Turkcell Iletisim Hizmetleri AS (TKC) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter 2008 Results Announcement Call on the 7th of August, 2008. I will now hand the conference over to Mr. Koray Ozturkler. Please go ahead, sir.

Hi. This is Koray. I would like to welcome you to our conference call on behalf of the management team. Today, we will start with a presentation, followed by a Q&A.

Before I hand it over for the presentation, I would like to note that 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.

Please also note that all financial data are consolidated, whereas non-financial data are unconsolidated, unless otherwise specified.

At this time, I would like to hand it over to our CEO, Sureyya Ciliv, for his presentation.

Good morning and good afternoon. I would like to welcome you all to Turkcell's second quarter 2008 results conference. I would start with slide four. I am pleased to announce that we have seen an improvement in our performance as a result of our actions and offerings during the second quarter. In the second quarter, we quickly differentiated ourselves from competition through our well-designed offers for various segments, supported by our new communication campaign. As a result, we have ensured the momentum we seek for the remainder of 2008.

We increased Turkcell Group's revenues by 17% U.S. dollars and 9% in Turkish lira terms as a result of our improved performance in Turkey as well as our other businesses. I will shortly elaborate on performance and plan of our subsidiaries later in my presentation.

We improved the group's EBITDA in nominal terms while EBITDA margins year-on-year decreased three percentage points to 37% and as a result of increasing costs in active competitive environments. We increased our net income by 56% to $426 million.

Moving on to the next slide, I would like to elaborate more on our key businesses, starting with Turkcell Turkey. Slide five. Global economic challenges and political uncertainties in Turkey have created a difficult environment. I am glad to see that at least the political uncertainty is behind us. At the end of Q1 2008, we regained our marketing flexibility to implement our marketing actions and pricing strategy. Since then, we have been executing this full force and we believe our actions will continue to show its impact in quarters ahead.

In April, telecommunications authorities revised (inaudible) co-termination rates, making a downward revision by 33% while maintaining the price asymmetry. We believe such asymmetry is unfair and we are making necessary efforts to challenge this decision. These new rates in Turkey are significantly below the European averages and we continue to communicate with the regulator in this area. Electronics communications law has been approved by the Parliament in July 2008. We believe this development is an improvement for better regulation of the telecom sector in Turkey.

This quarter, we continued to lead the market with our 56% market share. During the second quarter, our strategy is to differentiate Turkcell from competition through well-designed segments -- segmented offers, reinforced by a new market communication works very well and in line with our offers. We have improved product perception of our subscribers.

We also continued to emphasize our strength in value-added services, with focus on corporate segments. During this quarter, we recorded strong growth in value-added services and usage in corporate segments to high usage levels in corporate messaging and mobile Internet. Our [watched] revenues contributed 12% of our consolidated revenues.

Now I will talk about our subscriber and usage trends in the second quarter. On slide six, in the second quarter, we achieved a turnaround in subscriber additions by adding 202,000 net new subscribers. In line with our continued emphasis on value, we focused on post-paid and corporate acquisitions as well as our incentives to switch high ARPU generating pre-paid subscribers to post-paid. As a result, we reorded the highest post-paid acquisition of our history.

As for usage, during this quarter we also recorded historically high usage since 2004 on the back of our actions. Usage increased by 26% compared to the first quarter of 2008 to 92.6 minutes during the second quarter. For the remainder of the year, we will continue with our executive usage incentives to drive ARPU growth.

Now I will elaborate on ARPU trends. Slide seven. During the quarter, we carried out our segment based tailored value offers by using effective pricing as a tool, we incentivized usage to drive ARPU. We launched simple and advantageous offers targeted to meet the needs and expectations of our customers in matched, premium, youth and corporate segments.

Our blended ARPU in U.S. dollar terms increased to $14.90, with the contribution of our year-over-year 12% price increase realized in June and December of 2007 and the appreciation of Turkish lira. Our blended ARPU in Turkish lira terms slightly decreased in second quarter of 2008 on annual basis due to dilutive impact of prepaid subscriber base combined with lower average pricing.

Our prepaid Turkish lira ARPU increased on an annual basis as a result of our effective usage incentives, such as Pomegranate campaign, while post-paid Turkish lira ARPU on an annual basis decreased due to higher subscriptions on new incentive offers and increased in data lines. Meanwhile, our corporate data subscriptions almost doubled on an annual basis and recorded strong data traffic.

On a quarterly basis, ARPU increased both in Turkish lira and U.S. dollar terms, mainly due to strong growth in usage, despite the depreciation of Turkish lira against the U.S. dollar. We expect to achieve better Turkish lira ARPU in the second half of 2008 compared to the first half of 2008. However, for the whole year, we expect flat ARPU compared to 2007 due to the adverse impact of the macroeconomic development and a downwards revision in interconnection rates.

Now I will continue with our international operations. Moving on, I would like to start with our consolidated subsidiary in the Ukraine, Astelit. On slide eight, I would like to go though Astelit's financial and operational performance. In the second quarter of 2008, Astelit continued to get the largest market share in net additions. Total subscribers almost increased by 60% to 10 million and the market share grew to 18% from 12% a year ago.

Astelit's operational indicators remained very strong with continued emphasis on simple and clear voice and data offerings. In the second quarter of 2008, three months active ARPU at $6.30 reached to the market averages. As a result, Astelit's revenue doubled to $110 million and positive EBITDA generation continued. We are happy with Astelit's operations and we asked Astelit to increase its focus on EBITDA and the bottom line in the near term.

Moving on, I would like to talk about our CIS operations. Slide nine. Fintur operations continue to record solid results. We are absolutely enjoying the value being built through these operations. The number of subscribers grew by 40% to over 12 million and consolidated revenues increased by 26% to $446 million on an annual basis, leading to higher contribution to Turkcell. Fintur's contribution to our net profit increased by 78% compared to a year ago and was realized at $39 million.

Now I will talk about our other businesses.

Slide ten. Telcom, our subsidiary in fixed line, fibre infrastructure business, is continuing its operations and investments. We believe there is a good business opportunity for Telcom's business in Turkey and with a very focused approach, Telcom targets both business and premium customers. We would expect up to $150 million in 2008 for infrastructure in Turkey and selectively continue to lay fibre between major cities.

Our previous guidance here was about $200 million. We are going to be investing less than the initial guidance of 200 million.

Our 65% owned subsidiary, Inteltek, is operating in sports betting business since 2003. Recently, government-owned Spor Toto announced that a new tender for sports betting business will be held on August 12th, 2008. We foresee Inteltek's operations to continue this year, regardless of outcome of the tender. The new license will be valid for ten years and Inteltek intends to participate aggressively in this tender.

In addition, in line with our international expansion plans, we signed a share purchase agreement to acquire 80% stake in Belarusian telecommunications network, namely BeST in Belarus. The closure is expected to be -- the closing is expected to be within a couple of weeks. We believe that the acquisition of BeST represents an important opportunity for Turkcell to gain access to a new market with a growth potential. We are glad that we will be able to start our operations with a partially established network, which we plan to enhance before the commercial launch.

We believe we can particularly use the know-how and experience we have developed through our Ukraine operations and, of course, the CIF now, which we have developed over the years for Belarus.

Now I would like to talk about our priorities from the beginning of the year. Slide 11. We have several priorities to focus on. We believe mobile Internet broadband, 3G, is critical for Turkey and Turkey must issue necessary licenses to enable our country and sectors to evolve in the right direction as soon as possible. Our communication minister and the Chairman of Telecommunication Authority have stated, promised, plans to have the 3G tenders before the end of the year, specifically in November 2008.

Mobile communication is highly taxed in Turkey, more so than fixed line business and we continue to give a lot of focus to communication with public and government on potential benefits of tax reduction, tax rate reduction, to our sector and therefore to the Turkish economy.

We believe we are preparing very well for implementation of mobile number portability processes in Turkey. We believe public awareness of MNP today is visible and for most the public, this is not a major expectation or issue. We actually like to position Turkcell to benefit from MNP process as much as possible.

We have continued with our infrastructure investment in mobile, and through telecom business, as we have briefly discussed. Through these investments, we will continue to have the best mobile network in Turkey.

We believe fair, competitive environment is key to the development of Turkish communication and technology sector. As you know, mobile taxes are higher than fixed line business. Estimated levels are not paid between mobile operators and interconnection rate decline is too rapid and significantly below the European averages. And as we expressed in Q1 2008, our financials can be impacted largely by a decision taken by the telecom authority.

Our aim here is to continue with our good dialogue with the regulator, telecommunication authority, continue asking for more openness, fairness and also hopefully trigger more competitive playing field in fixed line telephony and fixed Internet sector in Turkey.

As for our targets, we believe we have ensured the momentum we seek for the remainder of 2008. And we continue to target double-digit revenue growth in Turkish lira terms and about 38% EBITDA margins in 2008.

Thank you. And now I will hand it to Serkan for the financial review.

Good morning and good afternoon to all participants. Now I will talk about our financial results. Our consolidated revenues on an annual basis grew by 17% to $1.8 billion in the second quarter of '08, mainly due to 4.7% increase in our subscriber base, 3.6% increase in usage, 6.5% appreciation of Turkish lira, revenue growth in our consolidated services and also price increases, which we have done in 2007.

26% increase in usage compared to the previous quarter was the main driver of our 12% quarterly revenue increase, despite 5% depreciation of Turkish lira against the U.S. dollar and also decline in our interconnection revenues due to 33% download revision for interconnection rates.

Even though in nominal terms, EBITDA increased on an annual basis, EBITDA margin in the second quarter of '08 declined to 36.5%, mainly due to increased selling and marketing expenses. Our EBITDA margin remained flat quarter-on-quarter basis and we expect our EBITDA margins to be about 38% in 2008.

On an annual basis, our net income increased to $426 million in Q2 '08, mainly due to transition losses of $140 million, which we have recorded during the same quarter last year. In the second quarter of this year, although Turkish lira depreciated by 5% against U.S. dollar, thanks to active cash management, we have recorded lower transition losses than last year, amounting to $19 million. And our net income margin increased from (inaudible) to 24% in the second quarter of 2008.

In Q2 '08, our net income decreased to $426 million from $487 million in the previous quarter of this year, mainly due to $19 million transition losses recognized in Q2, they're at $125 million transition gains recognized last quarter. And also $20 million penalty charged by the telecom authority related to campaigns in which pre-minutes or counters are given to the [Tunif] subscribers in their introduction sets.

As a result, our net income margin declined to 24% in the second quarter of 2008 from 31% in the previous quarter. Moving on to the next slide, in Q2 '08 even though the cost of revenues, including depreciation and amortization, increased by 10% in nominal terms, as a percentage of revenues, the cost of revenues decreased to 48% from 51% in Q2 '07. This margin improvement was mainly due to lower depreciation amortization expenses as a percentage of revenues. Our operational expenses, excluding depreciation amortization, as a percentage of revenues remained stable at 38% in Q2 '08 compared with last year.

Quarter-on-quarter basis, share of direct cost of revenues in total revenues declined to 48% from 52% a quarter ago, mainly due to a decrease in depreciation amortization as well as lower interconnection costs.

The share of general and administrative expenses in total revenues remained almost flat, both on a quarterly and yearly basis. Proportional selling and marketing expenses to revenues increased to 21% in Q2 '08 from 19% in the second quarter of 2007. This stems from higher marketing expenses, due to higher campaign activities and higher selling expenses with increased dealer and distributor activities in an active, competitive environment.

Selling and marketing expenses also increased by 25% in nominal terms compared with previous quarter mainly due to higher gross acquisitions, increasing our selling expenses and also with offers and campaigns introduced during the quarter increasing our marketing expenses. Hence, selling and marketing expenses as a percentage of revenues increased from 19% to 21%.

Moving on to the next slide, in the last slide, we will have a snapshot on some of the key cash flow items. During the quarter, we reported a consolidated EBITDA of $641 million. Major cash outflows for the period were $229 million for CapEx, of which $99 million was related to Turkcell Turkey and $58 million was related to Ukraine operations. Secondly $290 million withholding tax payments for 2007, $88 million corporate tax payments for the first quarter of 2008 and finally $520 million dividend payment made by Turkcell Turkey.

As a result, our net cash flow during the quarter was minus $213 million, which led to a decrease in our cash balance to around $2.9 billion as of the end of June. Our general CapEx guidance for this year remains the same, however our CapEx guidances for telecom in the Ukraine are revised at 150 and $300 million in 2008 respectively.

This is the end of our presentation. Thank you.

Thank you very much, Serka. We will at this time proceed with the Q&A session and we ask you, again, please to limit your questions to two and then possibly if we have time, you can come back and ask another question. At this time, [Sal], I would like to hand it over to you to open the session for the Q&A.

Thank you, sir. (OPERATOR INSTRUCTIONS) The first question comes from Alex Wright with UBS. Please, go ahead with your question.

Yes, good afternoon. Just sort of regarding your guidance of -- last year guidance for revenue and EBITDA margins unchanged for the full year, which would suggest that you're expecting further acceleration of revenue growth in the second half and also an improvement in margins, so my question is really, as you've mentioned, you're looking for ARPU to increase year-over-year in the second half. Are you also expecting subscriber growth to accelerate? And if so, is that a result of churn coming down? Or, are you seeing signs that your gross additions increasing already in the second half?

And my second question is on the margins. Clearly, you've spent quite heavily on sales and marketing in the second quarter. Could you just tell us really how you're thinking about the expense side? Do you see that sales and marketing expenditure are a kind of up-front expense related to the relaunch of your Pomegranate campaigns? And is that an item, do you think, we should see less expenditure as a percentage of revenues in the second half of the year? Thank you.

Okay. I am going to respond, and then I'm also going to have Lale, our VPO of Marketing, respond as well. My thinking is H1, because of the environment, was a very difficult environment and global issues, Turkish political uncertainties, regulation decisions, all of this coming together created a very difficult environment. And really some of these regulated -- regulative decisions to lower the off-net prices and also lower the interconnect rates has made an impact to our revenue by around 3% to 3.5%. And so going forward, we think the environment, at least from Turkish political position, is much more clear, and that's Point Number One.

Point Number Two, the third quarter is our strongest quarter and the third business, because of the regulative decision in last October are -- and November and December sales in last year's -- last quarter were negatively impacted by those. So, we expect our revenues to increase because of -- we will continue to subscribers, and we'll continue to receive higher average revenue from those subscribers.

Would you like to add to this, Lale?

If I might elaborate a bit more on the subscriber numbers, the second quarter was still negatively affected by our silent period to -- between October and February, so we can expect to have an increase in subscriber additions in the second half of the year, but we have adopted a more value-focused and [force-based]-focused position strategy for the Group going forward. So, we may not see numbers as high as the previous years.

Thanks. Also, in the increased [net] additions that -- we are also forecasting, at least in the third quarter, our churn rate to continue to trend, and our Q1 rate was a high rate and in second quarter, it has come down. And I expect churn rates to be lower.

About the expenses side, on the marketing end sales, the major increase came from the increased acquisitions of new subscribers, and we expensed the cost of acquiring these, and these are about $30 per subscriber. So, they add up quickly. And we did increase our marketing expenditures, but it wasn't -- the most of the gap was from the acquisitions of new subscribers.

Okay. I guess my question on the margin side is just, given that you're expecting a pick-up in subscriber growth in the second half where you think the margin improvement can come from in the second half?

Well, in the third quarter, summers are -- days are longer. As a result, we get seasonal high revenues, and that is going to help our margins.

Okay. And then, sorry, just a final follow-up question on one of the points that you made, as you said, Q4 '07 was negatively impacted by the regulators' ruling, but you also have a one-off benefit of $46 million from the [Avaya] interconnection settlement? So on a net basis, do you think that Q4, or let's put it this way, do you think that the loss of revenue due to the regulatory intervention was greater than the $46 million benefit that you received from the Avaya settlement?

May I -- this is Lale again. When I said we were negatively affected in the last quarter, it was mainly because we were unable to do some of our campaigns to get more acquisitions and also to retain our customers, which impacted our revenue in the quarter. So revenue-wise, the Q4 revenue was not negatively impacted, on the contrary, because we couldn't give the promotions and offers we would like to give to our customers. Our -- [for many] prices have increased, and those have a negative impact on our customer retentions in the coming quarters.

Okay, that --.

Has a negative affect on revenue.

Alex, just about the churn you had asked, I think let us try to clarify, year-over-year basis, we are expecting higher churn this year versus last year. In Q2, the trend is downwards in comparison to Q1 because unusually high churn was achieved due to this regulatory action and the campaigns that we haven't been able to do sometime, as we had explained last quarter. So, we are not necessarily expecting lower churn in Q3 and Q4. On the other hand, it's going to be controlled environment, and we don't see a significant impact to churn because of MNP. That's how we can summarize the churn thinking.

Okay, great. Thank you, very much for all that.

Thank you.

Thank you. Our next question comes from Sergei Arsenyev from Goldman Sachs. Please, go ahead with your question.

Good afternoon. I have a question on promotions. Clearly, your success with [Usagen] in the second quarter was driven by promotions, the Pomegranate promotion that you mentioned, are these type of promotion -- or, have these types of promotions continued into the third quarter? And do you think that there may be a risk of your competitors initiating some -- or, complaining to the regulators about it? And do you think that there's a risk of yet another adverse regulatory decision for you on the back of these promotions?

It is difficult to comment on the regulations -- regulatory body's actions, I think there is always a risk, but I think there's also the court decision that we won that went against the regulator interfering with retail pricing. Also, in our license agreement, it clearly states that we have right to determine the pricing level.

But at the same time, the regulatory body has a right as well and so, limit to -- there's always a risk, but I think we need to manage those risks. And actually, the regulatory body is -- and they lowered some of the interconnect rates, so they are after lowering the prices. So, I think it is very difficult for them to force us to increase our prices.

Right. And if you look at the very low on that price, or as I understand in some cases, zero prices on that task, have the competitors challenged you on that? Or, do you believe that this can -- or that the regulator can [really] that particular point again?

We -- Sergei, maybe I misunderstood you, but if you said zero tariffs, we do not have zero tariffs.

Or, very low, perhaps it's my wrong understanding.

All of the tariffs are priced upwardly, and total cost of the average of these tariffs are below our termination costs. So --.

Okay.

Despite, let's say, a practice in line with the norms and with the regulations. But, I would also like to add that you refer to the Pomegranate campaign, whether it is continuing or not, it has actually become part of a prepaid option. And in July, in the press release, we also mentioned we have rolled out two -- at least two new major campaigns, one to prepaid and one to postpaid.

On the postpaid side, we are providing some benefits to the customers where they buy bundled packages, which we call [Hello] packages, and depending on the purchase of the bundle, the price can vary from, for example, 4.3 [krush] to 8 [krush], so it's a very attractive offer. And on the prepaid side, similarly, we have a goods advantages, let's say, pricing offer.

Last week, we've also held certain communication activities and compared our prices to other operators. Not only on pricing but in all other areas, we are right now as attractive as ever and better than competition.

And if I may add on these ones, besides the Pomegranate campaign, in Q2 we relaunched or [youth] tariff and turned it into a very -- actually, the most attractive youth tariff. And the launched a campaigns that Koray mentioned. The one thing to note in all these campaigns is that our price is the most attractive on the market, based on the customers' top-up [concerts]. So, all the advantage is prices, various advantages prices are based on high top-up, which is reassuring us that we increase our [in-home] use and also revenues at the same time.

Okay, thank you very much.

Thank you.

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

Yes, hi. Thanks. My question concerns the postpaid revenue stream, please. I wondered if you could give us a little bit more color as to why the postpaid revenues, as I calculate it, the growth slowed so significantly. And on a related perhaps basis, on the data side, it looks to me as if your actual data revenue was pretty flat quarter-on-quarter. If you -- I wondered if you could explain that too? Thank you.

Postpaid side and prepaid side, we've been doing campaigns. Obviously, there is more of a elasticity on the prepaid, and there's a better pick-up in minutes of usage, and it takes a little longer on the postpaid side. But, there is a reasonable pick-up on the [amolieu] for the postpaid and in return, lower revenues in postpaid and better revenues in prepaid, so in time and as we said in the second half, we are likely to see better streams of revenues from each segment.

Perhaps then as a follow-up on -- specifically on the data side, your explanation is that part of the reason the postpaid ARPU came down was because of --.

Data lines.

Data lines, are you optimistic then that we'll see a [lag] improvement on the data revenue there as well then?

From a data side, for this quarter, the data is about 12% of our revenues. We are likely to see also similar trends and pick-up in the data side, and these data lines are very critical and part of the business on the corporate. So, we will continue to push that. So, that's one of the reasons why ARPU is flat [as] we expect it this year.

All right. If I can just follow-up, are you running -- have you been running some promotions that effectively give data away cheaply?

Particularly on the data side?

Yes. Have you been running some promotions to offer that cheaply?

We've been running promotions, and what we have is for that where we have daily -- or from the -- on the mobile side, one [UTL], daily usage, almost as much as you like, on the weekly basis, 25 counters as much as you like and in monthly basis, nine UTL, as much as you like from the mobile phone. And on the mobile, let's say Internet, if you buy the Connect Cards, there's $39 and $59 purchases on certain gigabyte, and this is also -- potentially cannot be fully utilized, so almost as much as you like [there from different parts of the offers]. And we've basically redeveloped these packages to be more bundled, and it's easier to understand and very attractive (inaudible). So, we do expect increases.

Okay, thank you.

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

Yes, hi. Just wanted to ask you a question on your acquisition strategy, since comments earlier today on Bloomberg quoting you as saying that you might be looking at some of the developed markets for the M&A targets and particularly in Europe, can you just explain if there is any change in your emerging market focused growth strategy and what sort of logic could there be in targeting the European assets?

You know, I think it was -- it came out a little bit different than what I meant. We are not making -- I'm not making announcements on which countries we are looking at right now. The last operation we acquired is in Belarus, and it is in eastern Europe, so it is different than the Middle East direction.

At the same time, we do have a lot of confidence and are able to manage these businesses in mobile communication. So, I think I cannot make any further comments in the new operations that we don't [require]. I think our team is evaluating. As I mentioned, we are looking for growth opportunities that we can add value -- where we can create shareholder value. This is our main focus in these acquisitions.

Okay. But in terms of geography, are you quite open to look outside of the traditional emerging market space, particularly in Europe in the developed world?

I think it depends on the situation. It may be the case, yes.

Okay, thank you.

Thank you. Your next question comes from [William Kirby] from Nevsky Capital. Please, go ahead with your question.

Thank you. Coming back to Alex' question on sales and marketing, given that you're expensing all these subscriber acquisition costs up front, are we likely to see sales and marketing expense staying at sort of 20%, 21% of revenues in future years? Or, is that likely to come back down to what we saw in prior years? Thank you.

We actually don't have a specific guidance for the future years at this time. It all depends on the market from -- market and the competitors' dynamics in this market. On the other hand, what we see is a more of a rational behavior in the market, and actually as we are able to pass the price increases that the competitors also do, so with the exception this year possibly MNP and preparations towards that, the impacts are let's say marketing and sales capabilities.

Also, we are obviously preparing for potential rollout or marketing sales activity for 3G, so we have certain budgets for those, let's say, one-time. After this year, obviously it's going to be a part of the ongoing operation, but it all depends on the level of play obviously. So, we have to watch and see that everything (inaudible)

Okay, thank you.

Thank you. Our next question comes from [Pamela Antay] from KBC. Please, go ahead with your question.

Yes, hi. Good afternoon. Just going back to the question on tariffs, I think maybe the question earlier refers to packages including bucket plans, i.e. free minutes embedded into any offers. Are there any offers where, because of the free minutes included, effective price per minute is lower, than say, your termination rates? And the second quarter is just on MNP, are there any campaigns you are launching ahead of the MNP introduction? And are you seeing your competitors stepping up their efforts ahead of it, because obviously your full-year guidance implies that you would have to grow your second half revenues by at least 14% year-on-year, or 23% from the first half, with the introduction of MNP? What, other than market growth and normal seasonality, will be driving that?

Maybe we should let you know first the procedure we follow. On all of these tariffs and new campaigns, these new plans and campaigns are always submitted to telecommunication authority, and then within certain time periods, if there is no comment, we proceed with this. So, average pricing is always above termination costs. We can say that for sure.

Maybe Lale can make comments, but in general I can say that one of the things that we are doing as part of the competition and to continue with our strengths and win versus competition. Some -- obviously, all the value propositions that we provide, i.e. the pricing, the strongest network, cost, the end coverage, customer service, value-added services, all of these combined will have -- or possibly potentially turn MNP to our advantage. And this is an ongoing effort for us. It's not a one-time effort, but years of effort we've been building on actually.

Right, okay. So can you just confirm, so all your prices, including promotions with say standard packages, go through the telecom authority?

Yes.

Thank you.

And the next question, please?

Thank you. Our next question comes from Brad Radulovacki from Oaktree Capital. Please, go ahead with your question.

Yes. I wondered if you could just give us a little bit of color on the competitive situation and particularly what may be happening with yourselves in relation to Vodafone? Just looking at their numbers that they've produced for the second quarter, it seems as if their ARPUs were down quite a bit year-on-year, over double-digits and yours were essentially flat. What is the level of, say, the subscribers that you churn in versus the ones you churn out? Is there a meaningful pick up in the ARPU of incoming subscribers versus the one that you terminate from your network?

Let me comment on that one. The average ARPU of the newcomers remains to be lower than our average ARPU level, but they also, the average revenue of the churning customers in our network are also significantly lower than our ARPU. So overall that doesn't have the acquisition and churn in customers does not have a negative effect on the average ARPU. We -- the campaigns mainly we are doing to retain our customers and to increase their MOUs is also our main tool to maintain our ARPU.

Well, I mean, another way of saying that is are your -- the customers you churn in coming in at a higher ARPU than the customers you churn out? Is that what you were saying?

No, they are roughly at the same level and both lower than our average ARPU.

Okay. And just relative to Vodafone, did you feel -- do you feel that you're somewhat gaining some of the subscribers or gaining a higher quality of subscribers from their network in any way?

Regaining the [organic] customers.

We have -- I will also [come] -- add something to your previous question. We have also stated that in our -- in our previous presentation that we had a post-paid acquisition focus and we had a very health post-paid acquisition in the first half of this year, increasing our total post-paid subscriber base by almost 16% now. So we have also started non-reportability within our network, converting our pre-paid customers to post-paid, which is also increasing -- which has an increasing ARPU effect. So focusing on post-paid also has a positive effect on the quality of the customers and the revenue we are getting from them.

But I also want to add that last quarter, when we had some slowdown. I mentioned that the basic competitive advantages of Turkcell were intact, which number one is we have much better coverage and we have much higher quality that we can offer to our customers. And when we are able to, price is not the number one marketing tool for us. But at the same time, we do plan our strategies to have competitive rates and in the second quarter, when we were free to do our promotions, we were able to balance the competitors' pricing attacks. And it -- and the customers in Turkey, they really, without a question, they know that Turkcell has the best network and offers the best quality mobile communications. So that is the main advantage, it helped us again in this quarter, when we're able to market ourselves.

Great. Thank you very much.

(inaudible) we are, obviously, (inaudible) big priority on acquiring subscribers, new subscribers, for the first-timers for the market. And also, specific, they're looking in certain acquisitions from competition. We did evaluate the question, but we do not want to disclose specifically the percentage distribution on these three, let's say, inflows at this time.

In the acquisition side, even in this quarter, we were not being overaggressive, trying to win any subscriber. The value and targeting traffic generating subscribers was still part of our action plan.

We spent a lot of time with the channel and we communicate and we educate the channel why Turkcell has the best service and those investments into the channel, they make a difference.

Great. Thank you.

Thank you. (OPERATOR INSTRUCTIONS) The next question comes Jean Charles Lemardeley from JP Morgan. Please go ahead with your question.

Yes. Thank you. Can you give us a sense maybe of how the -- how revenues paced throughout the quarter? So how your revenue growth year-over-year looked in June compared to April? Presumably you finished the quarter stronger than you started it because you still had the effect of the -- of those free minutes you were giving away.

And I know it's very, very early days, but have you felt any pick up in demand following the clearing of the political uncertainty about a week ago?

And then the second question would be just on the termination rates, can you, again, repeat the impact? I heard something around 3.5% impact from termination of the -- so it would be a little bit lower? And is there any discussion already going on regarding next year or do you have any indication of what might happen next year to termination rates in Turkey?

Yes. As I said, (inaudible) rates and also on-net Internet connect, those were the regular telecom authority decisions. When those prices came down, it obviously impacted our revenue and we estimated that between 3 to 3.5%.

So that is some revenue that we had last year. All of the possibilities disappeared this year. And we have the challenge to make up for it and increase in our subscribers, we are increasing our MOU. That is the way we are attacking to make up for that lost revenue.

But in the year-on-year, June revenues, it's a better trend. It's upward. I think that's what you had asked in the beginning.

Yes, how did it compare to the -- to April? I mean, were you already around 10% in June or -- ?

The month-to-month, I don't have these numbers in front of me right now. Maybe we can (inaudible).

Okay. Just on termination, is there already any indication for next year, whether there could be more cuts? Because if the regulator's concerned about you having an undue representation on all net, that's the way to go for them that's easiest, continue to cut, no?

In general, the regulator may have some thinking on the further decline in the interconnection rates. On the other hand, there's no definitive that we are aware of in terms of timing and percentage. We are not likely to see any further cuts this year. And we are also in the process of communicating, obviously, communicating the benchmarks and how rapid it should be for Turkey.

It has already been rapidly enough. And we said that in the presentation.

Okay. And then just out of curiosity, I mean, the -- where are your competitors now with their off-net offers and their off-net rates to mobile? How do they compare with your most widely available on-net tariff? What's the gap now?

On the -- I mean, there are flat rate tariff plans and if we compare the flat rate meaning to all directions, operators, operators, we are better. We currently have better offers and off-net pricing is -- on-net advantage, while providing on-net advantage and off-net pricing, off-net pricing is almost equally priced by the operators. So there's not a major disadvantage or advantage in that area.

Okay. Thank you.

Thank you.

Thank you. Our next question comes from Anna Bossong from Unicredit. Please go ahead with your question.

Yes. Thank you very much. My question, firstly, concerns the market rate of growth. Because I noticed that net additions for the market, I think, were only about 900,000 in the first quarter of this year and 1.3 million fourth quarter last year, so we're looking at much higher levels in the first half of 2007. But just firstly, with your growth in the second quarter, do you get the feeling that was a high share of net adds and that maybe what we're seeing is a slowing market growth trend? Or do you think that market growth is picking up from these low levels in the first quarter (inaudible)?

Number of subs. Number of subs (inaudible) in Q1?

Q1?

I think you refer to the general market growth --

Yes, net adds in the market were only 900,000 in the first quarter. And only 1.3 million, I calculate, in the fourth quarter last year. So that compares with over 3.3 million in 2000 -- in the second quarter. And 2.6 million in the third quarter last year. So I'm just trying to get a sense for actually are we seeing a very slow market growth scenario now, perhaps, on a reaction to the economy and critical concerns, etcetera. And should we expect to see that during the next few quarters?

(inaudible).

I think this -- the second quarter -- the first quarter and the second quarter, at least I think that was either flat or declining subscriber net additions growth. I think this will pick up in Q3 because of seasonality and because growth. I think this will pick up in Q3 because of seasonality and because of a lot of tourists coming in. But because of the current uncertainty and the economic downturn, I think we saw some slowing new acquisition markets.

Thank you. But can I ask you and perhaps you'd take over about a one-third market share -- incremental market share in the second quarter? Could we get a gauge for how strong you are at the moment?

I don't know all -- I don't think -- aware it has announced their numbers, so we don't know their numbers.

Okay. Great. And the other thing was --

I think we want to say our focus was, again, continuing to be various acquisitions who are generating traffic. In the past, sometimes, we have seen extra motivation for dealers end up creating extra SIM cards that doesn't generate traffic. We are not out there making investments that are not returning any benefits without -- I am proud to say that in Q2, despite all of these difficulties we had in Q1, we continued our (inaudible) and we will continue in the quarters ahead.

We care more about the revenue share and we care more about building profitable businesses where we can generate enough profits to invest for the future.

Okay.

So subscriber numbers, we pay attention to them, but we know that different operators, different companies, there's sometimes different ways of calculating those numbers.

Okay. That makes sense.

(inaudible) example, different term policies and stuff like that.

Thank you very much.

My second question is on the new offers in July and you've still got the Pomegranate offer carrying forward. Should we therefore assume that with all this stimulus that there should be more traffic stimulation going on in the third quarter than in the second quarter? And perhaps Ramadan, how much of an impact should we expect from that? Because I don't think the impact was very strong last year that I remember.

Last year, Ramadan was partially in September and partially in the Q4. This year it's in Q4, but the -- I mean, Q3, but Q3 is also seasonally higher. Despite the impact of Ramadan, we should still be able to see increase in units in respective quarters, in Q3 and Q4.

Right. But are the packages you're promoting, is it more traffic stimulating than the -- what you had in the second quarter?

These are new ones for pre-paid and post-paid. We expect them to stimulate more usage.

Thank you very much.

Thank you. Our next question comes from Russell Waller from New Street Research. Please go ahead with your question.

Yes. Hello. Thank you. It's Russell from New Street Research. I was just wondering if you could quantify the impact of the on-net pricing regulation in this quarter? So in other words more -- would it be in your revenue growth if the regulator hadn't chosen to regulate your on-net pricing at the beginning of this year and back end of last year? And then my second question is just on the Ukraine. It looks as though your number of active net adds was about 100,000, maybe just a little bit less. And that's quite a lot lower than the number of active net adds throughout last year and I was just wondering if that's because your market share gains are slowing or if that's because it's all market growth, do you think is slowing? Thanks very much.

Classifying the impact of all net pricing in Q2, there is no impact in Q2.

No, no, no.

Because we quantified the impact of -- what -- can you clarify the question? Did you say quantify the impact of lower interconnect rate?

Yes. No, no, no. For example, I think at the time of the Q1 results, you said that there would be an impact on Q2 because of the way that you were booking revenue, for example. And therefore, I was wondering what's the size of that impact and what a -- what revenues would have been if there hadn't be any regulation.

It is -- I mean the -- of course the regulatory action taken in Q1, therefore the momentum we have lost, they have led to, in Q2, but we cannot quantify that. On the other hand, we've been very flexible and we regained that marketing capability in Q2. In that sense, there is no impact as far as our actions. But it is very difficult to quantify that. We cannot do that.

Okay.

And the Ukraine question. Could you repeat the Ukraine question?

Yes. Sure. It looks as though your number of active net adds was about 100,000 or 90,000, which is quite a lot lower than the number in the preceding few quarters. And I was wondering why that is. Is that because you're losing -- your market share gains are slowing as the overall market growth is slowing?

Yes, I think in Ukraine, there was -- because of our strong market share gains, one of our competitors reacted very aggressively to our offers and that action by the competitors has cost the competitor some revenue, but at the same time, has slowed down our new subscriber acquisitions.

Fine. Thank you.

(OPERATOR INSTRUCTIONS) The next comes from Alexander Balakhnin of Goldman Sachs. Please go ahead with your question.

Good afternoon. Two questions if I may. The first is on mobile revenues, taxation, potential reform there. There was an announcement at the end of July that taxation may change in 2009. I just have a question on this, how it basically will be structured, what might you estimate are the probability of this change?

And my second question is on telcom. You had a pre-Q potential amount of [mining] into this asset and this year that was also pretty considerable. Can you probably share with us your business plan targets you want to achieve, like this year and next year? Thank you.

About the taxation, taxation on mobile communications is now a very popular issue. It is Vodafone has also published a report. We are always talking about taxation and aware that the third operator is also talking about high taxes on mobile communication.

So I think we are making progress in getting our messages heard. But it will -- I think it is much more -- better understood, it is much more widely communicated issue. And I think there is more consensus building among the press and among the government, but it was -- it is important to recognize also that Turkcell collects about 3% of the tax revenue in Turkey. TL5 billion comes from Turkcell versus TL171 billion. And I think as a result, Minister of Finance is keen on protecting this important revenue source for them.

So we have more work ahead of us in building the models that decreasing tax rate for mobile telecommunications will have enough benefits to overweigh this loss. And we really have discovered some real sources and sources of revenue.

So when you have more of the economy being recorded in computers, the more of the transactions digitally captured, then the government has much higher chance of collecting revenue from those transactions.

So we do have the support of the Minister of Communication, but the challenge is to convince the Minster of Finance. I think this year will be a much higher chance than any years before, but there is no guarantee.

Would you like to add?

Not on the taxation issue. I think well covered the telcom business plan and targets. We -- what we said for telcom last year, the top line impact to our business was around 1%. We don't see a major significantly different contribution from telcom to our top line this year. There may be some increase, but it -- it won't be a significant one. So more meaningful contribution is expected to be 3 to 5 years we can say that. And we will continue to invest in telcom through broadband as Sureyya said, in his presentation, targeting mainly corporate and very premium subscribers.

We do not -- we have not disclosed the details of the telcom business plan because you have to understand that in this teleconference, probably there are all of our competitors very well represented and listening with a lot of attention. The [other security] market opportunity in fixed line Internet business in Turkey, Turkish Telecom has 100% market share and we see that as a huge opportunity. So we have a business plan that is very focused, going after the business customers and premium customers and we are making some investments of -- into building fibre optic backbone that will support Turkcell business and it will also give us calls to customers. That is all I can say at this time.

We recruited a new general manager for the business and we are watching that business very closely because we have high expectations on this business in the future.

Yes. Thank you.

Thank you. Our last and final question comes from [Akilki Hamras] from [Ilse] Investments. Please go ahead with your question.

Hi. This is Akilki from [Ish] Investments. When will we start seeing Super Online in your numbers, is my first question. And second is the current percentage of hard currency yield's total cash position? So if you could answer these, I have a few more brief questions.

Thank you, Akilki. I think Serkan will respond to that.

I think from my -- from your last question, our hard currency allocation is varying based on the market conditions, but I can say that generally, less than 50% of our cash. And regarding super online, we are still awaiting Competition Board approval to close the transaction and we guess that during Q3, we are going to receive the Competition Board approval and the transaction will be closed. Therefore these front-end numbers will be consolidated in Turkcell numbers starting from the end of Q3. But that is based on the Competition Board's approval then, surely.

Okay. And do you give out usage figures for Ukraine and what are your figures for Ukraine?

We do not disclose that, Akilki, at this time, but we will keep reevaluating that decision.

Okay. Two very quick questions. Why did the subscriber number come down in Cyprus? And regarding the [Ida] tender next week, in the case that Inteltek does not win the tender, how long do you think will it take the new winner to be operational? Because you said that Inteltek will continue to operate these services.

So first question, in fact, I am not aware of our subscriber numbers being down. Does everybody agree?

Essentially 284,000, to be exact, subscribers in Cyprus, it's 140% penetration and so the 74, 75% market share and it's sizably very small operation, but the good news on Cyprus is 3G is starting in Cyprus (inaudible) 3G, but Cyprus, we are gladly, can say, we'll have and we will have some choice there in October.

And on October 14th, we had the commercial launch. We will have all of the network completed and we'll have 3G network will be available to people in Cyprus. Cyprus population is around 200,000, but they do have a lot of tourists and a lot of students. As a result, their penetration rate comes very high at 140%. We have 286 -- 284 or 86,000 subscribers in Cyprus and that represents about 74%. I was just there last week and so we have a nice business. However, we also have to announce that our competition, Vodafone, has acquired 2G license and then they acquired 3G license in Cyprus. So we may see more competition from them in the future.

About Inteltek, I think it will take -- wee -- first of all, we are [said meeting] that we are in the best position for this tender. We have the experience, we have the distribution channel, we have the know-how and we have a good partner as well. So we will be aggressive in trying to win this business, but I think if the winner is somebody else, other than us, it will take them six months to 12 months to build -- to be operational. This is why we mentioned that at least this year the operations continue.

Okay. Thank you.

And, sir, that appears to be our last question. Are there any further points you wish to raise?

I would like to say in the closing that Turkcell, I think, has quite a few advantages. Number one, in the network. We still are making a lot of investments in the network to keep a significant gap of quality service between us and our competition. And the people of Turkey, they know this, they feel this and they are aware of this advantage.

Number two, this year we became the number one most admired company in Turkey.

Number three, we became the number one brand in Turkey.

I also feel we have significant advantages in distribution. We have significantly strong technical teams that are working on value-added services and I think it's [there] and I believe that we have much more involved, much more capable and we were -- the -- from the culture point of view, we have amazing people in Turkcell and we have teamed up much better with our partners, so our Turkcell overall team is stronger in execution versus competition.

So this is why we bounced quickly back from Q1 challenges and we are confident that there may be storms in the future, there may be new challenges, but we have a team to tackle these challenges in the best way possible. So that's how I would like to close.

Thank you for participating in today's conference call and please be reminded that the audio recording of the conference will be available to you for the next two weeks and if you have any follow-up questions please --.

This concludes the second quarter 2008 results announcement conference call. Thank you for participating. You may now disconnect.