Turkcell Iletisim Hizmetleri AS (TKC) 2007 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the second quarter 2007 results announcement conference call on Thursday August 9, 2007. Throughout today's presentation all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions. (OPERATOR INSTRUCTIONS)

I will now hand the conference over to Mr. Koray Ozturkler. Please go ahead sir.

Thank you very much [Christine]. This is Koray, Head of Investor Relations. I would like to welcome you to our conference call here on behalf of the management team. Before I hand it over to Mr. Ciliv for his presentation I would like to go over the notice very briefly.

This presentation may contain statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially because of factors discussed in this presentation, in our press release in the risk factor section of Turkcell's most recent Form 20-F or in other reports and filings with the US Securities and Exchange Commission. We undertake no duty to update or revise any forward-looking statements whether as a result of new information future events or otherwise. Please note that all financial data are consolidated whereas non-financial data are unconsolidated unless otherwise specified.

At this time, Mr. Ciliv, if you could go over the presentation please.

I would like to welcome you all to our second quarter 2007 results conference call. I am very glad that we were able to accelerate our growth and deliver strong quarterly results. We believe these results showcase our sound execution despite active competition. Especially pleasing was the 29% increase in our revenue year-on-year to $1.5 billion for the quarter. Similarly, EBITDA was also up 29% with the margin of EBITDA maintained at 40% largely due to cost management focus.

Our strong operational performance also reflected in our bottom line and we recorded $274 million in net income and strong margin of 18%. Serkan Okandan, our CFO, will totally elaborate on these details of our financial strength in the finance section of this presentation.

On top of the strong performance in our core market, our international operations also performed well. Astelit, our subsidiary in the Ukraine, grew its subscriber base by 62% to 6.3 million and ensured 178% of year-on-year top line growth. We are very pleased with this promising performance. Fintur operations continued strong revenue generation with a total of 8.7 million subscribers contributing to our results very positively.

Now I would like to comment more on the market dynamics in Turkey. Moving on to the next slide.

We are quite pleased with the continued growth in our subscriber base during the quarter. We accelerated our subscriber acquisition activities remaining very focused on our bottom line and saw record net additions of 1.5 million for the quarter. Our subscriber base grew to 33.8 million which is evidence of our strong market share.

Talking in a bit more detail about the market we believe it is an attractive environment due to the relatively lower penetration rate in Turkey, growing GDP per capita income, combined with strong demographics such as the young population of the country. We continue to be a clear leader in our market with approximately 59% market share and expect to maintain our value based approach going forward.

During the quarter, our competitors remained quite active with major rebranding activities, aggressive subscriber acquisition activities and communication campaigns to manage price perception of the subscribers.

As for pricing trends, we observed price increases on average and overall players maintained their rational behavior. During the remainder of the year we expect the growth in the Turkish GSM market to continue where we project the penetration to reach about 80% level by the end of 2007. We expect our subscriber base to continue to grow whereas we expect our net subscriber additions in second half of 2007 to be lower than the first half level.

Our clear sharpened focus on customer segments, our focus on channel -- our channel, helped us win, but key was our strong value props which Turkcell built over many years. Let's move to the next slide to go into more detail in this.

During the second quarter we continued to highlight our top five value propositions. We believe our customers clearly appreciate and prefer our strong value propositions and we make an ongoing effort in differentiating offers to increase satisfaction and loyalty of our customers. Being aware of the importance of network quality we continuously monitor our network. Currently we have approximately 13,000 base stations providing a population coverage of 97% an EDGE coverage of 74%, which is a sizable gap in our favor against the competition.

We provided advantageous pricing offers for our large subscriber base during the quarter as part of our value props. Through NAR or pomegranate campaign as they were called, we targeted the prepaid segment which also targeting the postpaid market with package offerings. These offers resulted in an increase in usage minutes on a segmented basis and contributed to healthy top line growth. They also contributed to new subscriber acquisitions allowing us to record the highest net additions for any quarter.

We conducted a wide range of channel activities during the quarter. We continued to trade and communicate our value props to our exclusive and non-exclusive dealer network while increasing the number of overall channels. We believe these combined efforts were well received and increased channel motivation thereby contributing to our strong results.

On the product and service front we continued with our offerings to increase the penetration and usage of our value-added services. Our value-added service portal turkcell-im, which with significant content [appealed] more than 2 million new and distinct users totaling 8.7 million since the launch date. Turkcell also launched the turkcell-im benim service during the quarter, another first in Turkey; turkcell-im benim means my Turkcell.

Through this new service Turkcell users are able to share photos and videos by uploading them to turkcell-im benim site via their cell phones. We believe that these innovations will continue to contribute to our customer retention efforts as well as helping increase our revenues. We also provide distinctive value props for the youth and corporate club members.

Moving on to the next slide. On this slide I would like to briefly elaborate on our long term region and growth strategy. Let me initially start by saying that we are excited about the markets we are in and the opportunities for growth that mobility and convergence offers.

We are keen on bringing the best communication and technology solutions to our customers and delivering the best value for them. We believe mainly the growth potential lies in our current GSM business, in new business models through a new value-added service creation, in new technology and in international expansion.

Connecting our customers to life through value-added communications and technology solutions remain our key priority and vision. We expect to continue to ensure sustainable market leadership through our strong brand image and our value propositions.

We intend to increase customer loyalty and satisfaction continuously, as a result attracting [value] subscriptions, retaining our customers and ensuring profitable growth. This is our current GSM business area which we expect to remain very strong.

In new business models area we intend to explore new opportunities through value-added service expansion. We believe we can further expand the range of our product and services based on the needs and expectations of other sectors in Turkey offering solutions where mobility and information technologies are applicable.

The Turkish market provides an important potential in broadband services area where we believe currently the market is under penetrated. In the context of new technology we aim to provide broadband services through our 100% subsidiary Calcom and capitalize on convergence opportunities.

Currently Calcom has a long distance telephony service license and the company was awarded a 25 year license to roll out and operate a transmission infrastructure. The Government's recent indication of issuance of licenses for local fixed telephone services in our market, which will take place during 2007, we believe is another positive development for the Turkish telecommunications sector and particularly for Calcom.

As for our international expansion objectives we will continue to select and evaluate international opportunities in emerging markets with a focus on ensuring value contribution from our existing businesses. Our recent decision to evaluate Kuwait and Iraq licensing opportunities is in line with our objectives.

In summary, second quarter was an outstanding quarter. I thank all of our customers; I congratulate all of the Turkcell team, our business partners for their focus, for their customer satisfaction efforts, for their dedication, for their passion for our business.

I also thank all of our investors and analysts for their confidence in supporting Turkcell. We are very happy about the momentum we have, despite increased competition, but we are excited about the future. We feel we have a lot of work ahead to do great things.

At this time I will hand it over to Serkan for review of our key operational and financial indicators for the quarter.

Good morning and good afternoon to everybody. As we have already communicated, we had a strong quarter including strong subscriber growth of 13%. We now have a total subscriber base of almost 34 million in Turkey. Together this subscription growth of our blended minutes of usage per subscriber MoU also reached all time high since 2001. MoU increased by 32% on an annual basis to 89.4 minutes which was mainly due to our successful loyalty campaign and incentive [record] segments. One of the most noteworthy campaigns we introduced during the quarter was NAR campaign, which was designed to increase the loyalty and usage of our prepaid customer base.

Our churn rate decreased by 0.4 percentage points compared to the previous quarter on the back of our retention campaigns. The churn rate was realized at 4.7% mainly due to continuing higher growth in the market and in our subscriber base.

The majority of our churn rates are involuntary prepaid disconnections who are global ARPU generators. For the full year we expect our churn rate to increase, compared to 2006, and to be around 20% level, while our emphasis on retention remains the high priority.

Moving on to the next slide. During the second quarter of '07 our blended average revenue per user increased by 13% to $14.1 compared to the same period last year. This increase was mainly due to increasing usage of minutes as well as 8% appreciation of Turkish lira against US dollar, despite the dilutive impact of growing prepaid subscriber base during this period.

Price adjustments we introduced which accumulated to 14% on an annual basis also contributed to the incremental ARPU. We are also very pleased about the 19% improvement in our postpaid ARPU thanks to our focus on fine turning our segmentation approach and offering.

In 2007 in spite of the dilatory impact of prepaid subscribers, we expect to see an increase in ARPU as an example of increasing usage combined with the positive trends in Turkish lira exchange rate against US dollar.

With a strong revenue increase of 29% year-on-year to $1.5 billion during the quarter was mainly due to strong uptake in subscriber base, the increase in minutes of usage, upward price adjustments and finally appreciation Turkish lira against US dollar. On an annual basis, the contribution of our consolidated subsidiaries has also increased and positively contributed to our revenue growth.

In 2007 we expect growth in our revenues to be at least 20% on the back of growth in our subscriber base, usage trends and our revised expectations of the exchange rate for the rest of the year.

Our EBITDA increased by 29% year-on-year to US597 million due to the increase in revenues, while costs remained stable as a percentage of revenues. Consequently EBITDA margin remains stable at 40% in the second quarter of '07. Given current trends and assumptions we believe 39% EBITDA margin is achievable for the whole year 2007.

We recorded net income of $274 million in the second quarter of 2007. The year-on-year increase of 215% was mainly due to increased operations and also the absence of the one-time higher taxation charge recorded in the second quarter of 2006.

In the second quarter of 2007 we recorded foreign exchange losses of $140 million. This was mainly due to translation losses on our [fixed rate] assets, mainly cash and transaction losses accrued from forward contracts.

We predict out of $140 million [with] $60 million fixed losses on balance sheet items, [so defined in US dollars] in fixed losses incurred on derivative transactions and finally $45 million fixed loss accrual booked for the open derivatives as of June 30 based on the revised fixed rate expectations for the second half of the year.

Moving on the next slide, direct cost of revenues including depreciation and amortization as percentage of revenues improved to 51% from 56% on year-on-year basis. This improvement was mainly due to the non-revenue base operational expenses such as depreciation expenses that remained almost stable. Also interconnection costs, relative to revenues, remained stable.

Selling and marketing expenses in the second quarter of '07 increased by 43% on an annual basis to $282 million driven by increased acquisition expenses and general marketing costs. The proportion of selling and marketing expenses to revenues reached to 19% mainly due to increase in marketing activities and also higher subscriber acquisitions.

Our administrative expenses increased to $54 million while administrative expenses, as a proportion to revenues, remained stable at 4%.

Moving on to the next slide we continue to generate strong cash flow from operations. However we had major cash outflow items in Q2 as well. Major cash outflows for the quarter were, total CapEx $191 million, of which $53 million was related to our Ukrainian operations. Dividend payment of $412 million which was realized in May 2007 and also other cash outflows such as corporate tax payment of $320 million for the year 2006.

For the second half of 2007 we expect major cash outflow items to be 3G license repayments, CapEx and potential international investments. For the year 2007 we expect approximately $400 million CapEx in Turkey, including some CapEx for 3G and broadband investments.

Moving on to the balance sheet, our cash balance reached to nearly $1.7 billion at the end of the quarter. Currently around 60% of this balance within hard currencies and we continue to monitor the markets to implement correct strategies for securing reasonable return on our cash. Our total consolidated debt amounted to $704 million as of Q2 '07. $505 million of this total related to our Ukraine operations.

We are aware that our current capital structure is not one of the most efficient ones compared to the benchmarks and during second half of this year we will continue to evaluate different alternatives to increase the efficiency of our capital structure.

Moving on to the international businesses, we are very pleased to see that Astelit in the Ukrainian market is nicely growing a subscriber base and revenues. Astelit subscriber base reached 6.3 million with a 100% year-on-year growth in its three month active subscriber base. Three month active subscribers' ARPU increased for another consecutive quarter and reached to $5 with a 57% year-on-year increase. Given the current trend we expect Astelit to record positive EBITDA during the last quarter of this year, which is significantly earlier than our previous expectations.

Moving on Fintur we are very pleased with the value contribution of our associate in which we own 41.45% stake. Fintur's operations which are in the lower market -- lower penetration market continue to generate strong revenue growth. The number of subscribers grew to approximate 8.7 million in the second quarter of 2007. The income that Turkcell recorded based on the equity pick up method amounted to $22 million during the quarter.

This is the end of my presentation, thank you.

Thank you Serkan. At this time actually we are ready to go over to the Q&A session with the help of our operator Christine. Please let's try to limit the questions to two per person and we'll see if we can have more in another round. Christine could you start the session please.

Thank you sir. (OPERATOR INSTRUCTIONS). Thank you, our first question comes from Mr. Cesar Tiron of JP Morgan. Please go ahead, sir.

Hi, my first question is related to pricing. It seems that your revenue per minute has decreased quite considerably in Q2 but this has been largely offset by an increase in usage. Do you expect this trend to continue in H2?

And my second question relates to the new government that will take office in Turkey and if you expect any changes in the telecom tax in Turkey? And also if you expect that this new government could put in place a law that would authorize share buybacks in Turkey? Thank you very much.

Thank you. Let me go over the first question on the pricing side. The average revenue per minute of usage as you said declined for us in Q2 relatively speaking to Q1, but at the beginning of the year we had said that we do not expect actually on year-on-year basis, major deterioration on average [ARMUS]. So from that perspective instead of guiding you or the market on quarterly basis we can still say that in average terms in comparison to last year, we won't see major deterioration, even the rationale [there on] the market.

But quarter-on-quarter we may do different campaigns, incentives and loyalty programs based on the dynamics of the market, try to create win-win situations for the customers and us. Actually that's what we've seen in Q2 creating a win-win situation, increasing minutes of usage, increasing revenues despite decline -- to an extent of ARMUS resulted in much better results. So we will have continuing similar thinking.

Yes, I would to expand on that a little bit, when Koray says win-win what we are after is to create incentive to talk more at a maybe lower price and get them to spend more. I think the key was to drive ARPU numbers up and I think you're very successful in that. So it is not --- our goal was not trying to improve every possible variable, we have create priorities about which variables are the most important ones and we are focusing on those.

(Inaudible) would you like to add anything on to that?

Well I think, I mean, [is if] the campaigns we did -- hi this is (inaudible), the campaigns we continue to conduct in Q2 and we continue to inject our value approach to campaigns. We are constantly trying to [urge] higher consumptions and give benefits to higher consumptions from our consumers. So the campaigns that we conduct in the second quarter have again to increase more users as well as (inaudible).

Now on the second part of the question it was about elections and the new Government and their views on the taxes. Our Prime Minister about a year and a half ago at the end of 2006 had made a promise that the taxes on communications would go down by 10%,15% and the Minister of Finance couldn't execute on this in 2007 because the budget for 2007 was already in motion.

We are optimistic, there is no guarantee here and the Government has been elected and they just announced today that they are planning to do reforms in taxes and I hope that they will prioritize this one, that impacts 53 million people in Turkey. So it would be a good one to get the tax benefits spread across the whole nation. We are optimistic but I should say we are cautiously optimistic.

[And that third question], and on the share buyback price there is not a clear expectation or guidance we can set. This is a difficult area because of the current legislation. So we have no guidance on that front.

But is it possible that the government will pass the law to allow that, do you think that's possible?

I mean speaking on behalf of the government right now; we believe it's too soon as well; we don't have any indications of such. But we do have plans to lobby for this --- before the government it needs to be proposed by the independent agency that monitors the financial markets in Turkey.

The good news is the Turkish government is trying to bring a lot of reforms nearing European Union and I think since this is allowed in European Union, it would be reasonable to expect, why not bring that situation into the Turkish financial market as well? But you know I think it will take time to go through the local agency and then get to government, pass a law to enable that.

thank you very much.

Thank you. Our next question comes from Mr. Alex Wright of UBS. Please go ahead, sir.

Yes, good afternoon everyone. I have some questions on costs and margins please. The sales and marketing spending obviously went up strongly in the quarter and that appeared to have been justified by the strong growth that you've seen. From what you've seen so far in Q3 and your expectations for the coming week, do you expect spending to continue at this level, either in absolute terms or as a percentage of sales? Or have you seen something of a slowdown in marketing campaigns since [in the] third quarter? So that was my first question.

The second one is on the new margin guidance for the full year. You've increased your expectations from 38% to 39%. I just wanted to understand a little bit more behind the thinking there. Is that -- yes, your margin in the first half was closer to 40%. Is there any specific reason why you would expect margins to be a little bit lower in the second half of the year, or are you just leaving yourself some safety room, shall we say, to meet that target? Thank you.

Now, first of all I think that we should all remember that in Q1 we had about less than 500,000 net additions. In Q2, we had 1.5 million net additions. And we had significantly high new subscriptions which come with acquisition costs. So, this is an investment we made in this quarter, it is included in the sales and marketing expenses; that we acquired a lot of new subscribers and consequently we ended up increasing our sales and marketing expenses.

On the margin side, we are increasing our guidance from 38% to 39% and we are being cautious. I think it's a very competitive environment and I think we expect this high level of competition dynamics to continue in H2, and we want to leave ourselves some room. Because we are going to defend our valued customers passionately.

And sorry can I just follow-up on the first question please? The guidance that you've given for the second half [is] you would expect the subscriber additions to slow down. So all other things being equal, we should probably expect to see sales and marketing spending also come down. Is that a fair expectation?

I think from the acquisition cost point of view that is a reasonable assumption. Would you like to add anything Serkan on that?

Maybe I can give some -- a few small additions. The reason for giving 39% [closure] EBITDA margin guidance [is in] we have 40% -- around 40% (inaudible) EBITDA realized. Two main reasons, actually.

This third quarter is, from a marketing perspective, is one of the most active quarters. In terms of acquisition it's one of the most active quarters. And historically the last quarter of each year is the lightest quarter in terms of EBITDA generation of the company. Those are the two main reasons behind the normal EBITDA margin for the whole year.

Thank you very much.

Thank you, our next question comes from Mr. Stephen Pettyfer of Merrill Lynch. Please go ahead.

Yes, good afternoon. Two questions please. Firstly relating to your sensitivity analysis you helpfully provided in your note 27 of your accounts. I just wondered if, given the change of your FX assumptions going forward, if you could give us any insight into same sort of 10% strength or weakness for the remainder of the year, or that's going to be pretty neutral now?

The second question relates to your network. You've had extremely good, impressive minutes growth across the network. My sense is it's better than you were expecting. I just wondered how, given that you've maintained your CapEx guidance at that $400 million level, I wonder if you've had to cut back on some levels or how you're managing to operate the network, given the usage growth? Thanks.

Stephen, I'm trying to answer your first question. For the end of this year, we have revised our FX assumptions for the end of this year to [1.45]. So it still seems a conservative one because there are some (inaudible) FX estimations. But we have made our sum based on the 1.45 year end FX rate.

On the network side we increased our MoU and this was planned and expected, and it was because of the campaign that Koray and Lale earlier explained, creating a win-win situation to get the customers motivated to spend more than they were spending in the past. But in the whole time we monitored and we were below our capacity and we did not jeopardize the quality of the service. And we are sticking with the same CapEx expenditure for the rest of the year.

Okay. Thanks. Maybe we can come back to the sensitivity announcements offline if you like?

Sure.

Thank you. Our next question comes from Mr. Sean Gardiner of Morgan Stanley. Please go ahead sir.

Yes, thank you. On the prepared remarks you sort of talked about looking at evaluating alternatives, in the second half, about your capital structure, and how you can improve it. Without any visibility on buybacks, can you just run through what options Turkcell has available to it? And maybe help us understand what your distributable reserves are available for any extraordinary dividends or anything along those lines that can help us understand how you can gear up your balance sheet? That would be great, thanks.

Unfortunately we don't have many many alternatives for this. The first one is, of course, dividend distribution. Currently we have around TRY0.5 billion in retained earnings, which can be distributed as dividends. And during the first half of this year, we've reproduced around TRY[675 million] additionally [distributed with] profit. So if the total's also [done] currently we have it on the [TRY1.2 billion] distributable profit as [only] in the first half.

So based on the board approval and on general assembly approval as you know we can distribute this profit to our shareholders, at any time actually. If we have the board and general assembly approval. This may be the first one, first alternative.

The second alternative, you know that direct share buybacks is not possible legally in Turkey. But there are maybe some different structures so that we can implement. However, I don't want to explain those alternatives in detail at this moment. But those are not direct share buybacks because it's illegal in Turkey now.

Okay. So you think there's a way that you can buyback shares, but not directly, is that what you're saying?

Maybe different scenarios can be explored, but, to be frank and fair, there is not a current established structure or specific guidance we can give in this area or regarding the board evaluation for the [dividend] distribution. What we are saying I think is for the second half we'll make this a management agenda to pursue. It's an area of focus for us given the mutual understanding of the, let's say, not enough efficiencies on the balance sheet structure.

Is there a number in mind that management thinks about as an efficient capital structure? Think about as a target?

This will be our focus area in the second half. We are going to focus more on what we can do to optimize the capital structure? But we also have to keep in mind that we are going to enter in Turkey 3G, third generation license, and it will cost at least $350 million for the licenses. And then we have some new regional tenders we are looking at in the near future. And we are also concentrating investment into Internet broadband in Turkey.

So, keeping those investments in mind, our main focus for (inaudible) this year is to increase shareholder value, so we are going to listen to our investors. We are going to talk to our investment bankers and explore ways, how to optimize our capital structure.

Thank you very much.

That's all we can say at this time.

Yes, thank you.

Thank you. Our next question comes from Mr. Alex Kuznetsov of Bear Sterns. Please go ahead sir.

Good afternoon, it is Alex Kuznetsov from Bear Sterns. I would like to ask your comments on how you achieved such a strong MoU expansion and dramatic subscriber calls? It's my understanding that subscriber calls was at their all-time high and it's very surprising, given increasing competition from Vodafone.

Also, I would like to ask you if you can provide your outlook on your investment cases in Iraq and Kuwait? Maybe you can characterize what you expect to achieve, what your target market -- market change, those markets and ARPUs? Thank you very much.

Okay. On the first question about increasing MoUs, and increasing ARPUs and increasing our acquisitions, we agreed that we needed campaigns to motivate our users and we discovered that our MoU was (technical difficulty).

Ladies and gentlemen we apologize for the pause in your presentation. Please bear with us.

To motivate them and I think still our MoUs are very, very, very [well] compared to other operators. And this represents huge upside potential for Turkcell. So, our campaigns like this -- we must run a campaign which works basically communicating the idea that if you buy one you'll get many little pieces. We've got people, let's say, spending $20 a month, we got -- created incentives for them to spend 30% more. And if they did that we will give them a lot of extra minutes to be used in one week. And this campaign was hugely successful.

This also helped our image, to be honest, because Turkcell was known as a high priced operator, high priced choice and we created values. Those campaigns got the MO user. Those campaigns got the ARPUs up. And those campaigns created extra motivation for the lower end of the market also to consider Turkcell.

But we -- I also want to highlight that six months ago we said we were not going to play numbers game for subscribers. We are after value subscribers, real subscribers who generate traffic. So, we renumerated the compensation package for the dealers -- for our dealers. And we are giving sometimes incentives based on the traffic they generate. And we are valuing each dealer, not on the number of activations they generate, but on the traffic that goes through the activations they generate.

So in a way we tightened the -- we improved our value approach and we tightened our approach of getting subscribers at any price.

And I also want to point out that I think it was very key -- we made some key changes in the deal that [appropriately] adjusted commission structure. We adjusted the pricing of some of these introductory SIM cards. And we also conducted a lot of training for these people where we communicated those five value propositions. And we achieved a lot of firsts, first time in Turkcell's history. We started training the [pure] employees of our dealers. We started training the sub-dealers in the past which we had not -- which we in the past we had ignored. So, education, teaming up with the dealers, paying attention to them, training them, I think was also instrumental.

Related to your second question; our main assumptions for Iraq and Kuwait [is its models]. For Iraq the tender's very soon, therefore it's not fair to share our managed assumptions with the confidentiality. And regarding Kuwait, we are currently at the [pre-qualification] stage and currently we are working on the business model in Kuwait. So it's very early to disclose any assumptions about that.

Thank you very much.

Thank you. Our next question comes from Mr. Herve Drouet of HSBC. Thank you, go ahead.

Yes good afternoon, my first question is regarding Kuwait and Iraq. Can you tell us a little bit more about the financing you have secured, if you can share with us any amount? And what would be the capital structure of these financings, especially in terms of currency?

My second question is regarding current trends in market share of net additions. Do you think your Q3 market share in net additions will be as similar as the one you had in Q2, or do you think -- I mean the trend we saw in Q2 is going to be sustainable in the next few quarters? Thank you.

On the international opportunities, I think Serkan just had responded to that prior to your question, but just to give you a few more flavors. In Iraq there is a regional licensing currently established in this country and there's going to be three nationwide licenses issued. Starting minimum price for the licensing is going to be about $300 million and there's going to be an expectation of revenue share of about 18%. Based on different alternatives going into the market, we are evaluating different scenarios of business plans and their feasibility.

On the Kuwait side, there are two operators. The market is quite saturated, 2.5 million people, relatively easy to get in and set up an operation, from a physical perspective. And per capita income is very high, up above $21,000 per year. So there's room for a third operator, even [feasibility] of the licensing. That's how we view it at this time, I think we need to leave it at that.

Yes, I remember when you were bidding for the Saudi license, for example, you know you put some financing aside. Do you still have access to those financing activities, in a similar amount?

We have, as you know, some cash balance and financial flexibility to raise cash from the market. Market sentiments, although we are seeing some volatility we think (inaudible) that if (inaudible) we'll be able to do necessary finance.

Now you had a follow-up question, or actually, a second question about a completely different area. It was about market share of the net adds. Now, I expressed our position where we are after new subscribers for generating traffic and quality customers who have potential to generate a lot of traffic for us. So we are very conscious of the cost of these acquisitions and we do not want to waste our money. So we continue to optimize our commission structures, our dealers' agreements, so that we are always creating the incentives for our dealers to create real, high value generating customers. So this is our position.

Now our competition does different things. And in the last six months we have seen them play different games, so I personally feel -- have some doubt about numbers coming from our competition, because they change their churn policy quite often, they revise their numbers that they have expressed and what we have seen them do was distribute free postpaid SIM cards. Because in Turkey if you buy a prepaid the operator has to pay the tax, about $30. But if you buy a postpaid the customer has to pay the tax over some time.

But some of these -- not everybody in Turkey is equipped to deal with a postpaid subscription model. And there is no trend and we are -- from the analysis we have done, some of these cost bases have very, very high ratios of churn. So, in summary, I've said also things what I want to sum up with, we are mainly focused on our own efforts and our efforts to capture quality customers. And we want to -- we don't want to spend and waste our money because we just want to look good in subscription numbers.

so am I correct in saying that, for the second half you may -- we may expect maybe a bit less higher net additions but maybe more because concentration of increased ARPU? Am I correct in reading what you are saying?

Yes.

Thank you.

A good question, excellent question, by the way.

Thank you. Our next question comes from Miss Olga Bystrova of Credit Suisse. Please go ahead.

Good afternoon, Olga Bystrova from Credit Suisse. If we look beyond 2007 what kind of market growth rates do you expect in 2008 and whether you are expecting a fourth entrant in the market at some point in time?

And secondly if, let's say, how do you view the -- in qualitative terms, the probability of your success in terms of international expansion that you're currently approaching? And if, hypothetically, it was not -- it would not succeed, let's say, what are you going to do in Turkey in terms of capital deployment and the use of cash? I think you touched upon a few things in previous -- when you were answering previous questions but maybe you could reiterate as well? Thank you very much.

Olga thank you for the first question. For the first question, we don't actually extend our guidance beyond 2007, at this point. Prior to Q4 or possibly around -- after Q3 we'll revise or we'll redirect the market for guidance for 2008 based on our assumptions at that time.

In regards to number of players to the market, that will be dependent on 3G licensing process. There is a potential that there is going to be an award of additional license during that process. But we haven't witnessed or heard a commitment yet from a party interested in this licensing process, at least publicly. So, when we hear them, we'll probably give them all but we'll let you know.

And on the second question, if I understand it right, what's our strategy, you're asking on the international expansion, is that the question?

Well my question was more, let's say, if hypothetically you were not successful in the international expansion that you are currently pursuing, what are you going to do strategy-wise, in terms of expansion in Turkey, investment and other areas, convergence etc? So that was the question.

Now, as you see, [I have to] admit that I didn't focus on international expansion as much as probably we should have done. You can only focus on so many things and I think in the first half, we were really, really focused on operations excellence, winning versus competition, increasing our customer satisfaction. And we are also focused on our generic growth for -- in our existing market.

We need to be more active, more strategic in our international expansion, but I think we can do better in that area. But at the same time I fully endorse our approach which is being value conscious and we do not want to win the tender and lose the business, or lose money. So, we are going to continue with our value approach but I think we are going to be more strategic, more active, more energetic, more creative in international expansion.

Also, in Turkey, we mentioned Internet broadband as an opportunity. We plan to invest in that market, today Turkish Telecom is the only vendor in the Internet broadband space and the markets can definitely handle more than one supplier in this area. And we are going to invest money wisely, again being careful but I cannot get into too much detail, for competitive reasons, at this time.

Okay. Thank you very much indeed.

Thank you. Our next question comes from Mr Ben Joseph of Nevsky. Please go ahead.

Hi there thank you for the call. My first question is, basically I'm just trying to understand exactly why you expect lower net adds in H2? Clearly the sales and marketing campaign in this quarter has been a great success for ARPU and for net adds. Are you going to significantly cut back on some of these costs or -- and that's going to lead to a slow down in net additions, or do you think there are actually one-off factors in the quarter that contributed to the particularly strong net add growth?

So far, you've mentioned improved training for your distribution network and some new distribution arrangements. Presumably that would actually continue into the second half of the year? [Will] potentially incur some new costs again but should again support much stronger net adds in the forthcoming months? Can you just help me understand these trends a little bit better please?

Ben, maybe I'll start and I think --

Ben, I think it will also help if you could clarify the question. I think -- I understand the area of the question but if you can a little bit -- be more precise. I want to answer your question accurately so can you help us clarify the question?

Why exactly will net adds slow down in H2, bearing in mind the success in the latest quarter? Is it because you're going to significantly cut back your marketing expenses? Are there -- were there one-off factors in this quarter that contributed to the strong net adds?

Okay. Excellent. We do not plan to cut our marketing expenditure in the second half. We are going to continue to be aggressive on the marketing side. We just feel that penetration rates are going up and there were a lot of new subscribers in H1. And also these are -- so, basically we are going to be active in -- just like in H1, we are going to be active in H2. But [there will be] competition from Vodafone, which was heavy in H1 and we responded to that.

So there may be some slow down if the competition takes that action, we may follow, but not drastically really on the marketing expenses side. So, we are building to being conservative from the market dynamics point of view, not because we plan to cut our marketing expenses significantly. I think we are going to be aggressive on the marketing side, going forward.

Were there any one-off factors that you can identify that contributed to the strong Q2 net adds that are going to fall out? Were there any particular promotions that will no longer occur in Q3 and Q4?

You know actually I think our marketing team is -- they did a great job in H1 but they're also learning, getting better and optimizing their campaigns. So I am confident that they're going to be even more productive in their campaigns. So we learned -- in this campaign we learned a lot of things that worked, some which don't work as much, as well. So, I think we are going to put all of that learning into use in H2.

And maybe another way of looking at this [Q2] is yes, it is high but when you look at in comparison to Q1, it was relatively lower than expected. We had explained at that time, normally 480,000 net additions for that quarter was lower than expectations. Basically, as we had explained at that time, the month of January was actually negative in net additions and the trend of increase picked up significantly in later months with increase of churn about 5% that quarter, there was less than expected net addition. So, that's maybe another way of looking at it. If we had more obviously relatively Q2 would have been still higher but not as much of a gap we would see. And as Mr. Ciliv pointed out the re-branding activities in Q2 particularly, and active competition helped grow the market better than expected. So that's the main causes.

Do you expect to spend less on sales and marketing in Q3 versus Q2 or is it actually going to be broadly similar amounts? If --?

For competitive reasons actually we don't want to be specific on overall cost structure on quarterly basis. But for the year, cost structure more or less is stable as percentage of revenue in comparison to 2006.

Okay thanks.

And as Mr. Ciliv again said, we will continue to be aggressive and not pull back on the marketing side.

Thank you. If I could just follow-up with one more question on the tax? Are you able to give us any guidance on the amount of deferred tax that'll be recognized in the P&L going forward and clarify any differences between the tax that we see in the P&L and in the cash flow for the balance of the year and potentially in the future years?

In Q2 the effective tax rate on a consolidated basis is 15%. It's very hard to give a guidance for the rest of the year because we are reporting on a consolidated basis. However, I can tell you that the full year figure will not be less than this; most probably it will be higher than the 15% for the whole year of 2007.

And will we see any major differences between the tax expense in the profit and loss account and the tax per the cash flow as we saw in this quarter? I appreciate that this quarter has made up for previous differences but are there any other major timing differences, delayed payments etc. that we should be aware of that you expect?

[Actually] we don't expect any one-time significant difference actually for the rest of the year.

Okay, thanks very much.

Thank you. Our next question comes from Mr. Brad Radulovacki from Oaktree Capital. Please go ahead.

Yes, just -- I was looking at the progression of your lira ARPUs and the pricing dynamics and it seems over the last three quarters, year-on-year you've been able to stimulate higher usage versus the decline in your tariffs. So you had a positive elasticity but it looks like it's been in place for the last three quarters and it was especially prominent this quarter. I just wanted to know if you found a mechanism or a strategy to, on a consistent basis, have positive elasticity? If you think this will continue, let's say for the rest of this year?

Now I'll make a comment and then I'll pass to Lale. You know research analysis across many operators clearly show that as the income per capita of a country increases, the ARPUs increase as well. So I think Turkey is going through economic growth, I think in the last five years the average was 7.2% growth and people's incomes have doubled. And now we have, after the elections, pretty clear outlook for the economy, continuing the same policies of the last five years.

So first of all the economic development will help our business and lowering taxes will help our MOUs increase and as a result generate higher ARPUs. Lale, would you like to add anything else?

What I can say is we have continued in Q2 to develop our segmented marketing efforts -- segmented campaign offerings. And we had different offers for our post-date customers, our post-date (inaudible) packages. We had a marked campaign for our pre-paid customers; we had different offers for our premium customers, for our [good] customers; a revision of our tariff for our [student center]. So we see that our segmented approach continues to work and that we're giving these offers to the most reactive customers by [re-activating] increase in MOUs and their usage through this campaign. We continue our success, so what we believe is that we will continue our segmented offer approach and through that, continue to increase the MOUs and our revenues.

Okay, well thank you very much and well done on an excellent quarter.

Thank you Brad.

Thank you. Our next question comes from Mr. Alexander Balakhnin from Goldman Sachs. Please go ahead.

Good afternoon, it's Alexander Balakhnin from Goldman Sachs. Just a couple of questions on your [Istcell floor]. The first question is, what exchange rate do you use for the (inaudible) estimate in Europe? Do you have it [supported]?

Exchange rate assumption we have revised to 1.45 per dollar and 1.45 [Turkish lira] per dollar. That's the closing rate expectation we have so that all the guidance that we are giving is based on that expectation for year end.

So you expect lira depreciation by the year end?

Yes.

And could you probably tell us what will be the impact on your P&L if year end exchange rate will be equal to the current level of Turkish lira?

Sure.

Maybe I can comment on that, 95% are already in Turkish lira and slightly more than 80% of our expenses are also in Turkish lira. Therefore if the exchange rates will stay at the current level, more (inaudible) US dollar terms will increase.

So the numbers will decrease but in terms of the margins we may expect that the impact on a normal fixed rate will be minimal on margins but the absolute numbers will be higher than the current guidance.

But what will be re-booked -- arisen from your derivative [alteration]?

We couldn't hear that last question. Could you repeat please?

Yes my question what will be re-booked on P&L from your [alterations] with derivatives?

(inaudible) derivatives?

[Actually] -- we have, as I said in the presentation, we have a good [$4 million to $5 million] fixed loss in the Q2 financials though that puts $5 million -- a fixed loss is not realized actually at the end of the Q2. That number is accrued for the outstanding derivatives which will be realized at the end of Q3 and Q4. So there may be some, depending on the fixed rates for the rest of the year, there may be some additional losses assuming that the fixed rate as you said, will stay at [1.27, 1.28 level] at the end of the year. But please keep in mind that [$4 million to $5 million] has already been accrued in the Q2 financials. Regarding possible future fixed rates, they're only outstanding forward contracts.

Thanks.

Thank you. Our next question comes from Ms. Anna Bossong of Unicredit. Please go ahead.

Yes hello, thanks very much. My first question concerns your commission fees on betting business which dropped 36% year-on-year and almost 70% Q-on-Q. I just wondered if you could talk through what happened there and what the outlook is perhaps for the rest of the year and how the margins are in that business?

And on that same topic, what -- if there's any news on the gaming license issue?

And secondly in the Ukraine, I was very pleasantly surprised by your ARPU trends there etc., given that I was concerned about the very irrational competition seemingly going on in the Ukraine. Can you tell us, is the competitive situation improving at all and what is your outlook going forward there? Thank you.

[Intertech], you're right I think in this quarter we had pretty bad results in [Intertech] and our revenues have come down significantly. And we had some unexpected high payments out and that impacted our contribution -- [Intertech] impacted [Intertech's] contribution to Turkcell's consolidated statement.

Going forward I think in the quarter the issues were mostly problematic during the first two months and in the third month, last month in June, the situation had improved. And also it was a slow month because of the (inaudible) and it is starting to this week again.

So I think I'm going to pass to Serkan to add on to this.

As an addition to the impact of the [Intertech] to our financials this year. For the second quarter it was not as expected actually. Actually compared to the first quarter it is very stable in Q1 and Q2. There are two main reasons, the first one the commission rates that we are receiving decreased from 12% to 7%, effective from March. That was the first reason. The second reason, as Mr. Ciliv mentioned, we had some excess payouts to the (inaudible). So those extra [charges] and excess payouts for the (inaudible) has been nipped off from the (inaudible) site. Therefore that was the main two reasons of worse than expected contribution in [Intertech] for the second quarter.

For the whole year actually the decrease in the commission rate is going to decrease the revenue a bit (inaudible) financials but we don't expect that decrease will be significant. It will not be significant to concern the financials.

Do you mean as in relation to 2006 it won't be significantly smaller?

It won't be higher than 2006; it may be around 2006 levels in terms of revenues.

Okay, thank you very much.

I want to comment, I think revenues and the operating income contribution from [Intertech] is likely to be lower than Q1 and is likely to be higher than Q2. It is my current thinking.

Super, thank you.

As for the Ukraine question, the market conditions have not significantly changed. In the Ukraine there is still a very competitive market but as for Life's performance, we feel that Life is on the right track with the right attractive offers, being able to expand the subscriber base and the current offers are becoming more meaningful as the basis is expanding and the quality of network is increasing, so we actually have a game plan. So if things get better from a pricing perspective, as spoken also by some players in the market, towards the end of the year things probably will be better for everyone. But right now as (inaudible) is performing up to the expectations and this will continue. That's our expectations.

[Again, it's me]. I visited [Astelit] recently and I am delighted by the progress I have seen. I think we have tremendous momentum in the market space with our brands Life. And I -- we definitely are the operator with the energy, marketing, marketing differentiation and marketing momentum in the dealer network. And the results show -- I am delighted by that investment. I think with a relatively small investment we are in an important, fast growing economy in the market and our operations are gaining momentum.

We are also the only operator in the market which has a Ukrainian partner. The other operators are almost wholly owned by foreigners and I also see that there's a possible advantage going forward.

Our team has done a great job of being very creative in marketing. I think we are the company, we are the operator with the momentum in the subscribers and also ARPU increases.

Thank you. Would you say that the success owes more perhaps to the fixed rate package you have, the unlimited traffic one or to the success and expansion of post-paid offerings? If you had to put it down to one or the other?

Where in Ukraine?

In Ukraine yes.

I think in Ukraine is it mostly pre-paid? It is I think -- it's mostly pre-paid today.

Lovely, thank you very much.

Thank you. Our next question comes from Mr. Osman Memisoglu of Finans Invest. Please go ahead sir.

Hi there. I just wanted to ask on the sales and marketing expenses, can you tell us what the fact figure for the second quarter was?

And also from a breakdown of revenues, could you tell us the share of data services and interconnect revenues and the overall revenues of the quarter? Thank you.

For the fact figure it was $26 in Q2.

Last year it was 30 I believe. Do you expect that to be higher, lower? Can you give us guidance on full year?

From a sales and acquisition cost perspective we don't actually expect higher than $30. These levels may fluctuate on quarterly basis but that's the expectation. The data revenues were 11% of our revenues this quarter. Given the size of the increase on voice and few other factors that I won't get into detail, the data side did not grow as much but we are heavily relying on data side and it's a great contributor to revenues, as well as [stickiness] from a customer retention perspective. We went over some of the new products that we have and interconnection revenues were 10% of our revenues this quarter so they actually have increased there as well.

Thank you.

Thank you. Our next question comes from (inaudible) [Alternative Invest]. Please go ahead.

Hi, my questions have already been answered thank you.

Thank you.

Maybe we can take one final question if there is?

Thank you. Our next question comes from Mr. Sinan Velioglu of Deutsche Bank. Please go ahead.

Hi, I was wondering if you could share data on drop rates and network congestion given the strong MOU growth?

The general figure we can you is -- there's not an increase actually, both drop and congestion rates are below 1%. As you know the license requirement is 5% in Turkey so we are quite below the licence expectations and emphasize in quality quite deeply on [database].

Thank you.

Thank you very much for joining the conference call. We expect to continue to communicate quarterly basis and through road shows and conference attendance. We'll be quite active in the September and November timeframe. The audio recording of this call is available to you for the next two weeks. Please don't hesitate to call us after the call or coming days to get more details from the IR team. Thank you very much.

Thank you.

Ladies and gentlemen that concludes today's conference call. Thank you for participating. You may now disconnect.