Turkcell Iletisim Hizmetleri AS (TKC) 2006 Q1 法說會逐字稿

Welcome to the Turkcell Q1 2006 results announcement on the 11 of May 2006. 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. Thank you, sir. Please go ahead, sir.

Thank you, Pat. This is Koray Ozturkler, Investor Relations at Turkcell. On behalf of the Turkcell management team, I would like to welcome you to our call. Here today we have our CEO, CFO and rest of the management team and we will start by Mr. Akpinar's presentation followed by Serkan's review of operations and financial results today. Muzaffer?

Thank you very much, Koray. Dear all, I would like to welcome you to our Q1 2006 results conference call. Our efforts ensured solid financial results in the first quarter of 2006 despite seasonality and an increasingly competitive environment. The GSM market continued its growth above our expectations during the quarter and we maintained our leading position in the new gross acquisitions market, growing our subscriber base to 28.7 million.

Having maintained the right balance between our revenue goals and our subscriber satisfaction, we increased our revenues to more than US$1.1 billion despite intensifying price pressure in the market. In addition, our segmented approach, successful retention of higher ARPU subscribers and a profitability focus led us to improve our EBITDA margin to 37% from 32% in the previous quarter.

In the international front, Astelit, under the Life brand, keeps increasing its market share despite intense competition in the Ukrainian market and assuring an appropriate level of growth. At the same time, Fintur operations continued to generate strong financials. We will elaborate on these operations later on during the presentation.

Now I would like to briefly talk about the competitive environment. As far as the market is concerned, based on the most recent available data, we maintained our leadership with approximately 64% of overall market share as of end of 2005. The transition in our sector continues with new players entering the market through Turk Telecom's privatization and the sale of Telsim. Irrational play is expected to continue until unclear competitive positioning is settled.

The GSM market grew above our expectations during the first quarter of 2006. The major reason underlying this was lower counteroffers in the acquisition packages. We believe that price sensitive subscribers tend to remain users of a specific community offer that is in line with their expectations impacting users' levels accordingly. However, we believe that competitors efforts to promote on-net cost to increase their share of airtime traffic has so far not resulted in a major increase in multiple SIM card usage, which is an area we watch very carefully.

The price emphasis of the competition on low rate community tariffs particularly towards the youth segment continues and is now being extended to wider communities regardless of the segment-based approach. Accordingly, we have so far not seen a change towards irrational play in our market during transitional period as we had hoped.

At this time, I would like to elaborate more on Turkcell stance during the quarter amidst the operational environment we have described. In summary, I would like to highlight again that while the competition in our market continues to focus on increasing their market share through low rate community tariffs, we have remained as the leading GSM operator with our continued focus on our "Better Value for Money" approach. We believe that our approach has continued to pay off as a result of activities introduced during the quarter. We kept our gross additions market share steady above 50% levels with the introduction of lower counter starter packs.

We further strengthened loyalty through previously launched Options and Packages programs, the deadlines of which were extended. We have renewed counters from us, a loyalty program named as Konbara, which is sort of a counter bank for prepaid subscribers, where we actually deposit their future counters earned to be withdraw at their disposal. We continued our retention activities through surprises, various offers provided to mass and selected segments, such as to the youth club, Gnctrkcll and the corporate segment.

We also promoted the usage of value-added services, the revenue of which constituted approximately 14% of our total net revenue in the first quarter of 2006. As you might recall, we also made an average tariff increase of 3.4% in January in line with our goals to maintain the right balance between subscriber expectations and our revenue goals. We will continue to develop and modify incentive and loyalty programs for different customer groups, keeping our competitive edge in dynamic market conditions with the aim of remaining the most preferred operator in Turkey. Our aim remains to deal with competition by maintaining our leadership position through our "Better Value for Money" approach and keeping an eye on changing market conditions.

Now I would like to talk about our international operations. Before I go into detail on our international markets, I would like to note that the number of Turkcell Group subscribers including those of our subsidiaries reached 33.7 million in the first quarter of 2006 from 32.1 million in the fourth quarter of 2005.

Now I will continue with our Ukrainian operations. Mobile line penetration continued its growth in line with aggressive usage incentives and multiple SIM card usage, reaching 70% levels, as of end of March 2006. Life now has approximately 3.3 million subscribers with a market share of around 10%. We believe Life has positioned itself quite well in its market in terms of new gross additions, reflecting customer confidence in its operations.

As for its financial performance, Euroasia, our consolidated subsidiary holding our Ukrainian operations, reported net revenues of US$17.1 million, a gross loss of US$22.1 million, loss of $17.7 million on an EBITDA level. As a start-up business, net loss for the quarter was realized at US$55.9 million.

On the financing side, the addition -- in addition to the $540 million long-term financing deal with Astelit Life have signed in January, we expect Astelit to increase its capital in pay by $40 million in the second quarter of 2006 and we intent to participate to this increase propionate to our shareholding. The main shareholders of Astelit, that is Turkcell and System Capital Management Limited, our local partners have agreed subject to the approval of the Board of Directors of each to be obtained on or before May the 31st, 2006 to ensure additional funding to Astelit in the amount of approximately $150 million.

We believe that the Life brand has been effectively positioned as an energetic, young, and innovative brand in Ukraine and so far, we think we have addressed the challenges of the market reasonably well. We expect Ukrainian market to remain very competitive in 2006 and we believe Astelit is on the track to demonstrate operational and financial performance in line with expectations of its shareholders.

As for our associate Fintur, in which, we hold 41.45% stake, we can conclude that Fintur continued its growth, its strong growth in the first quarter of 2006. The GSM businesses in Azerbaijan, Kazakhstan, Georgia, and Moldova grew their total number of subscribers to approximately 6.4 million as of 31 of March 2006. Fintur operations continued to generate value during the first quarter of 2006 and the income that Turkcell recorded based on equity pick up method totaled to US$15.8 million. We are very pleased with Fintur's efforts in those markets, which are also becoming more challenging.

Now I will elaborate on our focus going forward. Overall, we believe that the continued stability in the microeconomic environment and constant consumer sentiment, coupled with management efforts, led to solid operational results in the first quarter of 2006. In an effort to maintain our operational profitability further, we will keep an eye on the changes in the microeconomic environment that may affect our results.

As far as the regulatory environment is concerned, there were no major developments regarding the issuance of 3G license, regulations regarding on MVNOs or MNP and our understanding is still that these items are on the Telecommunications Authority's agenda for 2006.

Another regulatory topic is the termination charges that are yet to be set among operators. We believe that current call terminations rates are already below European averages, and our aim is to maintain current levels of pricing as much as possible. Even though a decline in current termination charges is likely, we believe that the impact should be limited, given the percentage of our revenue that is derived from interconnection revenues.

Speaking of regulation, we are glad that the amendment in our license agreement regarding the definition of gross revenue has been completed and become effective as of March the 10th. In April 2006, we initiated a lawsuit against the Turkish Treasury for the difference between the payments that were made starting from July the 21st, 2005 when the relevant law was passed until March the 10th, 2006 when our license was amended.

On the competitive front we believe that we are well position to meet future challenges in the Turkish market, always repositioning on an as-needed basis to balance our revenue goals by capitalizing on our strengths. We will continue our loyalty programs, churn prevention, retention, and acquisition activities on a segment basis focusing on our "Better Value for Money" approach.

We are continuously improving our nationwide distribution channels with dedicated sales representatives. Our emphasis on our network infrastructure continues with our investment plan for this year approximately at $350 million. We already have a nationwide GPRS and more than 50% EDGE coverage. We also intent to maintain our leadership in VAS management, where data revenues now constitute 14% of our total revenues in Q1 2006. Additionally, we will continuously monitor and evaluate opportunities in the global GSM sector as they may arise in line with the strategy we applied for the prequalification in Egypt's third GSM license, and we will study the feasibility of this market further.

All in all, we were satisfied with the financial performance of our company, and we intent to share this value with our shareholders. Accordingly, our Board of Directors recommended payment of a total net cash dividend of approximately $379 million US and a total stock dividend in the form of bonus shares amounting to approximately $257 million, representing an 18.6% stock dividend per share out of 2005 earnings to be approved at our Annual General Meeting on May the 22nd, 2006.

At this time, I would like to hand it over to Serkan for operational and financial review. Serkan?

Thank you, Mr. Akpinar, and good morning and good afternoon to everyone listening to us. Before looking at the first quarter financial results, I would like to start by briefly talking about the changes we have made in our reporting standard and the definition of EBITDA that both became effective in the first quarter of 2006 financial result onwards.

As you may be aware of, the [inaudible] from the investment community for service which we independently conduct impact our 101 interaction. Through this effort we are trying to meet their needs and expectations. One suggestion we have been receiving was that the announcement date of our financial results be earlier, and that's more detailed on the financial statement, and they are now provided on a more timely basis.

Starting from this quarter is our transition to IFRS; we aim to achieve exactly what you have suggested so far. As you know we have historically prepared and presented our consolidated financial statements in accordance with US GAAP in US dollars for purposes of reporting to the SEC in the US and in New Turkish Lira in accordance with Turkish GAAP and Turkish CMB in Turkey.

With our transition to IFRS as mentioned in our quarterly press releases and in this presentation. We are providing our interim as far as consolidated financial statements and note consensuses. The interim IFRS consolidated financial statement and notes are made available together with the distribution of our press release yesterday. As our announcement [inaudible] compared to our historic increment and [miniatures].

Another improvement we have implemented based on our key figurers index. Beginning from the 2006 fiscal year, we have revised definition of EBITDA, which include our income/loss. And new EBITDA using the EBITDA definition starting from the first quarter of 2006 result announcement to provide consolidated income from operation, excluding items such as income from income from subsidiaries, translation gain and so on. Please note that this is, it's been previously reported EBITDA amount and the EBITDA amount renewing costs only due to revision made in the EBITDA definition and the work constitute a change in our operational or financial performance.

Now I would like briefly talk about the first quarter of 2006 financial results, just to provide you a quick assessment before getting into the detail. Despite seasonally lower MoU they recorded more than US $1.1 billion revenues is in first quarter of 2006, mainly due to 3.4% tariff increase in January increasing the number of our subscriber base, depreciation also experienced against US dollar on an average basis. We have sustains our solid operation performance that improved by 7% EBITDA margin corresponding to US $414 million EBITDA. Net income for the quarter was realized at US $187 million.

Now I would like to give you more insights regarding our operational and financial performance indicators. In the first quarter of 2006, Turkcell grew its total number of subscribers to 28.7 million. The net new addition that around 843,000 while 89% go to proper growth subscribers acquired in the first quarter of 2006 were pre-paid and the remaining 11% post-paid. While continued SAC price is offer to competitors, further supported overall market growth in our market, is also led to an increase in our churn rate to 3.5% from 2.9% in the fourth quarter of 2005.

As far as subscriber acquisition costs are concerned, Turkcell subscriber acquisition cost increased to US $37.1 in first quarter of 2006. This was mainly due the price increase in acquisition packages and an increase in other activities and campaigns in a competitive environment. Although Turkcell has recorded relative high SACs during the quarter, we may say that the valuable contribution of this subscribers [inaudible]. Beside this our value based approach to growth in our revenues continue [inaudible] have been pre-paid and lower value subscribers.

Even though we expect an increase in SAC in 2006, this increasing competition under the churn circumstances, we do not expect the year-end average that should be higher than first level of the first quarter. All in all, we may expect the proportion of sales and marketing expenses as a percentage of revenues to increase in 2006, but in a contour of manner as we plan a number of actions to strengthen loyalty further.

As for the MoU levels, our blended MoU in the first quarter of 2006 decreased to 57.9 million mainly due to the effect of seasonality and the effect of community offers. Although priced-based competition and particularly the expansion of community offers in the market have not helped our price towards MoU Russian outplay, we see increase in the year through various incentive and royalty programs throughout the year. We will continue to monitor the impact of competitive offers and effect on usage levels carefully.

Now, I will move on with ARPU. Although Turkcell has reported relatively higher subscriber acquisition costs during the quarter, we may say that we are pleased with the average contribution of our Turkcell Group subscribers and issuing reasonable extended period based on the ARPU from addition of these subscribers. During the first quarter of 2006, ARPU remained almost flat at US$12.2 mainly due to 3.4% sales increase in January and depreciation of Turkish lira against US dollar on an annual basis. This was mainly due to the dilutive impact of prepaid subscribers.

We have recorded more than US$1.1 billion in revenues during the first quarter, implying a 4.8% increase compared to the last quarter of 2005. As we have mentioned on ARPU slide, this was mainly due to tariff increase in January, increase in the number of our subscriber base and depreciation of Turkish lira against US dollar on a leveraged basis is positive for the year and incentive provided to better meet subscriber needs and expectations.

EBITDA in the first quarter of 2006 increased by 20% compared to the previous quarter and was realized at US$440 million. The increase was mainly due to increasing revenues that I had just mentioned. Our revenues declining [inaudible] converting into the percentage overhead was a result of decreasing interconnection cost and also decrease in the proportion of sales and marketing expenses and selling, general and administrative expenses as a percentage of earnings. Please also note that the one-time impact of unregistered handsets had adversely impacted EBITDA in the fourth quarter of 2005. Consequently, the EBITDA margin increased to 37% in the first quarter of 2006.

At the bottom-line, we are equal to US$187 million net income in the first quarter of 2006. The decrease compared to the last quarter was mainly due to increase in taxation expenses and decrease in other income line. Financial income increased in the first quarter of 2006 to US$53.6 million mainly due to increase in interest income on deposits, a modest increase in our Turkish Lira deposits and foreign exchange case realized in the first quarter of 2006.

Financial expenses on the other hand increased to US$20.2 million in the first quarter of 2006 mainly due to the increase in total investments. Overall, net financial income increased to US$33.4 million in the first quarter of 2006. On the total US$87 million tax charge, the longevity was due to the corporate tax provision for the first quarter of 2006, which we'll be mostly paid in May 2007.

The lower tax base in the fourth quarter of last year felt from the tax credit and deposit due to early payments made to Turk Telecom in December 2005 in the closet of the supplement agreements signed with Turk Telecom, and the Treasury. Please note that Turkcell investment incentive certificate provides tax benefit in this form of reduction for Corporate tax deposit. We are exempt from the current third quarter in Corporate tax, to extent such productions are subject to withholding cash flow 19.8%

As far as the balance sheet is concerned, our cash balances include $1 billion US at the end of the first quarter. The increase in short-term debt of Turkcell or mainly due to traditional short-term loans for working capital requirement in order to be able to benefit from a contagious long-term returns on time deposit, while being able to fund operation is relatively low operating income.

Based on Astelit's separate interim financial statements for the first quarter of 2006, Astelit's is in breach of one of its covenant contained in the syndicated long-term project financing. The breach of a covenant is an event of default and the lenders in the syndicated long-term financing may demand immediate repayment of the outstanding amounts, which would also trigger the cross-default to and acceleration upon notice of, substantially all of the Astelit's borrowings.

The breach of the EBITDA covenant is an event of default and in accordance with IFRS, we have reclassified Astelit's total long-term debt amounting US$382 million as short-term debt payable as at the end of Q1 2006. After the quarter, Astelit requested demanded to waive this breach of covenant in order to make further drawings under the syndicated long-term financing.

As also the Astelit has obtained the waiver letter from the lenders enabling Astelit to draw loans under the syndicated long term financing. In the meantime, both shareholders of Astelit, mainly Turkcell and System Capital Management Limited SCM have agreed to contribute up to US$150 million in total according to the Astelit respective share in the form ideal capital rejection or subordinated law. This contribution is subject to the approvals of Board of Directors of each shareholder to be obtained before end of May 2006.

In consequence, our short-term consolidated indebtedness increased to US$883 million as of 2006 first quarter. Meanwhile, our total consolidated debt-to annual EBITDA ration is only 0.5 confirming our flexibility of leveraging the balance sheet in the forthcoming years, if needed. As for the cash flow, capital expenditure in the first quarter amounted to US$108 million, of which is the US$56 million was related to the Ukrainian operation.

Increase in the other cash outflow item in the first quarter of 2006 is mainly due to the increase in our trading like several securities portfolio and the prepaid portion of frequency usage fees paid on behalf of our prepaid subscribers. The change in that in the first quarter of 2006 was mainly due to increase in the short-term indebtedness of Turkcell. Consequently, our cash position at the end of first quarter of 2006 reached US$1 billion.

As far as the debt repayment is concerned, also the US$817 million for the debt repayment in 2006, we realized a US$483 million debt repayment during the first quarter of 2006, 800 -- say, US$380 million just announced represents repayments for the short-term borrowings or outstanding, which for all new finance serving the new long-terms project financing facilities.

Starting from the New Year, we have been utilizing short-term Turkish Lira denominated loss full of our Turkish Lira credit loss from various banks. We know that it's more effective to manage our cash position and enhance our return. Typical measures of all of these loss range is been one week to one month.

On the back of our strong cash generation capability, we aim to finance our upcoming liabilities, such as 2006 CapEx, Corporate tax and dividend payment as well as possible local acquisitions and acute injections in our International operations, through our future positive free cash flow and our current cash balance.

However, as part of our ongoing recent account equivalent to management strategy, we continues to monitor in-depth and capital markets and consider contingent financing alternatives, and learnings of our business plan, in order to decrease our borrowing costs, and extend the maturity of our loans in an unsecured basis. And we will continue to evaluate such feasible options, when the market conditions are appropriate in-line with our cash management strategy.

Thank you. And now, I would like to hand over to Mr. Ozturkler for the Q&A session.

Thank you, Serkan, we have actually concluded the presentation part and the next session is Q&A. We'd like to remind you, again, to please limit your questions to two. And at this time, Pat if you could please start the Q&A session.

[OPERATOR INSTRUCTIONS]

Hello.

[OPERATOR INSTRUCTIONS]

One moment, sir, for the first question.

As we are not able to hear that question --

We do have some questions, sir. We're just waiting to see who wants first. One moment.

The three, four that are in the queue, however, they are in orders, we can start to --

You want to take them in the order, they're on the queue. Okay. Bear with me, sir. The first question today comes from Mr. Sean Gardiner, please state your company name followed by your question.

Yes. Thank you. it's Morgan Stanley. Two questions, please. Firstly, on the commission income in your revenues that was up significantly year-on-year from 22 million -- 22.5 million to 60 million, can you just run through what's driving that and whether that is a new run rate we should look at for that line item.

And then, secondly, for Muzaffer, just in terms of the rumors that are been going around the market for the last few months in terms of the management of people, can you just, sort of, clarify to as exactly what's going on there, the Board of Director level. And also, clarify your position at Turkcell as well that that would be very useful. Thank you.

This is Tulin Karabuk. And I would like to answer the first question. We'll always gain on block business and that market acquired big market in the Gulf, I mean according to some researchers. Of course there are some disagreements, but the one we had is that of Tehran $450 billion market. So the volume in Turkey is as we had expected. And so this is a commission of the Company and not the volume generated by the customers.

I was under the -- I had the understanding that that was a seasonal business, which saw first quarter falloff and pickup in summer, but it seems to be accelerated in the first quarter.

The season is one week games are there mainly, because it's betting business [inaudible]. It's the high season. In the first quarter, we held through the end of the league it's more exciting and there are so many matches for it's the high season actually.

So first quarter is the high season should come down?

Throughout the league is high. But at this time, first quarter, it's through the end of the League. And the nature of the league is big, you know, chances of two big groups are being continuously touched.

Okay. Thank you.

Just an any information, the league in Turkey is going to come to an end this weekend. So the high season on the Turkish League is coming to an end this weekend, so it will be a partial effect to the second quarter. But it was a full effect to the first quarter. Coming to the second question, actually, as it has been written and rumored and speculated around, there has been some changes in the Company on which the CEO and the Board had some different opinions.

But at this time, the management team is settled, and the newcomers on board are elected from within the Company with some experience in the culture and background of the Company. And the Company obviously has very strong fundamentals, which will enable the Company to strive forward on a very [inaudible].

Your question on my personal position at this time as we are behaving so in this conference call as well I am CEO of the Company. And I am at my seat and the companies are established and run on an ongoing concern and for endless expectations obviously, although it is a license-driven company. But managements have their own enterables, let's say, coming and going and the Company's corporate structure is the most important part of it.

So at this time, there isn't a change at my position. On the other hand, I am looking forward to some improvements and changes on the AGM and Board and any improvements thereon afterwards.

So just to follow-up, does that mean the differences you had haven't really been resolved yet?

Sorry, the differences--

That you had between yourself and the Board haven't been fully resolved, that you still have a difference of opinion?

There are still some different opinions. Obviously, the hottest point was on the change of the team, let's say, but that is, as I have stated, at a stable environment at this point of time. But still, there are some different opinions. Have we made any change on my position at this time? No. But we are looking forward to any improvements in this aspect going forward.

Okay. Thank you, very much.

Thank you.

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

Yes, good afternoon. It's UBS. My first question is regarding the environmental tax, which was removed from the bill that recently went through Parliament. But in the press, there are some talk of a flat fee perhaps to be paid by various mobile operators. I wondered if you could update us on your understanding of that situation.

My second question is regarding Ukraine and thanks for the details on that. And really there are two elements to the question. First of all I think you mentioned in the presentation that the $150 million of additional financing that you and the other shareholder are being asked to ensure may take the form of either debt or you know debt guaranty or potentially a capital increase. Can you just confirm if that is the case? And if there is a capital increase could it take place together with the 40 million that's already planned?

And just separately on Ukraine as well, you seem happy with the way that things are going there in general. But given that there has been a breach of the debt covenant there, I wondered if you could explain to us whether there's been some sort of change in the developments of the operations there which has taken you by surprise in the first quarter? Thanks very much.

To start with the environmental tax, yes that was a law that was offered to the parliament which included one new TL per subscriber per month, which was a major fund or burden on our industry going forward. Thanks god that part of the law was excluded before it was accepted at the general assembly.

So at this time there is no legal ground for the environmental tax burden on the wireless telecommunication industry. And there has been to our understanding some different opinions between different ministries on this issue. And we still understand that the environmental ministry has some needs for extra funds for the environmental protection of the Turkish Republic to be in line with the EU requirements as well. But at this time there isn't a concrete issue for the wireless industry to be taxed for environmental purposes.

For Ukraine, I believe the question has some different portions. I would try to recap as much as I can recall. The $40 million is separate than $150 million. So 150 is on top of 40. We do not know if it will be a capital increase or if it will be a subordinate kind of a loan to be extended until the end of the senior loan. So that is not decided yet but as the management of Turkcell and also Astelit's management have done the same procedure as well, with the conditions precedent to our boards approval.

We have signed and delivered a letter to Astelit that we will support the company with a further fund of 150 in order to make the company successful and create value going forward. The company is obviously not in a comfortable zone as we are in Turkey. We all know that being challenger is a totally different game plan and comfort level than being a leader. But the advantage or the positive side for Astelit's case in Ukraine is that we did not pay any large sum or amount to start the business up in Ukraine two years ago. So we do not have any sunk in cost for the resources for this scare resources like the frequencies and the numbering plan, which eliminates the business plans returning to positive, relatively easier than large entry fee kind of startups on a third or fourth suppliers in other regions.

Has there been a major change in the position or the game plan that has pretty good just 150, actually the market is very competitive one, the fourth one coming on board purchasing URS is rather a fairly later development after the negotiations. That is one reason behind it. But on the other hand the irrational SIM card distribution and very tough competition from the first and second runner-up is continuing even beyond the expectations.

But still we see that at the end of the tunnel, there is the green light for the company going forward, which is a reason or an argument behind our signatory of support of 150 still with the [EP] of board approval.

Okay. Fine. Thank you. I want to just follow up on that briefly, you're able to give any kind of estimates as to when we might see an EBITDA breakeven or free cash flow breakeven in the business?

Alex, unfortunately at this time, we do not have the policy of sharing this information. We are still building up the confidence on the understanding of the country, the business plans et cetera. We will keep on sharing them when we feel the minimum confidence, but still we are building up.

Okay. Thank you.

Thank you.

Your 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 just follow-up on one of the previous questions about the differences between your staff and the Board. You kind of implied that the main, kind of, difference was about the personalities in the composition of the Board. I just want to confirm that this is, in fact, the main difference and it's not about the strategic direction of the company that you have differences about.

And my second question is about the subscriber acquisition costs in Turkey. You sort of touched in the press release about the differences over -- about the reasons for market entries at the subscriber acquisition costs. I'm just wondering if you could elaborate and maybe quantify the increase in dealer's commissions that led to such a dramatic increase. Thank you.

Could you repeat the second question once more please.

The second question is about the subscriber acquisition costs in Turkey. That's quiet of dramatic increase in the first quarter of '06 from, you know, fourth quarter -- the first quarter of the previous year. And you mentioned in the press release that it's due to the increase in dealer commissions and et cetera.

So I'm just wondering whether you could elaborate a little bit on this, and maybe quantify the different elements of the subscriber acquisition costs that contributed to such an increase.

Let me start with the second question. That is mainly increase because of the increases in different items like the service tax, I mean it's not increase in the surface tax. As you may remember at all times, we were -- we are leading the market actually as necessary and as possible. It increased the service tax price, and normally we are leading the market, but when it's necessary -- conditions in the market are changing.

We are of course adapting. So that's what such a theory is. I mean that is such a theory is actually very intensive and kind of irrational competition -- it's slower. So we are adapting our stock exact prices, which increases influx. That's the main reason actually. We are not quantifying. I am giving the slip, because it is the main reason I can't tell you.

Of course, in the meantime, dealer activities were higher and promotion in the market was higher when you compare to last year. So -- but we can say that it's the real control increased influx, and we are always watching the work balance between stock and newcomer ARPU levels. So as long as it's in acceptable levels for us when you're compare it to many other operators in many other countries and also in terms of payback seriously, we think it's in acceptable levels.

On the first question, actually on the presentation we have touched many strategic issues that we see concretes for the company going forwards. And coming to the specifics of the issues between the Board and the CEO, frankly speaking, I don't think that there is any value at this time speculating or making comments on this issue. But we all stand behind the strategies that we have tried to describe and make you feel during the presentation today. Thank you. We can take the next question?

Our next question comes from Mr. Istvan Matetoth. Please state your company name followed by your question.

Good evening gentlemen, this is Istvan Matetoth from Credit Suisse. It seems that in the Ukraine, you do have a revenue problem. And could you elaborate a little bit more what exactly the plan is? When can we expect some material improvement in the revenue generation of that business?

And, you know, repeating a colleague's question, is it according to your plan or have you been negatively surprised by these very lights of these in Ukraine? And secondly, could you please break down the $281 million other item in your cash flows? What exactly that relates to? Thank you very much.

Well I would try to comment on Ukraine, and then pass it onwards to Serkan for the second part of the question. On the first one, we all know that in the Ukrainian market the double, triple SIM card entry is a major reality. And the business methodology going forward is rather different than the markets like the homeland Turkey for example.

In our understanding of business model in Turkey, we set up the core network and then the radio base stations and then the business. Actual business starts with the SIM cards. But it's our understanding today that business really starts after we established the SIM cards as well. So there must be basic investment into the market in three levels, core network, radio network and then the SIM cards. And afterwards the operator -- operators, start to compel the customers and make them consume the -- more use on the existing platforms of the SIM cards.

This is, I think, the major challenge in Ukraine going forward. We have a fairly positive penetration of SIM cards. But making them being used as the primary SIM card is a challenge going forward. That is why we have lower and more use, which is really reflecting to revenues as well. Is this a major surprise to the Company? This was something that we had realized from the company on market researches at the startup, sorry, it is not a major surprise to us.

But it is a challenge going forward. Still, we believe, we will be able to overcome this challenge, reasonable amount of revenues compared to our costs. I would like to mention also that this basic networks SIM cards being the elementary investments level. We are happy that the subscriber acquisition cost is rather under console in Ukraine, which doesn't make us burn hard cash on this level of investments that is making our lives relatively easier. Thank you.

Regarding the second question. The other item in the cash mainly consist of two items. The first credit is our investments in multiple securities for Australia in government bills and treasure -- government bonds and treasury bills announcing that's US$7 million. And the second item is frequency which is based on behalf of our prepaid subscribers, which are not been expensed during the first quarter and due to expense throughout the year. Those are the two major items in that other item.

I'm sorry, can you repeat that I didn't catch the second one.

That's it's already -- its US$1 million in the other item in cash flow mainly consist from two items. The first one is, our investment in marketable securities portfolio amounting to US$97 million. And the second item is frequency usage fees paid on behalf of our prepaid subscriber base, which are not been expensed during the first quarter, but will be expensed throughout the year. Those are the two items in that -- of this amount?

Okay. Thank you.

Thanks.

We're ready for the next question, sir.

Yes. Please go ahead.

Thank you. The next question comes from Mr. Herve Drouet. Please say your company name, followed by your question.

Yes, sir. Good afternoon. Herve Drouet from HSBC. The first question is regarding a tax. I just wanted to check with you in term of timing by the current government to pass the reduction of income tax.

And wanted to see when it is passed if you can rate, what are trivially reduced, the tax rate you have taken in Q1, yes or no. The second one is regarding subscriber acquisition cost on churn -- and as well if you kind of bit -- be a bit more specific about the reason, why as well churn increase.

Is it due you to external or an internal churn and mainly. And compared with the beginning of the second quarter, can you give us a sense on how is the trend is evolving for the second quarter follow the sub-agreement just, kind of, it could be customer churn. Thank you.

Regarding the first question, the timing of the actual payment or the floating taxes are May 2007.

I'm afraid the other parts of the first question are not heard very clearly. So I believe there are some missing parts, so if you could kindly repeat the question, maybe can elaborate further please. Also could you please speak further up louder the line is --

It's not very good, sorry about that. The first question is regarding the change in income tax in term of timing and in term of when these reductions of income tax may be put in actions in term of financials. And if you can reduce income tax charge real actively something from 2006, or not -- all from first quarter 2006 or not?

And the second question is regarding churn. Can you tell us, if the increase of churn is coming from external or internal churn? And if you can give us an indication for the second quarter, and how do you see the trend of subscriber acquisition causing churn evolving?

Regarding the first question. There are two different verification changes, regarding the corporate tax and income tax environment in Turkey. The first one is the usage of the investment incentive, that's part of legislation, has been first and it is legal now. If you take the first part of January this year, there is no investment incentive rectified by the governments to companies.

However, on our balance sheet, although our '05 churn actually, we have $2.9 billion investment incentive, that's in the use until the end of 2008. So we have the serious claim to use those investment incentives. And effective tax-rate on those investment incentives are as you know 19.8%. The other part for the changes in the legislation is requesting of corporate tax from 1% to 3%. That part will be change, it's still being discussed in the Parliament and therefore, that's part is not been effective as of today.

Okay. And when it will be passed when -- kind of I think it's from some of it was starting, that would be the beginning of the year or would it be when it is passed?

We were not informed on this as of today. We haven't seen the graph and on the other hand usually the laws are valid only after the date of validity, which is the signatory of the president of Turkey's Republic. So most probably afterwards, but how they will do it, we are not sure about it yet. Also, we have to mention about the incentives as well. As Turkcell we are so far and we have some accumulated incentives. And you have touched this issue, I believe that Serkan.

Okay. Now the second part of the question, well the SACs on the chart, yes.

Absolute chunk of churn, I can only give you indication on the year-on-year basis. That's what of course what we are -- we were expecting to have an increase in the churn. But as to the coming quarters, we are not giving kind of guidance on that. As we see, don't know, how long that irrational play -- transition period will end -- will look for the competition. So I cannot give you that unit trends either.

On the other hand why our churn increases, just mainly because of the nature of the acquisition market, particularly last year in spring, which lower entry barrier, and our basic acquisition complaint. This resulted in increasing our churn. But I would like to underline that this is, we are closely monitoring and we are aware of this, corrected [six] of groups that are churning today tax forward -- yes I mean tax structure, which we have been investing for five years already.

And so, and we see the average revenue per churn is quite lower than our ARPU levels and it's under control. And we will be managing our upcoming programs when we see a change in development. That's what we can say at this point.

And can you tell us a bit more, I mean in terms of this increase of churn, is it mainly due to external churn or have internal churn as well you know increased?

Internal churn is not a major thing I mean.

Okay.

It is there, but not major.

Okay. Thank you.

Thank you.

The next question comes from Mr. Stephen Pettyfer. Please state your company name followed by your question.

Good afternoon, Stephen Pettyfer from Merrill Lynch. My first question relates to your contract or postpaid ARPUs, which look like they're rising quite nicely. I was wondering if there was any relation with that progress and the new bucket plans or I think you call them package, package plans you've introduced in for the postpaid segment.

My second question relates to your international expansion and your very strong balance sheet. I wondered after Egypt, are there any other countries that you have your eye on currently? Thanks.

I will start with the second one. It's a correct statement that the company had some funds and energy. And we're trying to turn that into a value creation. Egypt is a cornerstone that we are trying to seek a value creation possibility. So we have applied for that and we will try to run the bidding, the tenders.

Still I would like to state that we will always keep our rational move and rational bottom line seeking positive value creation methodologies. Do we have any other cornerstone or a milestone after Egypt? We are constantly looking for it but there isn't any concrete topic that I can share at this time unfortunately.

So for the first one please?

How can I comment on that? Of course, there are several reasons for that we can see. First of all postpaid subscribers are kind of higher revenue generators and they are not that much price sensitive to temporary attractions so to say. So on the other hand most of our -- a significant part of our postpaid subscribers are our corporate subscribers. And we have been, of course, applying many packages and other programs, volume discount programs for them.

Apart from that I can only -- I can also mention we have launched a new structure where we are handling our corporate subscribers face-to-face starting from the beginning of last year. So this also has improved the loyalty. There are of course several other factors but I think these are the main three.

Thank you. As a follow up, can I just ask you, when you look at your competitors over the last quarter, have you -- and you've mentioned many times the pricing competition in the market. Would you characterize that pricing competition being broad, spread across all segments of the market or more focused in one area over another? Thanks.

Actually, you are right. They are called community discounts and community tariffs and so on. But what we have seen is that starting from the beginning of this year it's kind of expanded which means you don't have to be a student to join a student tariff and such things we see. Such kind of discounts or expansions we are seeing at this time.

So just to understand moving more from the prepaid segment to more into the postpaid?

Sorry?

Is it moving from post to pre? Not necessarily, Stephen. It's just more on the prepaid side. The current existing offers are extended to other segments, sub-segments, et cetera.

Okay. Thanks, very much.

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

Good afternoon. This is Atinc from Global Securities. My first question is related to the quarter-on-quarter decline in usage, which had used to be beyond the historical seasonal trends. I understand this is part to -- due to community offers by rival networks.

Could you comment furthermore regarding the current trend in second quarter, and whether we should expect your usage to be depressed due to these community offers?

And my second question is, recently I've seen some press report in Greek press that your Greek partner is planning an IPO for your joint venture, the football betting games. Can you confirm that there is a plan to lift this operation in the near term? Thank you.

As to the MoUs, there are several reasons for that decline. One of them is -- as you have also already mentioned, is seasonally lower historic level. That's the main reason I must say. And that on the other hand, specific to that period, two things I would like to underline. One of them, just during that period our main free usage, free MoU -- our main programs under that period, and at the same time competitive large and increased effect of or level of their programs which includes free usage. So this has also affected that period level I must say.

On the other hand, the third effect is just as you have mentioned community targets. As we have mentioned already, there are significant minority of people using double SIM cards. That's the one of the effect. And on the other hand, we should never forget that dilutive effect of prepaid, especially on a year-on-year basis, all that has reflected on that.

There is also, I think, a seasonal factor in Turkey as you know. Second and third quarters are seasonally better quarters. So historically that has been so. We should have similar trends this year.

Okay. Thank you.

Maybe just one addition to the first question. Obviously, during the last few days we are living in a relatively volatile environment in Turkey on the macro economy. We do not see the full picture on the total telecommunications sectors, minutes being carried around during any specific month. So we do not have any specific arguments. But we should also watch out the macro improvements and its effect to all the players -- not only to Turkcell, but all the players on different behaviors on the MoUs.

Coming to the second question, yes, we have also heard from the press that the partner of Inteltek is willing to make an IPO on Inteltek. But our company at its own respective management ground, which is the Boards, this issue is not discussed. There isn't any concrete road map or plan on Inteltek's IPO whatsoever. IPO is IPO and being public is something that, as a culture, we favor. So maybe in due time, in appropriate times left this can be discussed. But coming to my first statement, this has not been discussed, and there isn't any concrete decision on this issue at the company level as yet.

Thank you, sir. I appreciate that.

Thank you.

The next question comes from Mr. Said Irfan. Please state your company name followed by your question.

Hello. I'm from IDC Middle East and Africa. My name is Said Irfan. I'd like to ask about -- for you to detail, probably give some more specifics on the minutes of usage for prepaid and for postpaid?

And second question is on the anticipated arrival of mobile number portability and the MVNOs, which would probably increase competition further. I was just wondering whether you have -- you could explain what strategies that you will be planning to implement to increase subscriber retention? Thank you.

What kind of detail are we expecting here on the MoU for prepaid and postpaid?

Can you probably explain to me -- and you have the blended MoU for the first quarter of 2006. I am hoping that perhaps you can possibly give a split into the how the minutes of use are for prepaid subscribers and from the postpaid subscribers?

Said, unfortunately we have not adopted the policy of breaking this out. But as for, let's say, future guidance on the MoU, our saying is that basically the price based competition and the community offers expanded in the market, as you suggested, have not helped our factors more rational play in the quarter.

So -- but we still aim this to increase the MoU this year through various incentives and loyalty programs through our CES. Obviously, we do have to watch the impacts of the play and level over rationality in the market. But we cannot break it down at this time the number portability and virtual network operators and any other similar kind of impact covering regulation around us.

Our strategy is that these are obviously universally accepted strategies and regulations, and they will eventually come to Turkey as well. And the bottomline of the business is customer satisfaction and the "Value for Money" approach of Turkcell, which has been internalized and emphasized during the last several years. So our aim is to have our customers on board, no matter what happens and no matter what regulation comes on. Obviously, they will have some impact, but we are trying to make sure that the impacts will be relatively small.

Okay. Thank you.

Thank you.

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

Hi. Anna Bossong from CA-IB. I just wondered if, firstly, you have a figure on ARPU for Astelit? I haven't been able to see it anywhere or heard it yet, I don't think. And secondly the lowering of entry barriers is that another way of putting companies or am I misunderstanding your SAC rise. These are the main questions.

Anna, we missed the first question. Could you repeat it?

Your ARPU in Ukraine?

Okay. ARPU in Ukraine is lower than last quarter, at around $2 levels at this time.

That's the full blended not just the GSM.

Full blended.

Got it, $2.

And the second question is, is there any handset subsidies within this SAC right?

Yes that's right.

On the handset subsidy strategy there hasn't been any major change around us and within the company. SAC is mainly coming from different price levels on the starter packs and lower level of counters packed with starter pack strategies, actually initiated by the competitor and followed by Turkcell's made the SACs go up.

But these starter packs do or don't contain handsets?

They do not contain handsets. In Turkey the starter packs are absolutely separate than the handsets.

But perhaps they contain free minutes that sort of thing?

Yes, they do have different levels of free minutes or not free minutes but bundled minutes let's say like 20 counters or 100 counters to be matched with different minutes yielding from different tariffs for different communities.

Lovely. Thank you very much.

Thank you.

[OPERATOR INSTRUCTIONS]

We now have a follow up question from Mr. Alex Wright. Please go ahead, sir.

Yes, thank you. You have about $1 billion of cash on the balance sheet and then around 100 million in government securities on top of that. And clearly in the short-term you have some of that cash in terms of the dividend payouts, the A-Tel option, possibly Egypt. But I just want to be on both main items really what you feel the maximum amount of cash is that you'll need to carry on the balance sheet going forward. Thank you.

Alex the last portion of the question the cash balance, after these incidences that you have suggested?

I was wondering what you felt the maximum cash balance is that you'll require on the balance sheet going forward once you pay the dividends, exercise the A-Tel option and to that participated in the Astelit capital increase?

Well at this time I do not have such a guidance to share. And the Company will continue striving value creative options. But any how the bottom line and the residual cash on the balance sheet of the Company is a major argument for the board to decide proposition to the general assembly as it has been always.

At this time the proposition is done and we will keep on carrying another year end and then I think the Company will decide and make the negotiations on this issue next year around the same timing. But I do not have a policy or a guidance or a minimum level that I can share at this time.

Okay. Thank you.

Thank you.

The next question comes from Mr. Sean Gardiner. Please follow up -- sorry continue the question.

Yes thank you. Just on your guidance for selling and marketing expenses you're guiding to them rising as a percent of sales and three months ago you're saying, they would be flat, specific to sales as a percent of sales in '05.

Can you just run through what that means for your EBITDA margin guidance, I think you said then it was flat, is there a [inaudible] that you expect to come into your business or is the risk that margin goes down in 2006?

At this time, one of the assumptions that we also haven't maybe we should highlight is, the assumptions that we had made earlier in the year and that was to irrational play that we see to either improve or continue at similar levels. But what we have suggested throughout the quarter, and what we have seen is that -- it's actually the irrational play continues, yes these offers are extended over to communities etceteras.

So we have -- we are positively, currently monitoring the market and from what we can see on the sales of marketing side, we will then increase as to be able to effectively manage growth acquisitions target etcetera from a competitive position perspective. In line with that as this time actually we are not seeing deterioration in EBITDA margins. Yes, we are seeing the fact that last year's EBITDA margin of 37% or 38% is maintainable this year.

And say what way you're getting the benefit from, can you just run through what's helping, you've got the treasury shares as one area is anyway else that you with the treasury fee calculations are anyway else you're getting your benefit on your margins compared to where you were three months ago?

Probably, volume increase we can think plus G&A, and some increase in sales and marketing expenses along with the treasury share improvement will give us sustainable levels of EBITDA.

Okay. Thanks.

Answered your question sir?

Yes. That's fine. Thank you.

Thank you.

We have a follow up question from Mr. Stephen Pettyfer. Please go ahead, sir.

Thanks. Just in terms of your better then expected growth you're seeing in the Turkish market. I wonder if you could -- if you have any feel for the percentage of those new customers that you are adding as an actual new users.

And secondly in Ukraine given the slight change of a plan there, any change if falls with regard to your past CapEx guidance there? Thank you.

I will take the second question to start with. On Ukraine, the CapEx guidance is not changed. As of today, we have about 2700 base stations, on which we will try to put up another 2000 within this calendar year, and that was our expectation before as well and at this time we are not changing the CapEx. But the CapEx that we had foreseen before is going to yield a better coverage with our new resource, new case resource on 900 megahertz as well that is very efficiently helping our geographical coverage, especially between the cities and on the rural areas.

Coming back to the first question, Koray, will you help us on that?

I think the -- if I understood the question right, you are asking about the new comers whether they have been in the system before or not, is that the question.

Exactly.

I think that, you know, we are not at a point to break that down in terms of acquisition market. The penetration level that we may have touched on what we expect 70% level next year. Obviously, we know that -- there are certain SIM card usages, double SIM card usages it's an area we watch carefully, but we have not seen a major increase in the double SIM card usage in the past couple of quarters.

And the gross acquisitions target we can touch on again. That is still the leading position, while we do announce 50% and we are watching the bottom-line and track carefully.

Thanks, very much.

Thank you.

[OPERATOR INSTRUCTION]

There are follow-up questions, Pat?

One moment sir, we do have a question. We have a question from Ms. Esen Raifoglu. Please state your company name followed by your question.

Hi, this is Teb Investment, Esen Raifoglu. In your press release, you said your interconnection cost decreased by about 20% due to the decreasing outgoing governments of usage. Is that for the fixed line or other GSM operators and what you attribute this to your on net packages and promotions?

The 20% includes actually all associated costs, all directions, but I don't have a breakdown on that.

Okay.

Is there a follow-up question.

No. Thank you.

Thank you.

There are no future questions at this time. Sir, please continue with any other points you wish to add.

Yes. There are no questions at this time. We would like to end the call. And please note that the audio recording of the call will be available to you in the next two weeks or so. And please call the Investor Relations team for any follow-up questions you may have. Thank you. Bye-bye.

Ladies and gentlemen this concludes the Turkcell Q1 2006 results announcement. Thank you for participating. You may now disconnect.