Turkcell Iletisim Hizmetleri AS (TKC) 2006 Q3 法說會逐字稿

Welcome to the Third Quarter 2006 Results Announcement on the 9th of November 2006. [OPERATOR INSTRUCTIONS] I will now hand the conference over to Ms. Ferda Atabek. Please go ahead.

Good morning and good afternoon. This is Ferda Atabek. On behalf of the management, I welcome you to our third quarter 2006 results announcement conference call. Let me note that the management presentation is accessible on our website and we wish to limit our conference call to 1 hour, 15 minutes maximum. Before I hand it over to the management, I would like to read you our legal notice. Any forward-looking statement in this presentation are not historical facts but rather represents Turkcell's future expectations. [inaudible - accent] expectations expressed in these forward-looking statements are based on reasonable assumptions.

However, forward-looking statements involve inherently an uncertainty and there can be no issuance that Turkcell's actual results will not differ materially from those expressed or implied by any forward-looking statements in this presentation.

In our most important sectors, this call, actual results that cause actual results to differ materially from those expressed in any forward-looking statement in this presentation including Turkcell's management position, the effect of competition and other economic business competitive and or regulatory factors affecting the business of Turkcell and the telecommunications industry in general. Forward-looking statements speak only as of the date they were made and other than as required by applicable law, Turkcell undertakes no obligations to update any of them in light of new information or future events.

This presentation does not constitute an offer or invitation to purchase or subscribe to any securities and no part of it shall form the basis of or be relied upon in connection with any contract or commitment whatsoever. Please note that all financial data are consolidated whereas non-financial data are unconsolidated unless otherwise specified.

So now I hand over to Koray Osturkler.

Thank you, Ferda. Before I begin, I would like to also welcome you to our Q3 2006 results conference call. The macroeconomic volatility in global markets, which also led to foreign currency exchange rate fluctuations during the second quarter of 2006, has been stabilized during the third quarter of the year to a large extent. Our market continues its growth trends on the back of acquisition-based campaigns and community offers and we led the market, growing our subscriber base to 30.8 million. Our continued actions with an ongoing focus on maintaining the right balance between customer expectations and profitability margins as well as seasonality, but has to maintain strong operational performance during the third quarter of 2006. Accordingly, we have realized the revenue of approximately US$1.2 billion and maintained EBITDA margin at 40%. All in all, we recorded US$312 million of net income and we are quite pleased with our strong financial results from top line to bottom.

Now I would like to briefly talk about the GSM market evolution in Turkey. On the next slide, we wanted to give you an insight to the evolution of the Turkish market. Market reports suggest that there are approximately 51 million GSM subscribers and that mobile line penetration has reached 69% at the end of the third quarter 2006. Given demographics characteristics of Turkey, with young and dynamic population and relatively lower penetration compared to those in European countries, we believe there is still room for further growth in our market and we estimate that the mobile line penetration rate may reach above 80% level at the end of 2007. In the longer term, we should see numbers close to European averages thanks to young and dynamic population in Turkey and combined with potential improvements in per capita income.

At the end of the third quarter, Turkcell is a clear number one player with a market share of approximately 60% and aims to keep its leading position in gross additions market, where it is focused on profitability.

Now I would like to go over the competitive environment. On the next slide, the subscriber acquisition trend remains strong in our market for the past few quarters due to the efforts of the operators to increase subscriptions and usage of mobile services with emphasis on on-net offers. In the first quarter of 2006, one of the shareholders of Avea Telecom Italia Mobile announced the decision to sell and complete the sale of its stake in Avea to Turk Telecom, further clarifying its final ownership.

In general during the quarter, our competitors continue to underline lower price advantages of on-net offers while remaining focused on improving their infrastructure-related capabilities as one of their high priorities. They also introduced some upward price adjustments or limited some of the usage incentives previously offered. We believe price-based competition did not intensify during the quarter.

As far as the regulatory developments in our market are concerned, NMP Number Mobile Portability, NVMO and 3G remains to be agenda items of the telecom authority. We expect the 3G tender to process, to take place in the first half of 2007 and implementation of NMP may be expected possibly towards the end of 2007. We do believe that our benefits for 3G to be realized in our market. We look forward to the tender process. As for topics such as NMP, we believe it is manageable. Speaking of the competitive playground, now I will elaborate on our actions along with our loyalty premise structure.

On the next slide, even we have a number of initiatives to ensure acquisitions as well as retention, I would like to take a minute to explain this tiered structure as depicted on this slide. Listed on the bottom of our pyramid, we have the basic tariffs, offering on-net users advantages which are widely preferred by our subscribers. On the upper layer of the basic tariff, we have the basic segmented loyalty programs to support our retention efforts while incentivizing usage. For example, the offers are counter bank for prepaid subscribers minutes from us for post paid subscribers or earn as you go granting incentives for the corporate subscribers.

In addition to the basic loyalty programs, we have periodic volume-based campaigns such as the packages and options that are designed for a specific time period for pre and post paid subscribers. On the top of the pyramid, we have our premium user whom we design and present offers in more personalized way. Based in its roots on our segmented loyalty approach, we formed the Young Turkcell Club for those who feel themselves young. Currently, more than 9 million members benefit from daily, weekly or monthly offers. Recently, we also introduced [Eshtecell], which brings all campaigns' advantages, offers and saving opportunities available to Turkcell's corporate customers under an umbrella.

Depending on the scale, the companies can make use of volume discounts at varying rates as well as Turkcell services, which boosts productivity for them, enabling their staff in the field to communicate and have remote access to up-to-date information. Based on gains to Turkcell Youth Club members' positive response to the club concept, we believe that our corporate customers will enjoy Eshtecell renewed corporate tariffs as well as product solutions tailored to the needs of our corporate customers.

All in all, our data mining capabilities and segmented approach make it possible for us to design offers for our subscribers in a customized fashion and on a timely basis, remaining sensitive to their usage patterns and preferences as always.

Now I will continue with our actions during the third quarter. During the third quarter, we continued to build on areas of strength and continued to differentiate Turkcell as the leading GSM operator in Turkey through various preemptive offerings and campaigns, while continuing to benefit from high-quality network and extensive capabilities of our sales channels. We started a new marketing communication with the motto "Connect to Life with Turkcell" in the third quarter, along with our preemptive volume discount campaign for both the post and prepaid subscribers. Despite some downside effect on our revenues as we previously expected, we are pleased with the campaign and we have decided to continue with this campaign in line with customer needs and expectations as an offer to one of our prepaid options.

This campaign strengthens the bonds between our brands and our customers as well as the perception of Turkcell brand attributes. We believe this campaign which improved Turkcell's positive perception and led to an increase in minutes of usage, served as a long-term investment tool to build on our customer loyalty. Besides, we carried on some activities to increase acquisitions through Anatolian campaign, with Turkcell Entertainment trucks through [by loads] wind campaign, which grants additional counter units, ensuring our subscription goals. We believe we have also been deploying our sponsorship capabilities, particularly leveraging sports for stronger bonds with our customers.

Now I will elaborate on the value-added services side. On the next slide, on the products and services front, our actions to promote the usage and penetration of the value-added services continued and our value-added services revenue constituted approximately 13% of the total net revenue in the third quarter of 2006. In the third quarter of 2006, we launched our new portal Turkcell IM, which is positioned as the single point of access to all of our services of Turkcell. Through agreements with major global and local content providers such as EMI, MTV, Universal, Warner Bros. and Sony BMG, we provide our subscribers with a choice from 300,000 content pieces, whether it is rich content, simplicity of use and accessibility via both [droped] and web, Turkcell IM is currently visited by 2.4 million users per month. We believe Turkcell IM will -- are driving force in the expansion of mobile Internet as well as contributing to our mobile content revenues.

In line with the strategy to increase revenue through new services, we launched Pay for Me from Abroad service, again a first in Turkey. Pay for Me from Abroad offers an alternative choice for Turkcell roamers to make calls from abroad by enabling the called party to pay for the call. We have also introduced volume and time-based Internet flat rate packages to our individual and corporate subscribers in order to increase mobile data usage.

Recently, we introduced an operator branded PDA for the first time in Turkey. Turkcell PDA enabled users to use their emails in real time as well as making access to the Internet possible from virtually anywhere, anytime. We believe that Turkcell PDA will help us increase the mobile Internet and email penetration. We intend to continue to keep our leading edge on value-added services as well as underlying technologies to continue to offer cutting-edge products and services to our relatively young customer base. On the VAS front, in 2007 our focus to grow VAS revenues through the penetration and usage of value-added services and products remains, while we believe that creating loyalty through our portfolio of value-added services will play an important part in our future retention efforts.

Now I would like to share some information on our high-quality infrastructure on the next slide. As far as our network is concerned, our solid infrastructure continues to set us apart from the competition in terms of quality. Our impressive network coverage of 97% of the population is one of our competitive advantages which we effectively use in our communication as well. Additionally, approximately 54% of our network is edge-enabled. Along with more than 11,000 base stations, that total US$6.1 billion demonstrating our long term commitment to high quality.

In 2007, we plan to spend approximately 400 million operational expenditures, excluding potential 3G capital expenditures in Turkey in core access and service network. As we indicated earlier, we do believe there are benefits for 3G to be realized in our market. We see 3G as an important factor for supporting our brand image and customer loyalty as well as increasing our customer revenues.

Now I will give you an update on the international operations. Before I go into the details on our international markets, I would like to note that the contribution from Turkcell group subscribers in terms of subscriber numbers are growing pleasingly. The number of subscribers -- group subscribers, that is, including 6.6 million coming from our subsidiaries, reached 37.4 million in the third quarter of 2006.

On the next slide, Fintur operating still under penetrated markets, namely in Azerbaijan, Kazakhstan, Georgia and Moldova. That is our exposure to high growth international markets through Fintur.

Fintur, our associate in which we hold 41.45% stake, continued its strong growth trend and total number of subscribers and its operations grew to approximately 6.9 million as of quarter three 2006. Moreover, consolidated revenues and net income of Fintur increased during the quarter, mainly due to strong operational performance supported by the seasonality. During Q3 2006, the income that Turkcell recorded based on the equity pickup method totaled US$27.2 million and we are very pleased with the value that Fintur operations are generating. We expect Fintur to nicely contribute to our bottom line as the strong operational performance of the company continues.

Now I will elaborate on our focus going forward on the next slide. In Ukraine, we operate through our indirect subsidiary Astelits under the brand name Life since February 2005. We believe there has been a rapid operational developments for Life in Ukraine. Since February 2005, Astelits invested US$400 million and established more than 3,500 base stations. Being the first in the market to introduce Asian GPRS services which provide the highest data transfer speed available in GSM network, Astelits now already covers 82% of the Ukrainian population.

Today, Life offers the widest edge coverage in the market in 41 cities of Ukraine, continuing to aim to differentiate itself from competition. Astelits, through its expansive distribution channel, with approximately 19,000 sales points and high brand recognition in the market, grew its subscriber base to 4.7 million by the end of the first quarter of 2006, capturing a 12% share in highly competitive [atascro] in Ukrainian market where the penetration has come to 85%, levels along with multiple SIM card usage trends. During the third quarter of 2006, Eurasia recorded net revenue of US$20.7 million. We also saw US$26.4 million including depreciation and amortization of US$25.5 million. The loss on the income and EBITDA was 57.9 million and 21.9 million, respectively. Just to remind you, Life started to consolidate BCC figures since the merger has been completed in August.

As far as financing is concerned, the main shareholders of Astelits, we participated in the first and second traunch payment of 50 million the form of a capital increase, so Astelits in July and October proportionate to our shareholding increased, and the third traunch is due in January 2007. Based on Astelits' financial status and discussions held with the lenders, significant additional shareholder contribution may be needed in the coming quarters. Despite the challenging conditions in the market, we believe Astelits' efforts will result positively towards achieving a sound business model in the longer term.

At this time, I would like to summarize our strategy. We can summarize our strategy for this year and next year in two main sentences. Maintain market leadership position, sustain top line growth and profitability at the same time. To maintain our market leadership position, we are focusing on our customers on a segmented basis, making our offers to every micro segment according to their needs and expectations, increasing our better value for money perceptions from their perspective. To achieve, for example, our better value for money perception, we plan to continue to make consistent improvements in quality of our products and services, accompanied by our superior infrastructure.

We plan to make certain offers, housing, for instance, privileges to our premium customers, equally differentiating. We will design and package our offers based on segment attributes such as traffic patterns, behaviors, income, et cetera. We will continue to highlight our successful youth club, now reaching over 9 million subscribers. And other community-based offers will follow. Last but not least, we will emphasize the value of our brand. We will continue to use our renewed marketing communication model, Connect to Life with Turkcell, to strengthen the perception of our brand values of being a leader, [transparity], dynamic, sincere and popular.

To maintain top line growth, we are focusing on under penetrated regions and segments such as Black Sea and southeastern Anatolia regions, launching new sales initiatives with new incentives for acquisitions, including various counter-refilling options. Emphasizing our extensive distribution channels already built, with over 40,000 sales points, not to mention our new flagship stores. Increasing the usage through bundled offers, sophisticated data services and in reach to our content is another area of focus we will remain eager for revenue increase as well as customer thickness.

On the other hand, we are continuously focused on effective cost management and sustaining cash generation capability of the company, which may be used in some expansion and acquisition opportunities in the region. Our efforts to selectively seek and evaluate new international investment opportunities continue. These efforts increase could include the purchase of licenses and acquisitions in markets outside of Turkey in which we currently do not operate.

Now I will hand it over to Serkan for the financial review.

Thank you, Koray. Good morning and afternoon to everybody. Before going into further detail, I would like to give you a brief on the third quarter results. As you may remember, Turkcell's macroeconomic data has been through some turbulence during the second quarter '06 on the back of volatile global markets. Due to volatility that has resulted in FX fluctuation and as well impacted our financials, has been stabilized during the third quarter of the year to a large extent. We recorded US$1.2 billion revenues in the third quarter of '06, representing around a 3% quarter on quarter increase, mainly due to higher MOU and increase in the number of our subscriber base, despite a 4% depreciation of Turkish lira against US dollar during the quarter.

Our operational performance has further improved with around 3% increase in EBITDA to US$477 million. This amounts to an EBITDA margin of 40%. Net income increased to US$312 million from US$87 million in the third quarter '06, mainly due to continuous strong operational performance and the absence of one-time items related to [inaudible - accent] and foreign exchange losses resulted from FX volatility in the second quarter of '06.

Now I would like to give you more insight regarding our operational and financial performance indicators. In the third quarter of '06, Turkcell added approximately 1 million net new subscribers, growing its total subscriber base to 30.8 million. Of all the gross addition, 91% were prepaid and we remained at 9% postpaid. Turkcell recorded quarterly churn rate of 4.1% in the third quarter of '06, mainly due to overall high market growth in the previous quarter and competition. In the fourth quarter of '06, we expect our churn rate to slightly increase compared to third quarter '06 churn levels, concluding the year overall with higher annualized churn rates in comparison to last year, in line with our expectations. One of our ongoing efforts on retention remains a high priority, and we expect our churn rate in '07 to be higher than '06.

Turkcell subscriber acquisition costs on the other hand, increased to US$33.5 in the third quarter of '06, mainly due to campaigns initiated during the period further to intensify competition along with the increasing dealer and distributors activities. We increased the average incremental contribution of all postpaid and prepaid subscribers, ensuring reasonable payback period given these levels of [fact].

Finally, our blended MOU in the third quarter '06 increased by 21% to 81.58 minutes, mainly due to the loyalty programs for the youth segment, the introduction of the incentive program in July for both the consumer and corporate segments, as well as seasonality. We expect our blended MOU to increase in '07 with our continued emphasis on segmented incentives and loyalty programs.

Now, I will move on with ARPU the next slide. During the third quarter '06, ARPU decreased to US$12.1, mainly due to the introduction of strengthened incentives and loyalty programs, 4% depreciation of Turkish lira against US dollar on an average basis and the impact of volume prepaid subscriber base despite the higher MOU. All in all, despite the balance side impact of our summer campaigns during the quarter, we believe proactively initiating these campaigns to most markets on a segmented basis is in fact the rules of our leadership effort and it leads some of these investments we are making proactively, we pay off in the longer term. Our blended ARPU is expected to decrease in '07, mainly due to depreciation of Turkish lira combined with the value to the impacts of prepaid subscribers.

Moving on to the next slide, we recorded US$1.2 billion in revenue during the third quarter, implying a 3% increase compared to the second quarter '06, mainly due to 21% higher MOU and the back of incentives provided to better meet the subscriber needs and expectations, as well as seasonality, and 3.4% growth in the subscriber base. The increase was despite the 4% depreciation of Turkish Lira against US dollar on an average basis and the negative effect of US$21 million revenue net-off, due to the SMS termination [inaudible - accent] that was retracted with an effect on our financials. In '07, we expect top line growth. However, the level of growth will be dependent upon potential micro as well as evolving competitive environments.

The direct cost of revenue, including depreciation and amortization, slightly decreased to US$652 million in the third quarter of '06 while the proportion of direct cost of revenues and total revenue declined to 54% from 56%. As our revenues increased on a quarterly basis, our direct cost of revenues remain relatively stable, driven by the positive impact on the reversal due to recent developments regarding the [inaudible - accent] Avea amounting to US$15 million. And also, lower termination fees set by the telecom authorities, which are effective between us and Avea, starting from July '06. Our selling and marketing expenses, on the other hand, increased by 8% to US$230 million in the third quarter of '06, mainly due to the increase in general marketing expenses during the quarter.

EBITDA in the third quarter '06 was realized at US$477 million and the EBITDA margin remains flat at 40% as the result of sustained operational efficiency. We aim to keep costs stable as a percentage of revenues in general. Accordingly, we aim to maintain EBITDA margin at approximately 38% on an annual basis in '07. All in all, our net income increased to US$312 million in the third quarter of '06, mainly due to strong operational performance and the absence of one-time items in the second quarter '06 resulting from an increase in taxation charge with respect to the decrease in tax rates from 30 to 20%, effective from January 1 this year and also an increase in the foreign exchange losses, due to currency fluctuation in Q2.

Moving on to P&L slide, now I will also be able to talk about other items in our P&L. Financial income increased to US$40 million in the third quarter '06. This was mainly due to the higher financial asset sales income, excuse me, as a result of the stabilization of macroeconomic conditions and higher interest income on higher deposits. On the other hand, on the financial expenses side, we started to recover our losses related to the volatility in the Turkish economy in the last quarter. Financial expense of US$89 million during the second quarter of '06 turned into financial income of US$43 million during the third quarter. This was mainly due to the increase in the fair value of the [formal] contract for which we recorded a sizeable mark to market loss during the second quarter, when US dollar-Turkish lira rates were realized above our expectation. To summarize, the stabilization of US dollar-Turkish lira exchange rate during the third quarter led our net financial income in the third quarter to rise up to US$83 million levels.

The total taxation charge in the third quarter '06 decreased to US$109 million. This was mainly due to the accrued and deferred tax expense from US$80 million to US$70 million in the absence of 100 [inaudible - accent] in the total benefits during the second quarter '06, as their corporate tax rate decreased to 20 from 30%. Of the total US$109 million tax charge, US$92 million was related to the current tax charges, which increased mainly due to increasing operational profitability.

Moving on with the balance sheet, our cash balance has increased to US$985 million, mainly due to the absence of dividend payments made in the second quarter and our ability to generate cash from our operations during the quarter. The decrease in short-term debt of Turkcell was mainly due to repayments of Turkish lira-denominated loans to [inaudible - accent] amounting to 50 million Turkish lira in'05 with a term of three years. The [inaudible - accent] was introduced our currency risk on our balance sheet. However, in August '06, they decided to early extinguish the loan due to financial market volatility leading to an increase in our costs. All in all, our total consolidated debt and EBITDA ratio is just 0.34. We are still very proud of our special ability on leveraging the balance sheet in the forthcoming years, if needed.

Moving to the cash flow. Well, our net cash flow from operating activities increased to US$616 million the third quarter of '06, which is mainly resulting from the increase in net income in the third quarter due to strong operational performance. Capital expenditures in the third quarter '06 amounted to US$136 million, of which US$29 million was related to Ukraine operation. In '07, we plan to spend approximately US$400 million operational CapEx, excluding potential 3G related capital expenditures in Turkey, which will be in core and service network CapEx. As for Ukraine in '07, we expect to spend approximately US$200 million for '06 for capital expenditures. Consequently, our cash position at the end of third quarter '06 reached to US$985 million.

Moving to the last slide, our consolidated investments, including investments from our Ukraine operations, amounted to US$645 million as of September 30. Of this total amount, US$468 million was related to our Ukraine operations. Outstanding Turkcell debt as of Q3 decreased to US$187 million. As you may be already aware, there will be two elections next year in Turkey, namely presidential and parliamentary. Mainly to eliminate possible negative impact of these uncertainties in the financial market and in order to increase our financial flexibility, we plan to put in place significant external debt financing to be utilized for potential international investments. [We follow] more opportunities than realized. We are positing to structure a credit line until the end of March '07.

This line will be simply a credit line that can be reached to upon need. This line will only be used in case of a solid investment opportunity comes on our agenda, and will only cost us an insignificant arranger and commitment fees in '07. Thank you.

Operator, we can take the questions now.

[OPERATOR INSTRUCTIONS] The first question comes from Pamela Antay. Please state your company name followed by your question.

Yes, hi, good afternoon, it is Pamela Antay from KBC. Just a couple of quick questions on Ukraine. I wonder if you could give us a little bit more color on the ARPU and SAC evolution and when could you expect the EBITDA breakeven in that business? And also, when you talk about potential significant capital injection that may be needed, can you give us a kind of magnitude for the capital injection and also where that will be directed, whether it's going to be on network infrastructure or just financial operational support?

Thank you, Pamela. I'll try to answer to the first part of the question and then Serkan will say something on the capital side. We actually believe there has been a quite rapid operational development on the Ukrainian market. And as far as the facts that we've gone over, in terms of the roll out, the brand image, our presence in Ukraine we believe is getting stronger and stronger. We will obviously as a general statement, to the more meaningful sizeable 4.7 million subscribers we have built in Ukraine, we'll be able to make campaign focusing on minutes of usage more effectively, given the size of the mass subscriber base.

ARPUs on the other hand are still low, around $2 level, slightly below $2 levels. But we are working on that. I think from a future perspective, given the Ukrainian market, the penetration is picking up. We still see a feasible model and a sound business case for Ukraine, excluding any assumptions of possible potential major changes in the Ukrainian market such as for example, a consolidation option at this time.

As far as the SAC, SAC is not a major issue in Ukraine. There is no handset subsidy. We are looking at quite low actually SAC levels, in single digits.

And regarding your last part of your question about our commitments to Ukraine, as you may all be aware, we have, our shareholders of Ukraine, have a commitment amounting to US$50 million to Ukraine, which will be paid in January next year. And apart from this, we have [estimated loan] amounting to US$370 million for our [sell it] and we are currently negotiating and discussing with the lenders about restructuring this loan agreement. And based on these discussions we made with shareholders, we prepare to make some additional capital injections to the company. Although we are planning to finalize these discussions before the year end, at this point I think it is very early to quantify the exact amount.

All right. Can you give us an idea of how or by how much Astelits breached its loan covenants?

Actually, in that loan agreement, there are lots of covenants and the breach of covenant is the EBITDA covenant. So we are currently discussing to cure that covenant, this and others.

All right. Just going back very quickly on the ARPU, you said that it is a little bit below $2. Can you be a little bit more specific? Because obviously the last quarter, there was also a significant sort of ARPU deterioration.

Around $1.7 or so, the ARPU. As I suggested, the speed of development is quite high. We are getting a lot of subscribers. So it is a matter of time to turn these subscribers into subscribers that are consuming more minutes of usage and we are trying to overcome the double SIM card users issues. So that is the strategy we have chosen actually in Ukraine. Given the double SIM cards or distribution of free SIM cards in the market existed and we participate in, as the new player in the market. So the challenge on the Astelits side is to basically stick those -- stickings of those SIM cards and increasing minutes of usage on those double SIM cards for our favor. That is actually what we are focusing on.

Okay. Thank you 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. I have also got a couple of questions please. Firstly, I just wonder if you can confirm that the promotions of the magnitude that we saw in the second quarter -- sorry, in the third quarter have been fully discontinued in the fourth quarter?

My second question is, I wonder if you can comment on the potential decreases in the communication tax that appeared in the press in Turkey? And my third question is on Ukraine. I just wonder if you can tell -- if you can disclose the minutes of use in the Ukraine in the third quarter?

Starting with the campaign in Turkey, Sergei, this is actually been a preemptive marketing effort on our part for the mass market. We strongly feel about a one-time effect that we would have created in the market from a longer term loyalty perspective, we think that there are going to be payoffs. So we have actually accounted for the downside in the revenue coming from this campaign.

On the other hand, we have seen a potential increase in minutes of usage, which we have realized. We are getting a lot of good feedback from surveys in terms of branding and perceptions. Now, in line with actually the previous plan, we have rethought this campaign, actually targeting it to prepaid subscribers as a prepaid option. So it will be used only selected base of subscribers, if they choose to use it. On the Ukraine side, I'm afraid we're not ready to disclose minutes of usage yet. But we will work on that. I will pass to Serkan for the financials.

Regarding the question about tax reduction, you know that this intention was announced by the Prime Minister at the conference this week. And you know that we have a IMF standard agreement and also currently next his budget is being discussed in the Parliament. And at this point, we think that it's better to wait for more concrete steps from the government regarding the tax reductions. However, as always, with that we think that telecom sector in Turkey is heavily taxed and we think that such a tax reduction will play a [inaudible - accent] role to grow the sector.

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 really just following up on the promotional discounts that you've had in place. Given that you've now got the prepaid options and you mentioned that about a million of your prepaid subscribers have taken that option, my first question is would you expect to see a reduction in usage and an improvement in revenue per minute as a result of the relatively small proportion of prepaid customers that have taken that option? And secondly, do you expect the rest of your prepaid base to take up that option fairly rapidly over the coming months?

Generally speaking, Sergei [sic], the prepaid option as you said is selective, so we don't expect a downside in terms of revenues from the new offer revised campaign. Of course, in the longer term throughout 2007, we will plan new campaigns, new offers to selected subscribers. I wouldn't say we won't do a mass campaign, it still all depends on market dynamics and needs and expectations of the customers. We have the prepaid option selected subscribers at around the 1 million or more level. It is not in lots of millions, let's say. And we may have some dilutive impact on the MOUs, but generally we are quite comfortable since we've designed it looking at the, let's say, effects of the mass campaign that we have developed and launched.

I suppose what I'm really wondering as well is if we look at the third quarter numbers, clearly the usage benefited from these campaigns. But there is significant dilution in the revenue per minute and the ARPU was quite flat compared to the second quarter in local currency terms. So what would you expect to see the revenue per minute increase in the fourth quarter as most of those discounts have been discontinued?

On the Q4 side, as you know, historically it is a low quarter. But just to give you an indication, I think from an ARPU perspective given consideration of these campaigns, et cetera that we are currently carrying out, we would not expect that downturn in the ARPU as much as the historical Q3 to Q4, let's say rate that you would normally see. So we would be more encouraged looking at the ARPU within Q4.

Okay, thank you. And just one final question on these promotions. As you mentioned, it was a long term loyalty tool. Do you feel that your churn would have risen to a higher level if you hadn't introduced these promotions in Q3?

I'm not sure if I am clear on the question. If we had not introduced them, what is the --?

Well, you're saying that the main reason for introducing these promotions was as a long term loyalty tool. So I'm just wondering if you would have expected churn to be higher in the third quarter than it was had you not introduced those discounts?

I think longer term, for example next year, we did highlight that churn will increase. But frankly, we are not talking about a major increase. So I would say more slightly in terms of the trend of increase. And this is I think again, quite controlled environment. That is how the management feels. We are not going to be seeing European averages of 20%, we believe it will be much lower than that. But we are also penetrating going after, let's say, lower income segments. So I think the natural result is the churn is inclined to be more as you go penetrate further down in the market.

Okay. Thank you, Koray.

Thank you.

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

Good evening, gentlemen. It's Istvan Matetoth from Credit Suisse. I have two quick questions. One is at the end of the first half, you said that you would expect subscriber acquisition costs for the full year '06 to remain the same as in full year '05. Do you see still this to be the case given first nine months? And secondly, is your expected capital injection in the Ukraine conditional upon any changes you intend to take? I mean, my question is that, it seems to me everybody is doing extremely well in the Ukraine market except you, and so I wonder what do you think you need to change in terms of strategy and approach to that market? Or do you think just unconditional capital injection, that will solve your problems?

Well, first part of the question, in the last quarter we had guided the market that we've seen $37 SAC in Q1 versus Q2 was $26 and we said that we will finish the year somewhere in the middle, somewhere in between. So this is actually quite in line what we are achieving in Q3 and the year end expectation is 30 plus a few points of SAC expectation. We are not concerned about this so much as you know that this is only a portion of the sales and marketing expenses. And in terms of the overall cost space, we will see stable costs next year in comparison to this year. And frankly, when you look at the SACs and look at these ARPUs, the payback periods are quite short, postpaid $30 ARPU, $8 on the prepaid. We are talking a few months only, even on prepaid. So we are okay with that.

And as far as the capital side on Ukraine, maybe Serkan can --

As we always said in the outlook, the investment in Ukraine was a long term perspective. At first, we always said that we are not looking for a short term return from that investment and from only a financial perspective, I should say, until now our Ukraine exposure is a total of US$400 million. And now this amount is only US$250 million in cash and the rest is corporate guarantees given to the lenders. And as you may be aware, we didn't pay anything for the license. Therefore, we think that we can have a return, slight return from Ukraine market with a long term perspective. And we think that we can still, as shareholders, continue to inject cash in that business.

That is very helpful. Thank you very much indeed.

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

Yes, good afternoon, it is HSBC. My question is regarding the heavier ARPU we have seen in the third quarter. Can you give us a bit more light on what is the main reason why the postpaid ARPU in Q3 compared with Q2 decreased while the prepaid was relatively constant? Is it because you are bundling more free minutes compared with Q2 in the new package you're offering in terms of loyalty programs? Or is it because the slight increase of tariff you are doing in local currency is mainly on prepaid rather than postpaid? Thank you.

Herve, I think from the ARPU perspective, we are going to point to -- point you to the similar answer which is the effects of the 75% campaign that we have rolled out during the quarter. So when you look at the postpaid and prepaid, they were similarly, I think, impacted from this campaign.

The prepaid side is obviously more elastic. Minutes of usage increase on the prepaid side is better. On the postpaid side, there is less elasticity and I can also include the corporate side into this picture. And another reason I think from a decline perspective, we are, needless to say, mentioning the depreciation of [TL] impact as well as dilutive impact. Also I can, I think, point out that another focus area which we are highlighting is the small and medium company perspective. We are more eager to expand on the small and medium companies. Of course, comparably speaking to larger companies, the average ARPUs there are lower.

Okay. So the fact on the postpaid and especially if we compared it with prepaid, you don't think it is any impact from competition that may be increasingly a bit more aggressive, especially on the postpaid segments on your front? Is it what you are saying?

We -- I think -- we wouldn't say that actually, as we have been highlighting in the last couple of quarters. From a competitive environment perspective, our comfort level is increasing relatively speaking. We are seeing more rational behavior, price adjustment. So this is actually for the next year valid as well. We would expect more of a rational environment given the initial steps we've seen throughout this y.

Okay. In terms of churn, is there any big difference between churns between prepaid and postpaid? Do you have experience during the third quarter?

Postpaid I think is quite negligible, comparing to prepaid. Prepaid side is the majority and it is basically based on our churn policy of seven months, we involuntarily disconnect customers.

So that means we can conclude that in the increase of churn we have seen quarter on quarter is not due to the postpaid segment?

Yes. You may. Actually, you are seeing an increase in absolute numbers on the postpaid side as well.

Okay. Thank you.

Thank you.

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

Yes, it is Brad Dulevarky at Oak Tree Capital. I just had a question about the prepaid ARPUs and those look like they're ticking up gradually this year in local currency terms. With your understanding of the elasticity of prepaid, which should be greater than postpaid, as you say, do you think that the fourth quarter you could actually have a ARPU number that's equal to or higher than the fourth quarter a year ago?

Well, I think we wouldn't draw a negative picture, at least closer to a stable picture, especially I think speaking on new TL terms, we would more comfortably say we wouldn't see a major downside. More like closer to stability on the prepaid side. And again, we have to take into account of depreciation et cetera and if we see a reasonable Q4, then we should have reasonable ARPUs. As I suggested, we wouldn't see a downturn in US dollar terms as much as we've seen historically going from Q3 to Q4.

Okay, okay. So you think that the prepaid ARPU can stabilize? And I just had a question about the minutes. With this discount, did you find that there were longer calls on your network or that there were more calls on your network from this discount plan?

Well, definitely obviously minutes of usage increased, we have seen. I would say around double digits, mid double digits, 15% levels or so. I can't really comment on number of calls, but different segments behaved differently. So based on this learning, let's say, we always look at the pattern. We have really targeted this campaign towards these prepaid options. We think it will go well.

Okay. Thank you very much.

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

Good afternoon. It is Alex Kuznetsov from Bear Stearns. Most of my questions have been answered, but I still have a couple of questions. Could you tell me what are the major components of the financial expense item and what was the reasons for reporting a positive number in this line? And secondly, do you have some estimates of the average time that's been your subscribers, by contrast, the units and the time they actually make phone calls?

Average talk time on the network is closely monitored, if I understand the question right.

No, it's not about the average talk time. It's about the time when your prepaid customers buy [counters] and the time when they actually use them? So how much time does it take for your customers to spend the counters?

I'll come back to that question after Serkan, Alex.

Regarding your second question about the breakdown of financial expenses, actually in the third quarter, we have US$14 million interest expense which is coming from interest expense on our borrowings. Apart from that, we have a positive FX gain amounted to US$53 million which is net profit interest expense and that FX gain is mostly coming from the forward contracts that we incurred losses during the second quarter. Therefore those two are the main items and at net-net, in the financial expense line, we have a financial income, actually.

And Alex, after clarifying with my colleagues here, actually we don't see an impact on the ARPU because when people buy counters, we don't count that as part of revenue generation. So it is when they actually load it. At that time, we realize -- load it and start using it, that's when the revenue is accounted for. So the time difference doesn't impact us from an ARPU perspective.

Yes, I understand that the revenue is counted at the time of -- when the phone calls are made. But still, it may be helpful to see what is the actual cost to your customers given the quite significant volatility in the interest rate -- in the exchange rate.

They -- actually, when they buy it, there is a three-month time period for them to be not -- before expiration, they have three months of usage. So there is sort of a balancing here. Within that period, they have to use it. If not, then the counters are expiring.

I see. Thank you.

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. Two questions please. The first one on number portability. Given the regulator's decision to introduce portability in Turkey, what is your anticipated actual timing of the implementation of this regulation, given technical differences between operators? And secondly, concerning your 2007 CapEx guidance, could you please provide us with a ballpoint figure on the expected price tag of the 3G license on your contingent budget?

On the CapEx front, maybe starting with that, we have said around US$400 million or so. Again, this is without 3G. It is at this time very difficult to say exactly what the 3G CapEx amount is going to be. Simply, we are not clear on the requirements of the 3G. This will drive the speed of the roll outs, whether there are coverage requirements or not. But our comfort is on the side that the equipment prices are quite in line with 2G prices. We can leverage our, let's say, strengths on the purchasing side. And therefore, we wouldn't attach a significant, let's say significantly more CapEx on yearly basis on top of our current averages that we are realizing. So at this time, that's what I can tell you. But we believe there is room for 3G in Turkey and that we see a feasible model based on several, let's say, CapEx scenarios and requirement scenarios that we are building a business case for.

And in terms of the mobile number portability, the regulation is not visible at this point. After that becomes visible, it could take up to 18 months or so to realize this infrastructure. So it could be, if it came up tomorrow, it could be towards the end of 2007 at the earliest, from our standpoint, our thinking point of view.

Thank you very much.

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

Hi. Alexei Melinkov from Citigroup. I've just got a few questions. Basically, the first question was about your competitors in Turkey. Have you seen any increase in the advertising activity in the past few quarters? And how do you think they will react or possibly have already reacted to Turkcell's promotional campaigns? That's my first question. And my second question, do you expect any further decrease in interconnection rates in Turkey and [menusco actions] would be interesting to know the share of on-net traffic, on your net, on Turkcell's network? I just need an approximate number, and have you seen that change in the last few quarters? Thank you very much.

As far as the interconnection rates, starting with that, we actually have seen a lot of downside on the interconnection revenues in the past, given the, let's say, decline on the termination charges and also high user-end pricing from networks to networks. Therefore now, we are seeing 11, 12% of our revenues coming from interconnection revenue. We don't really expect major downside on the interconnection, let's say, termination rates from now on, given that these are already at low levels in terms of internationally known comparison.

But, we are just seeing that in Europe, interconnection rates are likely to be changed and brought down quite significantly. Do you think that might happen in Turkey as well?

I mean, I think we have to look at Turkey and our specific agreements with the operators. For example, with Vodafone, we have made an agreement for the next three years. So we can actually see next three years of potential interconnection charges. So we don't think it's a major issue, frankly, on our day to day thinking.

Okay.

And in terms of on-net traffic, the majority of our traffic is on-net. So --

What percentage is it approximately?

Up to 80% levels, slightly even above that is on-net. So we've been focusing on on-net a lot, actually taking advantage of the large subscriber base of the company. And we will continue to do so.

And have you seen this number change in the last few quarters?

It's quite stable, actually. But if you look at it from 2001 onwards, it has been changing in favor of us.

Okay.

And I missed the first question, actually. You asked about the competitor actions?

Yes. That's correct.

What about the -- I mean, anything specific about the --

Basically, if you've seen your competitors reacting to your promotional offers or your offers which you've release in the last quarter. And if you've seen that, what their reaction was? I mean, did they just reduce the price or you've seen more advertising activity?

I think generally speaking, I cannot point to a reactive particular campaign at this time. What we see more is a lot of infrastructure focused network build out. As you know, there are quite a gap between our quality and capacity coverage wise, geographical or population against competition. So it is an infrastructure year for them and also next year it is likely to continue.

On the other hand, we can touch on a few on-net price increases. A few new campaigns, perception of possible discounts but actually targeted towards increasing chargeable minutes. So these are actually good things, good observations that we are making from a behavior perspective that we had not seen, let's say, three, four quarters ago.

Okay. Thanks very much.

Thank you. Your next question comes from Ms. [Vanita Onkolivich]. Please state your company name followed by your question.

Yes, good afternoon, it is Vanita Onkolivich from UBS Asset Management. I have two questions actually. First of all, looking at your total traffic in Turkey, it increased something like 25% quarter on quarter and the question is, how your network quality coped with that increase? And also, my understanding is that Avea recently put a lot of effort into increasing their distribution network. And how do you see them right now? Are they becoming like more successful and serious competitor as a result?

From a quality perspective, we are quite comfortable actually. The investments that we are making, majority of that goes into elective spaces, new base patients to increase coverage. Some software upgrades, giving up the features on the data side et cetera on the network side. But a lot of capacity improvement. So we are looking at dropping congestion rates of 1%, below 1% levels. This is quite actually acceptable against European average as well. Not just in Turkey.

And in terms of distribution network, I think we wouldn't compare the established network that we have built over the years at this time to the competition. This is another area of quite, let's say, established position for the company. 800 exclusive shops, 40,000 and more points of sales we are using both digital media or physical locations from referring perspective or distribution of SIM cards perspective. So quite accessible and the researchers point out quite significant, let's say, success for us on the distribution side.

Okay.

And I mean, if we get into perceptions, et cetera of course, the surveys focus on different perceptions that exist as well. Besides the physical gap that I just pointed out for example on the network side, there is even a greater gap in terms of customer perception in favor of us.

Okay. Great. Thank you very much.

Thank you. We have a follow-up question from Mr. Alex Wright. Please go ahead.

Yes, just a couple of questions please. Firstly on Ukraine. You've clearly stated your commitment to the Ukrainian business in your previous answers. But you also talked about potential consolidation options in the market. Are you indicating through that that you may be prepared to consider a merger with one of the other operators? Or are you just talking about consolidation between some of the other operators accepting Astelits?

And then the second question is regarding the credit line that you are looking to establish. Can you give us an indication of the size of that credit line that you are looking to establish for acquisitions? And if you don't find any acquisitions, would you consider using it to buy back shares or pay a special dividend? Thanks.

Alex, in terms of consolidation, we wanted to basically reference to current efforts of other operators in terms of being vocal to merge with another entity in the market. We weren't really referring to Astelits at this point in time because there isn't enough that we can tell you as far as the concrete, let's say, opportunity. Of course, as businesspeople, if such opportunity came and the shareholder rights and expectations are fulfilled, possibly Astelits could take a look at it. But we are not really there from Ukrainian market point of view. However, in the longer term, these types of activities are likely in this market as other operators have efforts to realize that. But without even that being realized, we see a feasible opportunity as Serkan said, even also our going in cost base being very low, not paying license fee.

On the credit line, I think that I can say a few words. Maybe Serkan can jump in and add. We are looking to ensure some line of credit. We said sizeable. Sizeable means a couple of billion dollars. On the other hand, we cannot identify at this time or completely tell you [committed] projects. We are looking around and if time were to come and this is needed and we find the opportunity feasible, behaving rational as we have done so before, for example in Egypt opportunity, it was too much for us to go forward. We will evaluate and make a business decision. Obviously, if there is not an opportunity that we require the line, then we are looking at costs of few million US dollars, which is quite negligible for establishing this line of credit.

So that's why we like to -- we made the decision to go ahead and start this process, actually.

Okay, but just following up on the last point. If nothing attractive were to appear over the coming months or year, then would you consider using that line of credit to potentially return cash to shareholders?

Alex, in your first part of the question, you stated buy back shares option. In Turkey, it's legally impossible. Therefore, Turkcell cannot use to buy back shares and returning our cash to the shareholders, as you may know, we have a dividend policy which says that our distributable profit will be at least distributed to the shares by 50%. So it depends on the guidance and --or the board and also the approved General Assembly.

If of course you are asking what the management would do, I would add on saying that management's behavior, we make several scenarios and provide options to the board based on the cash needs of the company. So if nothing is realized in terms of new investments and the company obviously is generating cash, we will communicate our point of view to the board.

Okay. Can I ask you more specifically on that point of view? Because the only reason is really, if from this current level of gearing, if you paid out all of your cash flow or all of your earnings, then you have still got net cash on the balance sheet without executing any acquisitions. So could you foresee a scenario under which you would propose increasing the gearing in order to hand back more than 100% of earnings to shareholders?

I think at this time, we are not ready to be too specific on this area. Frankly, this has not been a specific agenda item for proper evaluation at this time. But given the existing cash generation and let's say, desire of the management to balance the value returns through investments and some cash return exists, at this time only thing we can say is if we cannot generate value and find opportunities to generate further value for the investors, then we will consider dividend distribution based on the policy. But we will also go back to the board with different options.

Okay, great. Thank you very much.

Thank you. We have no more questions.

Thank you, operator. I guess we don't have any more questions. Thank you for participating to our conference call. If you have any more questions, you can always contact Investor Relations. Thank you. Good evening.

Thank you. This concludes the conference call. You may now all disconnect.