in interest income was due to decreasing deposit balance of Turkcell Company. Interest expense, on the other hand, continued to slide as increased expenses related to outstanding balance for Turk Telekom settlements decreased and expenses related to high-yield bonds shrank. The increase in the Ukrainian loan is another factor which increases interest expenses.

Moving on with the tax line, of the total $142m recorded in the third quarter, $92m is deferred tax, which mainly increased due to the reversal of deferred tax assets because of the payments related to settlements. In addition to that, we booked a total tax provision of $50m, based on the projected tax to account for 2005 year-end, the [total global] impact of which will be realized in May 2006.

Furthermore, despite of the tax charges, our net income was realized at $327m. Our net profit margin during the period increased to 26% from 20% level last quarter, due to the improving operational performance.

Then for the cash flow, capital expenditures in the third quarter amounted to $122m, $40m of which was expense for the Ukrainian business. This increase in investments and marketable securities was due to mature -- held to maturity investments in the third quarter of 2005.

Other items in the third quarter increased to [$204m] from $160m a quarter ago, mainly due to Turk Telecom settlement payments and increased revenues as a result of increased tariffs in the third quarter of 2005.

Net debt increased due to Cellco payments. All in all, we managed to retain our cash balance at $642m during the quarter on the back of our ability to generate cash.

On this slide, we present our payment schedule related to the settlement of our dispute. As you will see, we fully paid all our obligations related to renegotiated [loan] during the third quarter of 2005. Turk Telekom, on the other hand, has been deducting their payments from our interconnection revenues since the fourth quarter of 2004 and incorporated that demand from our total debt.

Up to the $105m paid in the third quarter, the remainder balance for 2005 is $101m. The total payment which is due in 2006 is $168m. The annual simple interest rate of the most recent Turkish-denominated discount bond, issued by the Turkish Treasury, which will be acquired on the outstanding balance, as payment realized is currently around 1.17% per month.

Now, I would like to discuss our debt repayment schedule. As far as debt repayment is concerned, of the total $728m total settlement in 2005, we realized a payment of $414m in the third quarter of 2005. The redemption of $400m notional of 12.75% Cellco bonds, due on August 1, was included in this figure.

Having realized this payment should save average cost of borrowing, excluding subsidiaries, reduced to 7% levels, down from almost 10% prior to the payment. So far this year, we've paid out approximately $1.9b concerning domestic settled expenditures, debt repayment, including principal interest, scheduled settlement payments, including [quarterly] interest, local tax payments and in dividends.

Having said that, I would like to remind you that we have successfully funded these payments without any additional external financing, thanks to our cash generation ability.

Similarly, our current liabilities and possible equity injections to our international operations in the remainder of the year, as well as in 2006, will be financed through our positive free cash flow and our current cash balance. However, as part of our risk and demand strategy, we continuously monitor certain capital markets and consider contingency financing alternatives in line with our business lines, in order to decrease our borrowing costs and extend the maturity of our loans on an unsecured basis.

We signed a three-year unsecured Turkish lira denominated [indiscernible] Turkish lira facility in August for this aim. And we will continue to evaluate such principal options when the market conditions are [legible], in line with our cash maintenance objectives. Thank you.

Thank you, Ekrem. At this time we are ready to start with the Q&A session. Before I ask our Operator to turn it over to you for the questions, I will please remind you if you could limit your questions to two, that would be great. Now, at this time, Yvonne, if you could please help us for the questions.

[OPERATOR INSTRUCTIONS]. The first question comes from Mr. Sean Gardiner. Please state your company name, followed by your question.

Yes. Hi. It's Morgan Stanley. First question -- I just have two questions quickly. First question on the Ukraine. The ARPU level there at the moment, of $4, an incremental ARPU of below $3, could you just give an indication of where you think you can get your ARPU to for 2006, as you get more post-paid subscribers on? And in relation to that, what sort of EBITDA margin you think you can achieve in 2006 with respect to the ARPU and having to invest in the brand?

And then secondly, you are net debt negative at the moment. It doesn't sound like there's many major acquisitions coming your way. Could you help us understand what your plans are for cash usage over the next 12 to 24 months? Thanks.

Thank you very much. The answer to the first question, especially on the average revenue per users in Ukraine. First, I must share with you that even on the pre-paid subscribers the drop of the ARPUs have come to a reflection point lately. That is good news on the pre-paids. And actually, to balance that on the mix environment, on the blended environment, the post-paid contract base subscriptions will also help. So we don't expect these numbers to go even further down, but most probably to a reflection point and to higher levels. That is good news.

But on the other hand, for 2006, what kind of ARPUs and EBITDA levels we can expect for Ukraine, I am afraid we are not at that point yet to share the guidance for Ukraine.

While -- yes, please.

Sorry, on that, when do you think we'll be getting an understanding of the business model in the Ukraine from yourselves, in terms of the numbers and your expectation for the next few years?

Well, obviously the Company is working on the AOPs and some scenarios for next year. And as a shareholder at Turkcell level, we do not have the 2006 prices as yet, and as soon as we have, we will obviously share, if possible, in the next conference call.

Okay, great.

On the other hand, for the accumulation of capital and resources at Turkcell level, yes, we do not have a concrete new target of acquisitions or new Greenfield operations to start and consume some cash in order to create shareholders' value, but we are constantly currently seeking for such valuable projects. And on the other hand, the Company's Board already has a guidance for the dividends, which is a minimum of 50% distribution. I'm sure, at the due time, the Board will evaluate that part of the equation and make the announcements accordingly. I'm afraid we are far away from making any other concrete announcements on this issue yet.

Okay. Thank you very much.

Thank you.

Thank you. The next question comes from Miss [Doygu Calfalglu]. Please go ahead with your question, please.

Good evening. This is Doygu Calfalglu for [Attendis]. I was wondering if you could give a breakdown of the MOU in terms of on-net calls.

And my second question is about the SAC, if you could give a breakdown in terms of post and pre-paid subscribers? Thank you.

Thank you. Let me respond to this question starting with the MOU. We unfortunately do not break down the MOU, as a disclosure policy. SAC, the same goes for the SAC, although I can give you a trend there, that in our market there is not a big variation between pre-paid and post-paid SAC. That I can tell you is the trend.

Thank you, sir. Thank you.

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

Hi. It's Stephen Pettifer from Merrill Lynch. My first question concerns margins. Apologies if I missed this, but is there anything particular in your gross margin that would account for the step change upwards in this past quarter?

And just related to that, just to clarify a point you made on the call, did I hear you correctly when you were talking about your EBITDA margin? Did you say you expected 2005 to be 3 percentage points higher than 2004?

And my second question relates to your statement, where on page six you talked about the issue of handsets being banned at the end of the year. And I just wondered if you had an idea of how many of your users had those potentially illegal handsets? Thanks.

Stephen, responding to your EBITDA question, the guidance for this year is 3 percentages better we see than 2004 average, that's correct. And for next year we said that similar levels can be maintained for 2006 in comparison to 2005.

And that was a few percentage points, sorry? Right.

Yes. That is applicable for 2005 average, in comparison to 2004, while similar levels of 2006 EBITDA are expected 2005 average [inaudible].

I will take the third part of the question. And on the handsets, actually the whole system is working on an infrastructure of equipment identity registers on the operators and a central one on the authority. And at this time, the operators already have their own equipment identity registers, but the central one is not up and working. Which means that the whole system is not working on a consolidated and transparent environment, which really makes the whole visibility rather difficult.

And at this time, the operators are depending on the white lists that have to be delivered from the Telecommunication Authority, and that is constantly changing and improving at this time. And there are obviously other issues incorporated as to how to approach the gray lists and the black lists. So it is, at this time, rather difficult for us to quantify the handsets that may be banned by December 13. We are currently working on it, but because of the reasons that I have just expressed, it is rather not visible by us at this time.

So, sorry, is that -- do you have any sense whether it's a few thousand, or a few hundred thousand, or anything like that?

I would say it is rather millions.

Ah. Okay. And on the question about gross margins?

On the gross margins the question was?

Sorry, the question was, I don't know if I missed it, but whether you gave an explanation why the gross margin jumped from 45 to 48%, sequentially?

That is mainly coming from the revenue increase. On the cost base, we have seen that, on nominal terms, we are rather parallel to Q2. And the margin is mainly coming from upward trend in the revenue.

So there was no particular item within your cost of revenues at [inaudible]?

Nothing major that we can discuss and compare between the quarters at this time.

Okay. Thanks.

The last one, cost items directly related to revenues, that represented approximately [30%] levels of the total revenue, these are three issues interconnected. Our revenue increase is only 30% part of the total operational cost actually increases. The remaining 70% is just non-revenue related expenses, so it will be important. This area will increase. It is less increase in the Company's operational costs. That's why, comparing quarters, we have bigger gross margin in quarter three.

Thanks very much.

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

Good afternoon. This is Sergei Arsenyev from Goldman Sachs. Can I ask you two questions please, firstly on Ukrainian CapEx? There were some reports in the press that Astelit plans to spend $1b on the network, and I think that's quite a little bit higher than what you were mentioning previously as your guidance. I'm just wondering whether you can comment on that.

And the second question is on the number portability in Turkey. Again, you mentioned in your press release that you don't really have the visibility on the number portability as yet. But can you give us your best-guess scenario on when it will be introduced in Turkey and when you reckon you will have to implement it, and it will potentially be operational in the market? Thank you.

Thank you. On the capital expenditures of Ukraine, actually we have already expressed that the first initial phase of two years will be around $300m. And at this time, we are also giving the guidance of 2006, which is $200m. So with the first initial phase plus 2006, we are already around $500m, and the Astelit guidance of $1b was for 2008 horizon. So after the first three years of investment of $0.5b, then two years comprising of the rest, it's not actually too much off between the numbers when you aggregate them together.

And actually, the funding round that we are running through at this time, and we are hopeful to complete by December 2005, and the possible cash creation expectations of the Company itself going forward, we expect that the operations will be fully funded. Because here we are talking about $510m of total funding, of which $150m is a junior loan, and then $360m is a senior syndicated loan. That is how we look at it.

Right.

And then the second question was about the number portability. And on number portability, obviously, we don't have the specific guidance on when the authority's regulation will come into force, and also what kind of operational environment or number portability will be taken as a decision.

There are some routing factors and central management issues on the numbers and then the routing of the calls which are critical on the infrastructure that has to be established, not only on the operators but also at an independent or jointly owned incorporation which will re-rout all the calls, so these are not decided yet. These will have different implications on the timeframe of MNP, combined with no clear indication from Telecommunication Authority yet. So we do not have a specific guidance but nevertheless, we do not expect that to happen before the second half of 2006.

Okay. Thank you very much.

Thank you.

Before we go on to the next question, actually, it is understood that when we talked about the handsets issue, and Stephen asked the question, I'd like to point out the fact that, as we said, the numbers are sizeable, in possibly millions.

There is also a -- it is important, I think, mention that there is a TRY5 charge for these handsets. And upon payment, these handsets, per Authority's regulations, become legalized. There is a procedure to do that. So it's important, I think, also to highlight that. And of course, the management and the Authority and the rest of the other operators are working on solutions there on this area as well.

Now, having said that, maybe we can proceed with the next question.

Thank you sir. The next question comes from Miss Anna Bossong. Please go ahead with your question, please.

Yes. Good afternoon. My question is about the regulator talking about MVNOs coming in this year, or sorry, being on the schedule anyway. I just wondered what your position would be if MVNO legislation was brought in. Are you -- would you challenge, legally, such a decision, and what's your view about the most likely outcome of that? That's my question.

Obviously, as Turkcell team, we are giving serious thoughts to any existing or possible upcoming regulation or new business model. And for MVNOs, obviously we'll be seeking on new value creative and added on top of our existing business volumes or business models. And we are, at Turkcell, usually welcoming any new energy or value added into the total game, as we have done in our distribution network or value-added services and content aggregators, providers and application providers.

And on the MVNO, obviously the discussion is rather early, so then we do not have the regulation on the table yet. But our philosophy is usually based on value creation and fair sharing of the created value.

So for you, the key thing, I guess, would be the terms on which they were brought into the market rather than whether they're brought in at all?

Absolutely.

Excellent. Thank you.

So there should be some extra values, like maybe a new channel, a brand value, a new reach to any customer that we couldn't reach so far. And obviously, with the existing infrastructure, we would always challenge these values.

Excellent. Thank you.

Thank you.

[OPERATOR INSTRUCTIONS].

Well, at this time, given we have exhausted the questions at this time, we would like to thank you for participation to our conference call again. Please be reminded that we will have the audio recording available for you for the next two weeks. And as always, don't hesitate to call the IR team. We are here to help. Thank you. Bye-bye.

Thank you, ladies and gentlemen. This concludes the Turkcell Q3 2005 results announcement. Thank you for participating.