Turkcell Iletisim Hizmetleri AS (TKC) 2008 Q1 法說會逐字稿

(Audio begins in progress)

...2008 results announcement conference call on Thursday May 8, 2008. (OPERATOR INSTRUCTIONS).

I will now hand the conference over to Koray Ozturkler, please go ahead sir.

Thank you very much (Christine). I would like to also welcome you to our conference call on behalf of the management team here. I will be reading over our notice and then we will start our session with a presentation by our CEO and then followed by CFO's presentation, then we will go quickly into our Q&A session.

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 Factors section of Turkcell's most recent 20-F or 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. Sureyya?

I would like to welcome you all to Turkcell's first quarter 2008 conference call. Our first quarter turned out to be a very challenging and difficult operating environment for three main reasons. First, because of the regulatory [decisions] constraint. They were initially unclear and later turned out to be very limiting from our marketing point of view. Secondly then is intense competition focused on price. And thirdly the macroenvironment situation in Turkey worsening. I believe we weathered the storm, the worst is behind us as far as I can see.

In the first quarter of 2008 Turkcell's consolidated revenues increased by 22% to $1,574 million. We recorded our highest postpaid additions growing our postpaid subscriber base, increased usage through [retentions], ensured healthy contribution of our corporate business as well as our value base (inaudible) in our market. These were the main drivers for the top line growth and our ARPU increased -- partly increased by 9% year-on-year in dollar terms.

In Turkish lire terms we recorded only 3% top line growth in (inaudible) Turkish lire ARPU. Looking at one period, we were able to start introducing our campaign and offers to drive usage in ARPU, only starting from end of February due to regulatory development.

The impact of our actions were not fully realized during the quarter and as a result this has reflected on our growth rate in Q1. To elaborate furthermore, our offers to increase usage were very front loaded in promotional minutes and the revenue and ARPU impact is expected to come (inaudible). [Income rates], the marketing investment we made [after] us having the flexibility to execute on our marketing campaign, we will see the fruits later on in the year.

On a positive note, through this approach we aimed to increase customer perception in a short time and loyalty, which was also impacted as a result of limited campaigns and offers during the period.

During the first quarter we grew our EBITDA by 12% to $577 million, while EBITDA margin was realized at 37%. Our net income grew to $487 million and our net income margin increased to 31%. In Turkish lire terms we also reported a strong net profit.

On the international front Astelit continued to record positive results and doubled its top line compared to last year to $90 million. Astelit also recorded positive EBITDA moving towards its full year positive EBITDA targets. As for Fintur operations, its consolidated revenues increased by 36% to $4 million, leading to growth continued profitability and contribution to Turkcell's bottom line.

Moving on to the next slide I would like to further elaborate on our operating environment. We have seen the 2008 macroeconomic expectation in Turkey worsen. The increase in political tension combined with macroeconomic volatility and the downward turn in consumer confidence has created a more challenging operating environment. And we are cautiously monitoring these conditions.

The competition was quite active in our market during the first quarter of 2008. Our competitors continued to focus on the price perception of our customers during the quarter, and particularly became aggressive during the time which we were limited on some of our activities due to the regulatory constraints.

Despite this difficult situation, thanks to quality and overage of our solid network, strong brand name and value propositions, we have seen no major impact on our premium segment of individuals or corporates. On the contrary these business areas had much better growth rates than average, highlighting our strong presence in our markets.

In our efforts we intend to maintain a very balanced approach within profitability and our acquisition goals although we believe we remain very strong in gross acquisition gained in the quarter, higher churn rate led to negative additions for the first time. Whilst some of this churn is related to high acquisitions from seven months ago and also price conscious segments, we believe an important part of churn is also related with not being able to execute segment (inaudible), retention offers, again because of the regulatory constraints.

Given the flexibility we have regained now we believe we will cope with the competition much more effectively going forwards. I will talk about out thinking on this a little later but first I would like to provide you with more insight into the recent regulatory development.

The communication authority's decision back in October 2007 set a maximum of net calling prices for all operators and exclusively at Turkcell to set its own net prices to be not lower than its lowest call termination rate. However, initial decision was not clear enough and did not provide us the necessary information to adapt our [curve] immediately. There was special [confusion] on the calculation o f this based on the rated average method or not. Although this decision negatively affected our ability to design and launch new campaigns and offers during Q4 2007 we were able to continue with some of our existing offers and campaigns.

As a result while the development impacted us negatively in Q4 the extent of the impact was not as much as Q1 2008. Since communication of this decision to us, we remain in close discussion with TA seeking clarification of the decisions. We were forced to limit our marketing efforts at (inaudible) until further clarification was received at end of February. As a result while we could not roll out new campaigns and offers we had to start to (inaudible) existing efforts as well.

As soon as we have heard the new clarification we have designed and implemented an alternative call termination pricing method with new pricing models. At present through this new model we believe we are in compliance with the regulator's decision and we have regained our flexibility to introduce new campaigns and offers.

Just to remind you, you know that our outstanding lawsuit with the Highest Administrative Court in Turkey regarding the decisions on the grounds that telecom authority has violated the telecommunication law, competition law and concession agreement between us and TA, Telecommunication Authority. We should briefly mention that the Telecommunication Authority also revised the reference call termination rates for fixed and mobile operators in April 2008. Based on the revision, our reference call nation charge of TRY13.6 has come down by 33% to TRY9.1 unless otherwise agreed between the operators.

This recent revision maintained the price symmetry in an unfair manner with other mobile operators. We believe the mobile call terminations in Turkey are significantly below the European counterpart averages. Whereas we believe that Turkey's fixed call termination rates are quite in line with European counterparts. Although we expect no major change on our interconnection revenues and costs on net basis as a percentage of revenue due to this downwards revision, the impact of this revision is yet to be seen in the retail market.

Moving to the next slide, I would like to talk about some of the actions during Q1 as well as what we intend to do during 2008 to cope with the increasingly competitive environment. We continue to view our sales channel as a strategic advantage [point]. We are much stronger than competition and we will keep it that way. In line with our views we are further strengthening our sales channel through training and new incentive programs. We believe such activity will add positive effect on our customer retention.

Furthermore we view localization as a major step for us in 2008. Localized in our marketing and sales efforts by designing offers and campaigns for specific regions and cities to increase our visibility is our major focus. And we already designed and launched strong propositions for the youth and corporate segments as we give high priority to these segments.

For the youth segment we introduced a very attractive tariff offer with a campus providing three minutes, three minute bundled incentives with airtime loading conditions targeted towards new acquisitions and retentions. For the corporate we introduced a stronger offer attractive on net pricing which we believe will further strengthen the loyalty of our high value generating corporate subscribers.

We also introduced a unique new service called home zone -- Home Turkcell which is a Homezone [home Turkcell] which is a home zone service. This allows customers to make calls from their mobile phones to fixed lines at a cheaper price than from their fixed lines while they are in their home zone. This new service has already made positive waves.

Driving loyalty is another area we prioritize as we are aware of the importance of retaining our valuable subscriber segments. We are working towards winning the hearts and minds of our customers by building our strong brands, underlining our better value propositions and realigning our customer contact points.

We continue to focus on ensuring the retention of our customers, especially in the premium end corporate segments in which we have much lower churn rates. In addition we are focused on growing our postpaid subscriber base along with maintaining high-value generating subscribers. During this quarter we recorded the highest level of net new postpaid subscriber acquisitions recorded in our history as a result of our continuous focus. We have also seen a pleasing growth in our value-added service revenue which now accounts for 14% of our consolidated revenues. Our focus in this area will continue. All-in-all we believe we have all of the strengths to handle any competition in Turkey with our focused efforts and well organized teams.

Moving on to the next slide I would like to talk about our stance for the remainder of 2008. We believe we are well positioned and excited about winning against competition, driving customer satisfaction and continuing to grow our business and sustain our leading position in the market. Naturally we will follow the development in our pricing environment (inaudible) for active development in the macroeconomic regulatory and competitive environment and take any necessary actions going forward.

I strongly believe that underlying our value proposition such as best coverage, highest quality network and most advantageous pricing, we'll continue to differentiate Turkcell from its competitors and will ensure loyalty of our customers. Additionally, ensure success of our existing subsidiaries while aiming to exploit new business opportunities in the international area.

In light of the current plans looking at 2008, we may expect the market growth this year to be at a slower rate than we previously anticipated while the mobile line penetration should reach about 95% by the end of 2008. The pace of growth of our subscriber base may be at a slower rate compared to that of our market in 2008. We aim to increase usage and ARPU in Turkish lire terms, leading to a double-digit growth in revenue in Turkish lire. We expect our EBITDA margin to be at approximately 38%.

At this time I will hand over to Serkan for the financial review.

Good morning and good afternoon to all participants. I will initially talk about some operational indicators before going into the financials. Our subscriber base grew by 9% and usage grew by 17.2% year-on-year. Gross acquisitions in the first quarter were strong with the highest level of net new postpaid subscriber acquisitions recorded in our history.

However due to regulatory developments regarding our retail pricing since Q4 and higher acquisition in previous quarters that led to higher churn we have reported net negative subscriber additions of 220,000 during the quarter. This results to a new [operating] 9% decline in our subscriber base quarter-on-quarter as of the end of March 2008.

In the first quarter 2008 we recorded a churn rate of 7.2%, an increase of 2.1 percentage points compared to the same period in 2007, mainly due to seasonally higher acquisitions in the previous quarters. In addition, this impact of regulatory interventions on retail pricing we temporarily halted some of our retention and churn prevention activities. As a result involuntary churn of pre-paid customers increased.

The churn rate were mainly low ARPU generating prepaid subscribers. In this first quarter 2008 our blended minutes of usage per subscriber increased year-on-year by 17.2% from 63.8 minutes to 73.6 minutes. This can be attributed mostly to the positive impact of our campaign that we revised and realized at the end of February to incentivize usage as well as further utilization of our incentivized tariff options launched in October 2007.

Despite the increase, we have achieved in our MoU we believe regulatory developments regarding retail pricing led to a slow down in our segmented campaigns and to some extent the development in the macroeconomic and political environments also had an unfavourable impact on our subscriber usage levels.

Moving on to the next slide, in Q1 '08 our blended ARPU in US dollars grew by 9.1% to $13.3 compared to the same period of 2007. This was mainly due to 15% appreciation on Turkish lire against US dollar and 7.7% decrease in Turkish to ARPU. Regulatory developments regarding the retail pricing led to slow down revenue triggering mass offers and thus impacted ARPU levels negatively. Although we have seen an increase in March ARPU figures in Turkish lire compared to January and February figures our Q1 '08 Turkish ARPU declined by 14.2% compared to Q4 '07.

Moving on to the next slide, I will now talk about our financial results. Our consolidated revenues grew by 21.6% in US dollars to around [$1.6 billion] in Q1 '08 compared to the same period for last year. The main drivers of top line growth were 15% appreciation in Turkish lira against US dollars, 9% increase in subscriber base and (inaudible) in usage and with positive impact of our consolidated subsidiaries, mainly ARPU.

However, quarter-on-quarter our consolidated revenue decreased by 12.9% in Q1 '08 compared to Q4 '07, mainly due to increased usage incentives introduced by the end of February 2008 and increased subscription to our incentivized tariff options implemented in Q4 '07.

Additionally, the one-time positive impact of the reversal of Avea invoices amounting to $46 million that was recorded in Q4 '07 has also increased our revenues in Q4 '07.

In Q1 '08, EBITDA increased by 12.4% to $577 million, compared to the same quarter of last year. However for the same period, EBITDA margin declined from 40% to 37%, due to increase in costings at a higher percentage than increase in earnings.

In Q1 '08 EBITDA declined by 22.6% compared to Q4 '07 and EBITDA margin declined to 37% from 41%. This was mainly due to decline in revenues as well as higher cost base causing higher cost base as a percentage of earnings and (inaudible) one-time post credit adjustments such as Avea revenue and treasury share (inaudible), which we have recognized in Q4 '07.

During our year end announcements, we've stated that our 2008 EBITA margin guidance was 3% lower than 2007. This was detailed in expected increase in our cost base, which could be a result of increasing competitive (inaudible).

However, lately we have a couple of developments which we did not anticipate earlier, such as regulated decision regarding retail prices, which resulted in a slowdown in our churn prevention activities and negative impacts on local and global economic concerns to the extent (technical difficulty) which, on the Turkish consumer segment had a negative impact.

We believe that this development led to an unanticipated slowdown in our subscriber acquisitions and to higher churn rate in Q1 '08, in particular, we have revised our EBITDA margin expectation to be about 8% for the full year 2008.

Coming to the bottom line, our net income increased by 79% to $487 million in Q1 '08 compared to the same period of last year, mainly due to an increase in translation gains, thanks to our US dollar loan positions during the quarter.

In Q1 '08 quarter-on-quarter we had a 21% increase in net income, again due to translation gains.

Moving on to the next slide, in Q1 '08 direct cost of revenues, including depreciation and amortization increased by 20% to $825 million compared to the same period last year. However, proportional direct cost of revenues (inaudible) revenues, slightly decreased to 52% from 53%. This was due to 2 percentage point decrease in depreciation amortization, despite 3 percentage points increase in regular salaries against interconnection costs as a percentage of revenues.

In Q1 '08 direct cost of revenues including depreciation amortization decreased by 3% compared to Q4 '07. However, the share of direct cost of revenues in total revenues increased to 52% from 47% in Q4 '07. This was mainly resulting from (inaudible) one-time net drop of $24 million treasury share expenses recognized in Q4 '07, higher interconnection costs due to increase offnet traffic and higher (inaudible) and depreciation amortization expenses as a percentage of revenues.

The year-on-year increase in general expenses was 38% in Q1 '08 mainly due to increase of expenses driven in Turkish lira and 15% depreciation of Turkish lira against US dollar on average.

General and administrative expenses in Q1 '08 decreased by 19% compared to Q4 '07. This was mainly due to lack of additional expense [growth] recognized in Q4 '07.

In Q1 '08 general and administrative expenses as a percentage of revenues remained at similar levels of 5%.

Selling and marketing expenses in Q1 '08 increased by 26% to $293 million compared to the same quarter of 2007. This mainly due to 15% appreciation on Turkish lira against US dollar and increase in frequency usage fees due to higher prepaid subscriber base of $29 million, as of end 2007 as opposed to $26 million, end 2006. The proportion of trading and marketing expenses to revenues increased to 19% in Q1 '08 from 18% in Q1 '07.

Selling and marketing expenses decreased by 11% in Q1 '08 compared to Q4 '07. This was mainly due to slower marketing campaign activities relative to Q4 '07 and decrease in selling expenses during the period. However, selling and marketing expenses, as a percentage of revenues, increased slightly from 18.1% to 18.6% due to slower revenue growth.

Moving on to the next slide, so far we talked about our US dollar figures prepared according to IFRS which includes the positive effect of the appreciation of Turkish lira against US dollar. On this slide, I would like to share a snapshot of our financial results expressed in Turkish lira to highlight our performance in Turkish lira terms.

We believe we maintained our solid financial performance and further grew our top line. And first from accounting differences in the main stay both sets of books are similar. We recorded TRY1.9 million revenues, TRY687 million EBITDA and TRY588 million net income in Q1 '08.

Moving on to the next slide, in this slide we have a snapshot of some of the key balance sheet and cash flow items. Starting from the cash flow, major cash flow -- cash outflows for the period was $193 million of CapEx of which $56 million was related to our Ukrainian operation. $133 million corporate tax payments for the taxable profit in Q4 '07 and finally $264 million 2008 frequent usage prepayment for the prepaid subscribers.

Corporate tax and frequency usage fee payments were the main reasons for the (inaudible) in other lines in our cash flow.

Moving on to the balance sheet, our cash balance is nearly $3.1 billion, of which (inaudible) 44% was in hard currencies as of end of Q1 '08. Since our potential cash outflows in 2008, [will be] both in local and hard currencies, we are continuing to monitor the markets and alternatives to implement correct strategies for securing currency liquidity and reasonable return on our cash.

Our consolidated debt amounted to $646 million as of Q1 '08, of which $533 million for this amount was related to our Ukraine operations.

Moving on to our international operations, on this slide I would like to go -- I would like to go through our Astelit's financial and operational performance.

In a phone operator competitive environment, Astelit has been the number one operator in net subscriber (technical difficulty) and increased its market share to 17.2% in Q1 '08 from (technical difficulty).

Total subscribers reached to 9.4 million with an increase of 62% year-on-year. Also the share of three month active subscriber base in total increased to 62%.

In Q1 '08, three month active ARPU reached $5.4 million representing a 29% increase on an annual basis. Accordingly, total revenues grew impressively by 111% year-on-year to $90 million in Q1 '08.

Astelit continued to be build on it's positive operational trends and recorded a positive EBITDA of $2.1 million in Q1 '08, moving forward to its full year [projected] targets. We are pleased with Astelit's operations and we expect this trend to continue in the coming quarters.

For the year end 2008 we expect Astelit to achieve at least 50% revenue growth and (inaudible) EBITDA.

Moving onto to Fintur in which we hold 41.45% stake we are very pleased with the contribution of this associate to our net income. Principal operations in Azerbaijan, Kazakhstan, Georgia and Moldova continue the growth in Q1 '08 with year-on-year subscriber numbers increasing (inaudible) 45% to 11.6 million in total.

In Q1 '08 income (inaudible) recorded based on (inaudible) amounted to $31 million with an increase of 38% compared to Q1 '07.

In summary we are pleased with the (inaudible) operations are generated.

This is end of my presentation. Thank you for listening.

Thank you Serkan. I would actually like to now to turn it over to Christine for the next session. And please, as we do usually, try to limit our questions to two, so if there's more questions we can come back another round. Christine, if you could pursue with the Q&A session please.

Thank you sir. (OPERATOR INSTRUCTIONS).

Thank you, our first question comes from Istvan Mate-Toth from Credit Suisse. Please go ahead with your question.

Very good evening gentlemen. I would like to ask you to explain a little bit more what happened to prepaid revenues? I recall that you had significant price increases in TRY terms. You are saying that the low ARPU generating customers have left and still we had, not only subscriber losses but a very significant decrease in ARPU, and a significant decline in effective prices. And any more details on how this has come about given the fact that we had a price increase would be very helpful?

And related to that is my second question, speaking to the guidance of ARPU going up in double-digit revenues would require it seems to me to be fairly punchy ARPU numbers in the remaining quarters. Does this mean that you have been able to alter some reverse of trends seen in the first quarter? And can you give a bit more detail, what would be the key driver of that ARPU growth in terms of pricing and [usage]?

I'll start with the question and I'm sure Lale here will contribute. In terms of drivers of ARPU, obviously we will have net additions and growth on the subscriber base price, although (inaudible) mostly prepaid and moderately slower in comparison to last year. But we expect to drive the real growth from minutes of usage increase and quarter (inaudible).

The total effect of three minutes we offered will eventually turn into chargeable minutes, higher and higher which the process started in March. And we will see the effects of that in Q2 and throughout the next [three] quarters. That's why we haven't actually revised the guidance of ARPU growth for this year as well as minutes growth.

And we are specifically focusing on postpaid and we have highlighted the fact that postpaid additions on the premium side as well as corporate side is going really well. We've done one of the highest recording of postpaid subscriptions in the quarter. So we expect similar trends actually to continue. The main aim is to get [best end] of the subscribers from the market. And actually although the churn has increased the quality of the subscribers lost is significantly lower than the average revenue per year we are seeing on our network.

Let me comment on the first part of your question. This is Lale Saral Develioglu. It was regarding the drop in ARPU prepaid customers, if I remember. As we had also mentioned in the results announcement of the Q4 results, the Telecom Authority's decision, it has an immediate impact on our campaign. We have to stop immediately some of our campaigns in Q4 which actually resulted in higher ARMU figures plus a significant decline in our MoUs in [Q1] which has a consequence of deteriorating customer satisfaction.

So we -- as soon as in Q -- end of February, we resolved some of the issues [on] pricing. We started very aggressive campaigns which restored our MoU levels which meant that our customers were starting to -- using their Turkcell lines more. Of course this had a negative impact on, well -- negative trend of ARMU and hasn't reflective positively on the revenue in the first quarters. And we believe that the positive MoU impact will result in positive revenue effects in the coming months.

And this is happening specifically on the prepaid side as we mentioned because this is the Group that is most responsive to and most sensitive to pricing issues. We don't see such trends on ARPU paid and premium and corporate customers.

This is very helpful. And can you just confirm that, we are already in May, what you have seen so far, this is encouraging and things are going according to your plans?

In terms of minutes and ARPUs compared with the Q1, things are going in the better direction, we can say that. And the first question I think you had asked about the prepaid revenue trend, is that right?

Yes, but that was fully satisfactory, thank you very much indeed.

Okay, thank you.

So, about the gradual performance, I think, as we said in our presentation, our guidance is double-digit growth in Turkish lira. And we are sticking to that guidance.

Thank you. Our next question comes from Dalibor Vavruska of ING. Please go ahead with your question.

Oh hello, just two questions, if I can have -- you mentioned that you have these regulatory issues in January/February and that was resolved and you could re-launch some of your campaigns in March. I just wondered whether you can provide a little bit more detail how this was resolved and how these new packages are satisfying the regulatory requirements?

And the second question. I wanted to ask about your broadband strategy and Telcem overall, if you can provide any updates about your investment plans? And perhaps, as you can see some slowdown in the mobile market, whether this is going to encourage you to speed up some of the investment in the broadband market or whether [you do not' see these things interlinked? Thank you.

About the first question. The regulatory constraints or regulatory decision that created problem for us started in October of 2007. And initially, they basically said ,we cannot make any offers. We currently are about close to 30 campaigns or tariffs and we were -- Telecommunication Authority was telling us that in none of them our prices would be lower than our lowest interconnection rate. And it didn't specify if it was going to use weighted average method of calculation and if that was the case, we would comply and we would have no problem.

So we waited and we worked hard with the Telecommunication Authority for a written response qualification on this but it didn't come until January, February timeframe and it resulted -- we were a little bit optimistic in thinking maybe.

We were thinking that common sense meant weighted average and we were waiting for that decision to come in. And regulatory decisions reflected had a negative impact in our Q4 2007 and this business is like an aircraft carrier, it doesn't turn in just a matter of weeks or months. As a result we saw the impact of that and at the end of February we took action so that for a limited time we lowered the interconnection rates to a very small number. And that gave us -- when the Telecommunication Authority said they were not going to use the weighted average, then we made this pricing change to our interconnection rate.

So for the -- for a small segment we lowered the price to almost zero and this technically gave us room to execute on our marketing campaigns and pricing. But then we did this after February and March was too short of a time to turn things around.

So on the Telcem side, Telcem investments are going slower because of the right of way permits that are required and in -- so we are moving a little bit slower than our initial plans. And we are still evaluating different ways of building this backbone infrastructure.

Okay thank you, this is very helpful. Thank you.

Thank you. Our next question comes from Alex Wright at the UBS. Please go ahead with your question.

Yes hello and thanks for the answers on the regulatory impact so far, that's answered some of my questions. One thing I'm still completely clear on is that, as you said, when you see some of your promotions in Q4, the effects of that was for a higher revenue per minute and lower minutes of use in Q4. And I would have thought given that your promotions were still restricted in January and February that, that would have continued through at least until the first couple of months of this year? But as other people have already pointed out, the average pricing level over the full quarter was very low.

Would you say that the average pricing level in the first two months of the year was still quite similar to that, that we saw in the fourth quarter and that it's really been pushed down by the aggressive promotions that you've seen in March? Or is there some other explanation for why the blended revenue per minute over the full quarter came down quite significantly?

Yes Alex you're right, for the January and February ARMU rates are really close to the average of fourth quarters, thereabouts TRY0.1 or TRY0.2 close but March is significantly below. There's an average of January and February and what we, the campaign that we did was (inaudible) campaign where if you buy [contours] you get free minutes or free usage.

And the revenue recognition methods we employed was using or consuming the free minutes first. So people bought [contours] but we recognized, we didn't recognize the revenue from the purchases they made, we kind of spent the free minutes they had received first and as a result the ARMU came down significantly. And as a result, the impact to revenue was less or was low compared to what we will see later on.

Okay, that all makes sense to me. I guess I'm still struggling to understand in that case why the ARPU increased in March compared to January and February given that the pricing has come down, the effective pricing has come down and you've yet to see the positive impact on the chargeable minutes? Can you just confirm really why the ARPU rose in March compared to January and February?

I think first of all the ARPU in March, I'm making it in Turkish lira, is very, very close to January. It's [TRY0.01] difference and it is higher than January and February is TRY0.1 lower than January but so there's only [TRY0.01] higher in March versus January.

But I also want to reflect what has happened. Really in a big picture our competition entered the Turkish market in 2006 and they started with very high marketing campaigns in early 2007. But our results every quarter, our performance, Turkcell's performance got better. And we improved in Q1, Q2, Q3.

And really in terms of Q3 I felt tremendous frustration by the competition. And they ran to the regulator in Ankara and they basically said -- they forced the regulator to take action. They basically said, we can't stop Turkcell, you need to do something.

And the regulator acted and we mentioned that -- controlling, rigging of pricing was not something expected or something usual. Our interconnect rates are one of the lowest in European markets. We had [a symmetric] -- we were disadvantaged in the interconnect prices anyway to begin with. And despite this the regulator in September cancelled 3G and then they cancelled fiber optic right away. They cancelled frequency -- frequencies and then they took this action to control Turkcell's retail pricing. And we had just announced new campaigns and we were just going to do the promotions and in a way we got caught in a perfect storm.

We couldn't execute on our marketing campaigns that we were ready to do and there were -- it was unclear a judgment decision by the regulator. We waited to clear that, that took some time and at the same time I have to admit the competition got better in their marketing attacks with very price sensitive campaigns. And we all saw slowly Turkish economy got worse that had a little impact; I wouldn't say a big impact, so all of this came together. But the essence, the business dynamics, the fundamentals have not changed.

Turkcell has the best network. Turkcell is willing to offer low prices. Turkcell has the best value-added services that differentiates itself. Turkcell has the best customer service. Turkcell has the best brand. Last year, in 2006 we were number two most admired company in Turkey. In 2007 [at the end], Turkcell became number one most admired company in Turkey. We were number two best brand in Turkey last year. Just recently, last week we were announced as the best brand in Turkey and we have an outstanding team that is focused, it is agile. I have tremendous confidence in our team.

So I think the business fundamentals remain very, very strong for Turkcell, and we will compete [harder]. We believe that we have learnt lessons from this experience, but we will win versus competition, we will continue to drive customer satisfaction and grow our business.

We also improved our government relations significantly in the last nine months. I think there was a more negative attitude about Turkcell nine months ago, and through various communications and various campaigns, various projects, we have improved our relations. I think we are better understood by the government, and we see more close to mutual environment at this time, which is significantly better than it used to be.

So these are my -- I just wanted to reflect my thoughts and my analogies in the big pictures, on the situation.

Thank you, can I just ask one very quick follow-up question, please? Since you introduced the set termination rates, it's obviously given you more flexibility in pricing your on-net minutes, but it can also give your competitors free flexibility in pricing their core packages? Have you seen much of a response trying to take advantage of some of those very low termination rates that you now offer?

You know those are for a very narrow band, for the first 100,000 minutes, and they changed slightly during the very off-peak hours. So I think -- we have said if the regulator is not going to use the weighted average, then we go and do that, and now I think -- if they have to do anything, they will have to go to weighted average, in the long run, which is the method that they used in Europe.

Yes, okay, thank you very much.

Thank you. Our next question comes from Stephen Pettyfer of Merrill Lynch. Please go ahead with your question.

Yes, hello, good afternoon. If I could just turn, please, to the postpaid segment, I just wanted to -- you gave at the outset three big picture reasons for the slowdown, and I just wondered, when I would look at the slowing lira postpaid revenue, whether you could give us an idea of what you thought drove that, was it -- how much of that was the economy, and how much of that was competition? And that's my first question, thanks.

So, first of all, I think if I look at the ARPU for postpaid, in Turkish lira I see 16% increase versus last year, and I see it drop versus Q4. So 16% increase versus last year is a pretty healthy increase in Turkish lira.

And, another -- I mentioned this in my speech, but we are also very happy with the growth in our value-added services. We were as low as 12% of our revenues coming from value-added services, now we are around 14%.

Okay, well, then just as a follow-up to that, you mentioned also in your remarks that the competition had responded during the time you had particular trouble, shall we say. Has the competition -- can you describe what the competition was doing during that period, and if they've stopped that now?

So, Lale can help me as well from the marketing side, but basically, both Vodafone and Avea, their main marketing message was, Turkcell is expensive and we are cheap, and this was the message they were hitting with their campaign. And during this time, while they were hitting this, because of the regulatory decision, we could not do any promotional campaigns that was below our interconnect rates, and this (inaudible) for October, November, December, and January and February. So that was the situation.

If I may add a couple of points to that, they had been very active in terms of trying to get new customers on the market, so they had been focusing on acquisitions. And they had been focusing on flat tariffs, trying to announce very attractive offers. But at the same time I have to mention that both of our competitors had an increase in their [scratch card] prices. That is why even though they had been very aggressive, in terms of their offer, which affected the Turkcell customers' perceptions, it hasn't turned out to be very effective in terms of their numbers, as well, we believe, because they had at the same time increased their [scratch card] prices.

Okay, thank you. And if you just allow me a very quick follow-on? You mentioned the revenue recognition for the free minutes that impacted March but I just was wondering, given that you, I believe, ended the promotion in the end of April, does that mean that we should expect certainly the first part of Q2 to be somewhat weak as well?

The people who benefit from the campaign can differ from March to April, so the people who have benefited in March can have a revenue recognition in April. But yes, the effect, even if it's not exactly like March, April is also one of the promotion months, so we would expect lower ARMU figures than January, February in April as well.

Thanks very much.

Thank you. Our next question comes from Alexander Vassiouk of Morgan Stanley. Please go ahead with your question.

Hi, just wanted to get back on the question regarding your alternative call termination scheme, which you believe allows you to comply with all the regulatory pricing restrictions. How sustainable do you think this scheme is, and how comfortable are you that the regulator will not want to force you to close that scheme, because surely they may argue it's not fully compliant with the spirit of the regulations, so they might try to address that through more pressure on you?

I think for that -- I mean, technically, the way for them to respond to this, or limit us, is to use the weighted average method, and if they use the weighted average method, I think we'll be happy. So, yes, I cannot guarantee, but basically I said, I think our relationship with the regulator has improved. But there is no guarantee that they will not take further action. And if they take further action, I think the lesson we have learned is that we'll have to be much faster in responding with new solutions.

And at the same time, we have a law suite and we are ready for a judgment on that as well.

Okay, thank you very much.

Thank you. Our next question comes from Arianne Mala from Tradewinds. Please go ahead with your question.

Just a follow-up on all these questions on regulations. Could you perhaps quantify for us the impact on your numbers going forward of that 33% decline in termination rate, because it's the biggest I have seen in years?

And also generally speaking, we can't help but feeling this regulator is after you, because of your dominant position, but also because the government owns Turktel, and we've seen them in roadshows, they've been very aggressive, Avea was saying we're going to get 40% of net adds, we did in Q4, we will in Q1, and they've got the regulator on their side. Now what can you tell us to feel differently about it, because it does look like Turkey is going even beyond what we've seen in Europe in terms of adverse regulatory decisions?

Regarding your first question, of course the impact of this new interconnection rate will be both on revenues and interconnection costs. Obviously the impact on the interconnection costs [right] as a positive is much more than the negative impact on revenues, in terms of percentage. But at the end of the day, the net impact will be minimal, in terms of percentage of EBITDA. Because there will be a negative impact on revenues, plus positive impact on our interconnection costs, and the net will be impacting the EBITDA, which will be -- which will be (inaudible) physical in terms of percentage.

And then about the second part, I think you have good points, that the government owned part of Turkish Telecom and this may have created some bias, but although they tell us that it's not the case. But also, there has been -- there has been a lot of complaints about Turkish Telecom's monopoly in many markets. And as I mentioned, we are the most admired company and we have the best brand, and we'll continue to differentiate ourselves through marketing and through quality networking, value-added services.

And we are also (inaudible) in a community program that is winning the hearts and minds of people. And we are also providing a lot of quality jobs, and we are the largest technology company in Turkey. And so, we communicate all of the positive things that we bring to the technology market in Turkey, and we are the leading technology company in Turkey.

Also we have a lot of foreign investors, and I think the company -- the country is trying to attract foreign investment. And I think it needs to be very responsible and it needs to be very fair to all of the companies, and Turkcell has the highest market cap in Turkey. We are the only company in the New York Stock Exchange. We have a major strategic investor in Teleo Sonera, part of European Union. We have a lot of foreign investors, we have a lot of public -- 92% institutional investors in our public shares. So, I think regulator needs to act very responsibly and be fair to everybody. And we'll continue to drive this point home with them.

Yes. Just as a follow-up, I just wanted to pass on a comment during the roadshow. It was extremely clear, at least to me, Turk Telecom has tremendous free cash flow on the fixed line side and I don't know to what extent the regulator cares about the fact that -- it was very clear they would use that to subsidize their aggressive push into mobile, where they want to increase market share. So I don't know to what extent the regulator is watching subsidization, or abuse of the monopoly position in fixed line to subsidize another business. But anyway, that's a thought.

Maybe just for Serkan, a follow-up on my first question, could you just remind us what the asymmetry is, what -- so people are paying -- what are you paying now, when you terminate on Avea and on Telcem's network? So you get [TRY9.1], but what do you pay?

So, it's in the slide, it used to be -- we used to pay 13.6. Sorry, we used to pay Avea 16.5, Vodafone 14.5, and they used to pay us 13.6. These are changing, so that we'll pay Avea 11.2, to Vodafone 9.5, and they'll pay us 9.1. So, basically, asymmetry has gone from 7% to 4% with Vodafone and it's remained at 23% with Avea.

Exactly, exactly. That's pretty clear. Okay. And do you have an estimate? Nobody seems to talk about outgoings versus incoming minutes. Does anybody disclose these numbers, of how much [traffic] is on ten minutes on your network versus going out, and -- nobody seems to have these numbers?

Is that correct, because we haven't really disclosed them, that level of detail, and I think at this point we shouldn't do it, but we will evaluate it.

Okay. Appreciate it. Thanks so much.

Yes, I would like to add a couple of points, about your previous question. I think it's worth you reminding that we monitor our customer satisfaction levels, in compared to our competitors, and our customer satisfaction levels are much higher than that of our competitors. Sureyya has already mentioned that our churn rates are much lower than our competitors, as well, which is a demonstration that our customers believe in our strong value propositions. And we are always more innovative.

Our recent launch of Homezone will help fix the mobile conversion, which is also putting our competitors, including the fixed competition, in a more vulnerable position. And as to fixed to mobile bundles we mentioned, we are closely looking at the legal aspects of such possibilities and/or the legal issues of such bundles, at the moment. And we will be closely following and taking action -- and taking a position on those issues.

Okay, thank you. Yes, that's helpful, because if -- assuming Turkey looks at what the EU regulator does, it's kind of a very, very tricky area the EU doesn't really approve of. So, I just wanted to understand, if it happens in Turkey, then you'd definitely be saying you're not aligning yourself with what other countries are doing.

Yes. And besides the regulator of Telecom Authority, as a regulator, I would say there is also Competition board, and some of the issues can be escalated to another board as well.

Yes. Great, thanks.

Thank you. Our next question comes from Anna Bossong, of CA-IB. Please go ahead with your question.

Thank you very much. My first question is, you were saying that you've been in close contact with the Telecoms Authority about this whole issue, I just wondered, given that you must have been discussing things with them since February, what they actually said when you told them about your new stepped interconnection deal.

And secondly, I wondered if you could tell me if you're seeing more competition from Vodafone, following their investments over the last year in their network? And if perhaps they're more aggressive now because they perhaps have more capacity, if that's an issue at all?

And also, I just wondered if you think that your mobile competitors, and telecom, will agree to the offer of these [naybo] or stepped interconnection rates, and if they do, what impact that might have on your earnings? Thank you.

(inaudible) take the first question?

Yes.

So, basically, they have not responded into our interconnection pricing scheme. And we made that at the end of February, now we are in May. So two months have passed. And I also want to communicate that there was more negative and more [competitive], and there was more pressures to stop Turkcell, and that -- and that was a little bit, there was a political side to it as well.

And, as I said, the relations with the government has improved, in my opinion with Turkcell, because I think we communicated our position and our value that we had to the country much better. And we are better understood and we have better communication, better dialogue.

Also the fact that Turkish Telecoms is going public, in a way, has helped the situation because, as you mentioned, they're a very profitable company, and it made people know that Turkcell is not the only company that is making profits in this business.

So, what the real short answer to your question is, we have not seen a response to the creative solution scheme, present scheme, that we implemented.

In terms of the second question, on the coverage side, I will make some comments. We have really focused investments this year, throughout Anatolia and in major cities, in terms of some coverage but also quality fine-tuning with premium segments and a lot of indoor fine-tunings as well.

So when you look at the network, we have the largest network, with 80% -- 98% of [the nation] coverage, and above 80% EDGE coverage, which is uniquely positioned in the market. I know one of the competitors have just started EDGE, the other one (inaudible) but there's a significant gap between us and that in terms of technology capabilities.

And in terms of minutes, what they provide in terms of constraint is received much higher total minutes on competitor's networks, given the much lower subscription on their network again. So this is actually creating more of an issue on that part than on our side in terms of network capacity. And in order to make more chargeable minutes on the competitor's [front] by competition, we've seen a lot of relatively rational play, as Lale pointed out, we've seen price adjustments [upwards] due Q1, for example, scratch card pricing. So that also explains why rational play, relatively, has to continue, and more of a price perception in the market is made. So, we are quite a good deal with that perception as well, as we also have the flexibility to launch these campaigns and new programs.

Regarding your last question, what will be the impact of these interconnection rates on our financials? As you know, we are still discussing with the interconnection -- new inter-connection rates with the other operators, and these are the (inaudible) tariffs. We took a conservative approach and we made an estimation based on this minimum tariff, and we have seen that these tariff will be valid, effective from April 1, which was the announcement date of these new tariffs.

And the impact of these tariffs on our revenues will be around 3% negative, but on our interconnection costs, will be a 29% -- around 29% positive impact. So revenues will decrease by 3%, but interconnection expenses will decrease 29%, and net-net, we are expecting that the negative impact on EBITDA in absolute terms will be [3%]. I should say that this will be the impact coming from the wholesale market. So there may be some impact coming from the retail markets based on these interconnection rates.

Thank you. So that's 3% positive, sorry negative on the group revenue, but 29% positive on just the interconnection part of costs. That makes perfect sense. Thank you very much.

Thank you. Our next question comes from Jean-Charles Lemardeley from JP Morgan. Please go ahead with your question.

Thank you sir, your line is open, please continue.

Can you hear me? Hello?

We can hear you [Jean].

Yes, I just wanted to go back to the point made earlier on the interconnection, the step international for not complying with the spirit of the regulator's decision, because I think we'd agree that 100,000 minutes a month for a mobile produces a continual amount. So just, if we look at the possibility that the regulators will strike that down going forward. First of all, what is the risk of not complying with the regulator's decision? In other words, when these things happen in other markets, we assume the operator's just not applied the decision and challenging the courts. Is that an option that's open to you? You mentioned you have yourself a legal case against the regulator. So that's the first question.

Second question, given your relative size, relative to the other two operators, you must have the possibility -- you should still be in a position to come up -- to structure some attractive offers to take advantage of the on-net effect. So do you have such plans, such contingency plans in place today? Can you reassure us about that?

Okay, the first question, the answer is, if you do not comply with those decisions, then they have an option to fine us, and those fines could be significantly high in 0% to 3%, and then they could fine you again, and then eventually, they could cancel your license agreement. And obviously we could challenge all of these in court and we could go to arbitration in Turkey or in Europe.

I when you mention 0 -- sorry, it's up to 3% of revenues?

Yes.

Okay.

Of the previous year.

Of the previous year, okay.

Regarding the second part of your question, of course --

Can you -- do you want him to repeat the question?

No, no, I'm fine. As I understand you're saying it's, what if the regulation -- the regulatory body changes -- intervenes with your system? Of course we will have to likely at this time have to go and re-evaluate our pricing scheme. We will be let's say (inaudible) even quicker this time to adapt to whatever the new requirement will be. And tariffs are only one part of how we manage actually our customer retention.

We have some of our loyalty schemes, we have different (inaudible) offers, we have [core branded] offers which are quite unique to Turkcell customers that our competitors really don't offer. We will have -- we will be going, and looking into all aspects for better customer retention. So I think this is all I can comment at the moment, because we don't really know what that international may be.

But you don't do contingency planning around those questions? It seems wise to have those plans, to have thought about those plans now. Again, if I was the regulator and I looked at your step into connection offer I would -- again, I would see it as a clear violation of the spirit of the decision.

Yes, what I meant was, we are evaluating of course, but it is not possible for me to comment on what we will be doing because it's not clear at the moment, that's what I meant. Not that we are not looking into the options.

Right, [say it again]?

We would not like to discus what would be our possible marketing plan at this time.

Okay, just going back to the earlier point on the size, given the 3% of revenues, I understand, what is it, 3% of annual revenue in year one? How does that work? Wouldn't it still be worth taking that risk? Because I think the extent of your loss of revenue with this quarter relative to -- would have been a normal seasonality in Turkey and it was much greater than that?

You know again, I think we think about those and we take those into consideration. Obviously, how frequently they would fine us would come into the thinking as well. But we would definitely think about those alternatives.

But I think Jean, we will stop at this point because we are talking about something that's becoming very speculative, and it's not proper to speculate on this as we have an outstanding legal case on the issue. And we are also taking corrective actions to go forward with the regulations, which we think we already comply.

Again, there has been at this point no answer from (inaudible) on your interconnection offers?

Sorry?

Has there been no reaction from the regulator, no formal reaction?

No. There hasn't been.

Okay, thank you.

Thanks. Our next question comes from [Denk Mallered] of Handelsbanken, please go ahead.

Hello, Mr. Mallered, your line is open. Please continue.

Okay, Denk Mallered, Handelsbanken. Just curious regarding the international project, Syria and Belarus, if you can give an update how the profits are going and what are your thoughts about these two markets?

Regarding both markets, discussions with the sellers and the local authorities are still going on and as you may know, doing business in these countries and the business environment are very difficult. Therefore the discussions and the process may be finalized in Q2 or later than Q2. There is -- it is very difficult for us to give a perfect timing. But all I can say is that the discussions are going on positively and there is nothing that we can disclose additionally at this point other than what we have disclosed previously.

And also if I have a follow-up, are you considering any other markets currently that you have found interesting for the M&A activities.

Yes we are evaluating different currencies and markets but at this point there is no concrete assumption that we can disclose to you other than these two countries.

Okay. Thank you very much.

Thank you. We have no further questions at this point, this concludes your conference call for today, thank you for participating.

I'd like to also thank you for participating on behalf of the management team here, please remember that the audio recording of this session will be available to you for the next two weeks. Thank you.