Turkcell Iletisim Hizmetleri AS (TKC) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Turkcell Q2 '09 Results Announcement Conference Call on the 6th of August, 2009. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions).

I'll now hand the conference over to Mr. Koray Ozturkler. Please go ahead, sir.

Thank you, Saha. I'd just like to begin with saying thank you for participating to our call, Q2 2009 Results Announcement. I will like to make a quick reminder that this presentation we are about to begin 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 due to factors discussed in this presentation. Please also note that all financial data are consolidated, whereas non-financial data are unconsolidated unless otherwise specified.

I'd like to now hand it over to Mr. Ciliv for his part of the presentation.

Good morning and good afternoon. Welcome to Turkcell's Results Call for the second quarter of 2009. In this quarter, we maintained our strong market position in our mature businesses and continue to build and invest in our emerging ones. Group revenue grew to TRY2.204 billion, EBITDA was TRY709 million, and net income was TRY389 million.

Our financial results were negatively impacted by two factors in the second quarter. Firstly, we recorded litigation provisions totaling $96.2 million. These litigation provisions impacted EBITDA margin negatively by approximately 2.5 percentage points and net income margin by 5.7 percentage points.

Secondly, our consolidated subsidiaries had a lower contribution to our financials. Astelit in Ukraine has been impacted by the volatile macroeconomic conditions while our betting business Inteltek's contribution to EBITDA margin declined by 1.2 percentage point. Additionally, the 26.9% devaluation of the Turkish lira depressed the dollar figures. Although we faced unusual challenges in our businesses during the quarter, we are excited and optimistic about the future. For the year-end, we expect EBITDA margin to be between 34% to 35% levels.

In the next slide, slide six, the best way to describe the mobile market in Turkey for the first half of the year, particularly in Q2, was a perfect storm. Economic challenges where GDP declined by 13.8% in Q1, unlimited and flat rate offers in all directions by the competition, lower interconnection rates result in a difficult environment where mobile line penetration in Turkey fell to 88%.

Turkcell Turkey executed very well and produced very strong results for the quarter. We built on our strong value propositions. We responded quickly and strongly against aggressive attacks by competition. We also continued our focus on data business, where our revenues increased by 71%.

As a result, Turkcell Turkey came out strong through the storm. Revenues increased by 3% year-over-year and 7% quarter-over-quarter. Our EBITDA for Turkcell Turkey was 35% margin. In a market where subscribers contracted by 800,000, Turkcell had -- Turkcell lost 43,000 subscribers. However, on the postpaid side, we added 854,000 net add subscribers to our postpaid base.

I would like now to elaborate on our operational performance. Slide seven. Our subscriber base totaled 36.3 million in the second quarter, at the end of the second quarter. We are focus on growing postpaid subscriber base. The postpaid subscriber base increased to 8.6 million and the share of the postpaid subscriber base improved to 24% from 19% a year ago.

Our successful campaigns and tariffs resulted in the highest usage levels since 2001. MoU increased by 38% to 128 minutes. ARPU in Turkish lira terms remained almost flat, slight increase from TRY18.5 million to TRY18.6 million in this quarter, despite lower mobile termination rates.

Slide eight. We believe we paid a key role in the launch of 3G in Turkey at the end of July 2009. We are happy with the interest of our subscribers with subscription, which already reached 2 million. In this new era, we are well positioned to differentiate Turkcell through our advanced network, attractive mobile broadband and innovative mobile services. We are also dedicated to delivering an alternative to Turkish fixed line broadband market by offering our customers at least average [adapt] speed internet from mobile devices anywhere, anytime.

And the next slide sets up how 3G will further differentiate Turkcell from the competition in Turkey. Slide 9. In line with our strategy, we differentiated ourselves by far with the best coverage and quality in terms of infrastructure. We currently have 18,000 base station locations, which is 60% more than our closest competitor. We also have a fast 3G rollout and now covering 60% of the population.

As you may see in the slide, we have introduced over 30 new innovative products and services from day one, particularly our outstanding 3G VINN connect card enabled the fastest way to access the world of mobile internet. And the demand for this product is very much above our expectations. We believe 3G is definitely a positive for us in our industry. We believe the market take-up will be strong. And as we had projected, we will continue to differentiate Turkcell against competition through 3G services as a leading communication and technology company in Turkey.

On the international front, on page 10, Astelit has 11.7 million subscribers, with a market share around 21.8%. During the quarter, Astelit increased its revenues in local currency. However, the challenging economic conditions in the Ukraine resulted in a 55% depreciation of local currency against US dollar, leading to a revenue decline.

Recently, our 100% subsidy [Finansal] utilized their loan of $390 million of which will be used to rollover the loan of that Finansal provided to Astelit. We remain committed to the Ukrainian market and expect Astelit's contribution to Turkcell Group to gradually increase as the economy stability returns.

Fintur maintain its leading market position, reaching 12.9 million subscribers. However, its financials were also impacted by the macroeconomic challenges. As a result, the net income contribution to Turkcell Group declined by 29% year-over-year to $27.8.

I will now hand over to Serkan for the financials.

Good morning and good afternoon to all participants. Now, I will talk in more detail about our financial results. In Turkish lira terms, our revenues remained broad to flat compared to a year ago, although negatively affected by the lower contribution of our consolidated subsidiaries, especially our betting business and Ukraine operation, and also by lower interconnection rate in Turkey.

Our mobile business in Turkey increased its revenues as a result of our growing [constant] subscriber base, partial impact of increased usage, and upward price adjustments. Our EBITDA margin dropped by 4.4 percentage points to 32.1%. This was mainly due to litigation provisions Inteltek as well as increasing operating expenses.

In the second quarter, we recorded a transition also of $44 million, the majority of which came from Turkcell Turkey, mainly as a result of our Forex loan position. Lower EBITDA, our FX loss and interest expense provisions related with litigations all adversely affected our net income. The net effect of litigation provisions on our bottom line was $80 million and consequently net income margin declined to 18%.

Moving on to the impact of provisions on our Q2 financials, legal provisions negatively impacted our EBITDA margin by 2.5 percentage points and net income margin by 5.7 percentage point. In Q2 we have recorded a total provision of $96 million, which has no cash flow impact yet.

Moving on to the next slide, direct cost of revenues decreased by 12.5% to $741 million. However, direct costs as a percentage of total revenues increased from 48% to 53%, mainly due to increase in our network related costs and 3.7 percentage point increase in interconnection costs, for which 2.5 percentage point increase was related to litigation provisions, while the remainder was due to increase in our outgoing off net strategy.

General and administrative expenses as a percentage of revenues remained broad to flat year-on-year at 5%. Selling and marketing expenses decreased slightly both in Turkish lira terms and as a percentage of revenues in the second quarter. Compared to the previous quarter, higher acquisitions and intensified marketing campaigns led to higher selling and marketing expenses as a percentage of revenues.

Moving on to the next slide, we recorded a consolidated EBITDA of $449 million and continued to generate a strong operating cash flow. During the second quarter, the major cash outflows were $790 million for CapEx, for which $497 million was for the frigid license in Turkey and $35 million was related to our Ukraine operations, $713 million dividend payment, and finally,$64 million corporate tax payment for the Q1 profit.

As a result, our cash balance decreased slightly lower than $2 billion, for which approximately 53% was kept in house currencies, such as US dollar and euros. Our conservative debt amounted to $776 million as of the end of June, for which $543 million was related to Ukraine. All of our conservative debt is floating interest rate denominated in either US dollar or euro, and $608 million will mature in less than a year.

This is the end of our presentation. Thank you for you attention and we will now hand over for questions.

Thank you, Serkan. Saha, we will hand it over to you. If we can remind you to limit your questions to two, please. And if we have time, we can come back around for another round of questions. Please open the Q&A session for us.

Thank you, sir. (Operator Instructions)

Our first question come from Pamela Antay from Brussels. Please go ahead with your question.

Yes, hi. Good afternoon. My question is actually on mobile tariffs. Can you just please remind us when was the last set of price increases and the average rate of increase because looking at the nearly flat ARPU year-on-year in TRY terms and the increased volume and this implies about a 27% decline in tariffs. I calculate from [20 cush to 15 cush] in 2Q '09. Can you give us some idea how much of that was from the MTR cuts and how much obviously from the increased competition?

Hi. This is Lale Develioglu, Chief Marketing Officer. Let me try to answer your question. Last price increases we have done on the prepaid side was in May. And on the postpaid side, it was the beginning of the year, beginning of January.

Okay. And the implied decline in tariffs?

If we understand it right, the question is ARPU is down --

Yes --

-- related to --

Yes, basically I calculate -- if I just divide the ARPU by the minutes of use, I get [20 cush] in 2Q '09 going down to 15 in -- sorry, in 2Q '08 going down to 15 in 2Q '09. So, that's 27% year-on-year decline. How much of that is from the MTR cuts and just the dynamic behind the rest of the decrease?

Pamela, first of all, I think we have to take the methodology of ARPU calculation maybe offline because you're not using exactly the correct methodology. So, I don't think the -- sorry? So, the calculation methodology includes everything in your method.

Yes.

On the other hand, we exclude certain things like roaming revenues, et cetera. So, we'll have to get back to you on that. But you are right about the fact that ARPU has declined.

Okay.

What we are doing there is trying to -- what we are trying to do is to reduce our per minute prices by giving bulk tariffs where customers can use more MoUs. And in that sense we can increase or maintain our customer base and ARPUs. So, we always balance the price decreases in our tariff campaigns with increased MoUs and manage to retain customers and the revenues as well. Of course, the increase in competition has also triggered lots of campaigns in the market, which has decreased the prices but also increased MoU.

Great. One of your competitors is doing a song and dance number about their flat rate package. Do you have similar offerings? And also, what's the proportion of your subscribers on such a package?

We have some flat rate offers as well. We cannot disclose the number of subscribers on those plans but generally, we have done some corrective actions in the market, responded from a retention perspective, and also we have used the [diverse sell] for up-sell. So, we -- all operators in the market do have these flat rate offers.

Okay. And sorry, just still on tariffs, are there any potential regulatory developments in the horizon that could further affect your pricing, especially on the on net side?

Now, regulatory body decides on the mobile termination rates every year in March, April timeframe. So, we do not expect a change on mobile termination rates until next year.

Okay. And what about for your on net prices? I remember there was a problem --

They announced -- they made an announcement, again in April timeframe, and we comply with that announcement.

Right.

-- decision.

Okay, thank you.

Thank you. Our next question comes from Thomas Chadwick. Please go ahead with your question.

Thank you. Just following on from that question on the regulatory approach to on and off net tariffs, could you set out the scope that the regulator has? I just want to clarify. Does this apply to all your tariffs now or is it just a select few? That's the first question. And secondly, do you expect to lose market share as a result of this regulatory strategy that they're imposing on you?

Regulatory decisions are clear on -- they had -- they declared maximum prices. They also put some constraints on us about our pricing to be above the mobile termination rates. And we had a few tariffs that we had to adjust and we made those adjustments. In the long run, our focus is based on growing our business. We think growing our business in a profitable way is our priority over subscriber share.

I was thinking, though, when I talk about market share, I should clarify I was thinking about your revenue share. Do you think you could lose revenue share as a consequence of these regulatory changes?

I think our goal will be to, as I said, number one, to increase our revenues in a profitable way. Our -- we are also paying a lot of attention to revenue share. We will have to manage our business carefully. I think the regulatory decision does not mean that we are going to lose revenue share. I think if we manage our business as well as we have done in the past, we can maintain our revenue share.

So, you're talking about maintaining it, not increasing it? Okay.

Maintaining, increasing, I think we see that with 3G the market dynamics are changing drastically. In my speech in early introduction, I described the first six months as perfect storm. There were a lot of kind of negative forces in play at the same time. But now almost in all of those fronts, I see significant improvement and I am a lot more optimistic. I feel the worst quarter -- in the first quarter, the Turkish economy at 13.8% decline. I think Turkish economy is likely to improve from that low point on. I feel we had a stronger second quarter and I think third quarter will be better. So, economy is improving.

I think the market dynamics in mobile market, I think all of the operators have learned -- if you look at the EBITDA margin of our competition, you would find out that our competition has been a lot more hurt from the -- from their own price attacks. So, I think people have learned from this. I feel they have also filled in their capacity; their traffic has been very high. And as a result, I think the market I feel can only move up from this point on. So, I am also optimistic about the market dynamics.

And third is 3G is in Turkey. And we have been talking about 3G for the last five years and with 3G in, even after one week, we are a lot more excited, optimistic about its uptake, about its adoption by the people, by our customers. And I think it's going to open up new services and new revenue opportunities for us. And in this new world of mobile lifestyles for consumers and businesses, some of these services I think will be even a lot less regulated.

So, I am very excited about the future of Turkcell. I think we are very well positioned to take advantage of the opportunities in this new era of 3G. We are offering one of the best 3G networks in the world because we just bought the latest and we did not have to pay extremely high license fees and extremely high infrastructure costs. And people in Turkey are very excited about having internet in their pockets through use of smartphones and also putting our VINN modems to the notebooks and laptops.

Okay.

It is a long answer, but I believe that regulation -- regulatory decisions do not limit our revenue share. It's up to our creativity, our innovation and execution. And during this perfect storm, Turkcell Turkey had 35% EBITDA margin. This is 35% with 2.5% EBITDA margin going to this provisions, litigation provisions. So, I think they all realize that this provisions and Inteltek issue has shadowed our amazing, very successful execution. We are sorry about that, but we remain very optimistic about the future. And let's not -- let's also understand the dynamics of this.

Thank you.

Thank you. Our next question come from Istvan Mate-Toth. Please go ahead with your question.

Very good evening, gentlemen. I believe you gave a guidance for full year '09 on one of the local TV stations about margins and revenue growth and I wonder if you could just repeat that and elaborate in a bit more detail how you see the rest of the year since, as you said, the market is changing? And secondly, I know that this one week may be too short, but if you could share some of the feedback from customers about the potential data uptake and how it is shaping your views about revenues for the third and the fourth quarter. This would be very helpful.

Okay. First, as I mentioned in my earlier response, I am a lot more optimistic about the second half. I think the Company performed very well, executed very well in the first half, and we are going to build on our competitive advantages and market position. So, we are giving guidance, revenue growth for 2009. And we -- on the EBITDA side, we are -- our new guidance is 34 to 35 percentage points for EBITDA margin, inclusive of these provisions we have taken.

And we are very encouraged, I think, and we were bullish on 3G. But the response is better than our best expectation. And I think this is a lot to do with the price performance ratio of 3G in July of 2009. I think this 3G is a lot different than 3G we had two years ago or three years ago.

Thank you very much. In terms of revenue growth, have you committed to some particular number or range or just saying that there will be revenue growth?

We just left it at revenue growth.

Thanks very much. That's all I have.

Thank you.

Thank you. Our next question comes from William Kirby. Please go ahead with your question.

Thank you. Yes, I just have a question on the betting business. Was the performance in the second quarter just due to bad luck, a few big payouts? And if so, what sort of normalized revenues should we expect? And then, just so we can get a sense or normalized EBITDA, what was the EBITDA margin that that business has been generating historically? Thank you.

I think probably Koray or somebody else can get into the exact detailed answer to your question. But I just want to remind for everybody, Inteltek is one of the businesses we have. It is -- it is not in the mobile communication business. It's in the sports betting business. And the commission rate in this business declined from 11% to 1.4% starting March of 2009. As a result, there was a significant decline in commission revenue.

But also in the second quarter, the betting odds moved against what Inteltek technical team was expecting and as a result, there was high excess payout and this resulted in negative revenue for Inteltek in Q2. This was really unusual situation. We had not seen negative revenues before. And we think that this is going to be corrected in Q3. But also, EBITDA margin, the business is very different, I think. That's the most important thing. The revenues of this business has come down 80%, 85% on the commission side.

Okay, thank you.

Regarding the second part of your question, we don't want an excess payout. For the quarter, the revenue from the betting business should be around TRY10 million to TRY15 million per quarter. And the normalized EBITDA is around 60% to 65%.

Okay, great. Thanks very much. That's useful. I also just had a question on sales and marketing expense. As the presentation points out, that growth in that is well below Turkish inflation. Is that sustainable or when are we likely to see an increase in that back up to what we were seeing a couple of years ago? Thank you.

We are expecting our marketing expenses to be more compared to the second quarter levels during the second half of the year in absolute numbers.

In Turkish lira?

Yes, in Turkish lira.

Okay, thank you.

Thank you. Our next question come from Anna Bossong from UniCredit. Please go ahead.

Yes, hi. Thank you very much. I just want to ask you, I thought the Turkish business, having such resilient subscriber numbers, was very impressive. And just wondered if you could just talk to a little bit if you had special promotions or how you actually achieved that performance and if you think you can continue to do this in the second half of the year? And also, I wondered about the subsidies on the 3G notebooks, et cetera, if you're seeing strong demand, if that's being helped along by any sort of subsidization of these sorts of products? That's it for now.

Okay. On the first side, about subscriber situation, we saw in the beginning of the year some of our competitors to go with very attractive, very low flat rate in all directions. And we decided to counter -- to respond to this attack aggressively and quickly because, as I have said before, we were not going to sit around and watch anybody to take our good customers away. We will fight for those customers. And we matched these offers ourselves.

We also decided to start a new campaign going after the public sector because we saw our competition attacking our strong customer base. And we also -- so this was overall -- we are all rational players, but if our opponents do irrational things, if they attack our customers, we are going to match them. And this was a learning lesson that I think the market has learned that we will respond to protect our customers. And we may all suffer our -- in profitability and I think the market in second quarter has suffered in profitability.

Now, I will give to Lale because I think there are a few other points that we did in the first half that Lale should expand on.

In terms of increasing our acquisition numbers, we specifically focused on postpaid. That was a strategy we adopted already from last year. And we focused on switching customers from our prepaid customer base to moving to postpaid packages. We have been doing targeted campaigns and offerings and trying to reach them through different channels as well as getting postpaid customers from competitors. So, we believe that increasing our subscribers on postpaid, even if we had a negative net add overall, is still very healthy.

That's excellent, thanks. I mean, this issue with Vodafone stayed fairly aggressive in the second quarter and I calculate they increased their revenue market share by about 1.5 percentage points. Do you see that they've learnt some of the lessons you're talking about in the market or do you think maybe that they will remain more aggressive and perhaps in the third and fourth quarter still be a problem for you and Avea ?

I think it is important to remember that Vodafone in general is a very good company and they want to be one of the premium suppliers, service providers. And they are rational and mostly they go after value customers versus being at very low end of the market. But in Q1, I think they lost -- didn't they lose about 1 million customers in Q1?

(inaudible - microphone inaccessible)

In the Q1, Vodafone lost 1.2 million subscribers. In Q2, despite everything they done, I think they lost about --

(inaudible - microphone inaccessible)

542?

Yes, thousand.

542,000 subscribers. So -- and Vodafone is really -- or has been in a -- they are trying to stabilize because they were having very big losses of subscribers. I think if you really looking to Vodafone, their revenue increase mostly came from other operators that offers free on net in all direction offers from Turkcell and Avea increased their interconnect revenues sharply in Q2. And that is the main reason for their revenue increase. I believe in the long run from what we can see in the marketplace, Vodafone will be more of a quality service, premium service and also value prices versus low end.

Lale, would you like to add on that?

I totally agree. And the reason that increase their incoming revenue is the same revenue that decreased their profitability drastically. So, I believe they will be acting more rationally going forward. And in response to your second question about subsidizing 3G notebooks, we are actually -- our strategy is not to subsidize (inaudible - technical difficulty) terminal.

But we are in close cooperation with laptop and notebook providers and we offer our customers notebooks bundled with our data offers. And those sales are going very well. And we will continue doing those cooperations to increase our mobile broadband revenues.

I'd like to add on that. In general, we do not subsidize terminals very much. I mean, we do bundles but we do not go and subsidize terminals. That is not in our strategy.

Okay, thanks very much.

Thank you. Our next question comes from [Benita McCullivich] from UBS. Please go ahead with your question.

Yes, good afternoon. I have a question about your subscriber base. I know that in the beginning of the year, you were guiding your subscriber base to contract this year, which pretty much happened in the first half of this year. But given the [public's] stabilization of the second quarter, what are your expectations going forward for the rest of the year? And second question, maybe I will ask afterwards.

Okay. About the subscribers, yes, we did -- in H1, we did lose subscribers and our subscriber base has shrunk a little bit. But we increased subscriber share to -- from 56% to 57%. About the second year, Lale, can you give your comments about the subscriber situation, expectations of the H2?

What we see is that the subscriber numbers, SIM card ownership is going down because the market for SIM card usage ratio has come down from around 20% to 16% due to the active market and due to the flat tariffs. So, customers are going back from multiple SIM card usage to single usages, which we think is also a healthy behavior and we believe this will continue in the second half of the year. So, we do not change our forecast for the rest of the year. We do not expect the subscriber increases in the second half.

Okay. And thank you. And second question I have is about interconnect. Of course, we had cut of the rate in May this year. So, what is your thinking right now and expectations going forward? And also, what sort of contribution to your revenues is coming from interconnect right now given this lower rate?

We always felt that we could adjust to lower mobile termination rates and we felt that mobile termination rates should not fall too much for the health of the market. I think second quarter results have shown very clearly that lower mobile termination rate does not necessarily mean good business for our competition. So, I think mobile termination rates in Turkey are 70% below the European average and fixed rate termination rates are 10% above European average. So, I expect -- I do not -- we will continue to remind these facts to the regulatory body.

But I also want to add for the benefit of everybody, I don't know if everybody knows, but Avea led with this unlimited offer at TRY55 in all directions. But there is not much of the management team left from Avea who did this because their EBITDA margin, if I have the numbers correctly, was high of 20%. Last quarter, it was 2.6%. And I think it clearly showed not only to Avea but to Vodafone and to -- even Turkcell people as well, that we need to be rational in these pricing tariffs.

And I think there is a new management team in Avea and I think they will be a lot more rational. And I think they will also focus on what they should have been focusing on and that is improving their coverage, improving their service quality versus just fighting on price.

I would like to -- I think this is an important development. As you know, in the last year, Vodafone's top management had changed completely and in the last two, three months, Avea's top management has changed completely. And I think this is a little bit because of Turkcell's resilience and success. And this is why we feel that we had a very strong H1 during a perfect storm. But I think we rode through the storm and I really feel that the storm is behind us.

Sure. And can you give me the roughly indication how much of your revenues right now is coming from interconnect as a percentage of your total?

In Q2, 10% of our revenues in Turkcell Turkey is coming from interconnect. It was 7% last year the same quarter. And so, there's an increasing trend.

Okay, so you have higher increase of incoming minutes versus outgoing minutes, yes?

Yes.

Okay. Thank you very much.

Thank you. Our next question comes from [Vina Mulche]. Please go ahead with your question.

Yes, I have two questions. Firstly, on your CapEx guidance for 2009, you don't appear to have reiterated your previously stated guidance and I wonder whether this is still intact or whether there are any changes to your outlook here maybe related to your potential 3G infrastructure sharing with Avea and Vodafone? And secondly, just on your strong customer intake in the contract segment, are there any material differences in ARPU between the public sector customers you're targeting and your existing customer base? Thank you.

Now, on the CapEx guidance, one thing we know is sometimes you can turn negative into opportunity. I think the global economic crisis created a pretty good environment for us to purchase equipment and we are able -- we were able to build a lot more network than we initially planned with the budgets we had planned.

And we are encouraged by 3G excitement and 3G performance. We mentioned this morning that already 48% of our data traffic is going through our 3G network. And we will -- we see this as an opportunity to invest in 3G and build a competitive advantage. But we also see Vodafone is also pretty excited about mobile internet and the business they can capture from fixed line. Avea is a little bit more quiet because of their Turkish Telecom connection.

There is no CapEx guidance change. It's the same guidance.

So, the customer intake, what I can tell you is that the ARPU of newcomers, especially from public offer, has an average ARPU above our ARPU level. It's below the postpaid ARPU level but above our average ARPU.

Thank you.

So, that would mean that it will have a positive impact on our general ARPU but lower postpaid ARPU.

Yes. Thank you.

Thank you. Our next question come from Ilke Homris from Istanbul. Please go ahead with your question.

Hi. Regarding the two telecom and Millenicom case in your footnotes, you talk about an expert opinion of around $188 million, and whereas you set aside only around $80 million in provisions. Why is that?

First of all, we want to -- I want to make a good point and then Serkan can add to it. This provisions are for legal pending cases. And we still believe that there is a -- there is a lot of process left, a lot of time left in this processes before the final decision. And we will also take this to the second court, appeal court if it is against us.

We do see -- we believe that we are right in our case. This is about three-year period from 2001 to 2004. At that time, Turkcell had received permission from the communication ministry and telecommunication authority to ship some of its international long distance calling to Millenicom and Turkish Telecom in 2005 complained, saying that they are monopoly and they should have all of the traffic.

So, we believe that because of the permission we had received, we acted on the permission, the guidance given by our Ministry of Communication at that time. What are we supposed to do? We are supposed to listen to the regulatory bodies and the ministries and we follow their orders. And so, that is -- first of all, I wanted to make sure that everybody understand this is a pending case and we have a lot of legal fight ahead of us and we believe at the core of it, we have a strong case in our favor.

So, Serkan, would you like to add?

Regarding the numbers, 280 was the amount mentioned in the extratives report assigned by the court. And we have calculated the provision amount based on our legal counsel methodology suggestion. But since the case is pending, it is not fair for us to disclose the methodology that our legal counsel suggested to us.

And on top of it, on top of the fact that we had permission from the Ministry of Communication, we believe that the initial amounts that are talked are the revenue numbers but the impact is really the profit. So, it should be much lower.

Okay, thank you.

But -- and it's a pending case.

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

Oh, hello, good evening. This is Dalibor Vavruska from ING. Just a couple of question, if I may. First is on 3G pricing. I just wonder if you can roughly compare how do you position yourself in terms of pricing compared to your competitors. If my understanding is correct, for example, some of your prices are lower than some of your smaller competitors. So, I just wondering if you can maybe a little bit elaborate on that and also maybe whether this is because you are trying to tap to the DSL market and basically pursue some of the DSL subscribers to go for your 3G offers.

My second question is regarding the regulation basically. It appears to me that the regulator is trying to promote this all directional concept or reduce the on net, off net discounts and make it sort of more sort of common for people not to think which network they are calling and which SIM card they should use.

I just wonder, obviously it's not in Turkcell's interest for this to happen, but would there be any possible for some deal with the regulator, say, okay, we will stop opposing this but you have to increase the MTR or something else? I mean, would you be strategically flexible on this or is this an absolutely crucial point of disagreement now between you and the regulators where the market should go?

And maybe the last question would be there was some signs of stabilization or maybe increase -- maybe it's too early to talk about increase in the voice pricing. But I just wonder, I think one of your competitor is, I think, indicating that the situation could stabilize or become more rational. You also mentioned the tenuous management of one of your competitors. So, I just wondering how happy you are with your market share and if the prices may be -- if some of your competitors start increasing their prices, whether -- how likely would you be to follow? Thank you.

First is question about mobile internet rates versus competition and Lale is going to answer that.

On our 3G data pricing, we have taken into consideration the competition, both on mobile and fixed side, as you mentioned. And as we are the market leaders, we believed we needed to look into the fixed competition which existed, our post structure regarding our pricing, international benchmarks and the best price to exploit the potential and develop a strong customer base off data users for ourselves.

We believe the competition of course is looking at Turkcell to develop their pricing strategy, as we are the market leaders, and we have been mentioning for a long time that we will be reducing our data prices when 3G comes so that it will enable our customers to use much more data and at the end, we will increase our data revenues in line with what we have been telling. We have reduced our bundled packages prices and we believe that will help us to quickly develop the 3G market.

In addition, I want to add to this. Initially, we were thinking really mobile has a different value proposition versus fixed and we were planning to charge higher prices. But what happened is the fixed line operator positioned itself through and started positioning WiFi as mobile, and it really cut into our mobile offer. And in a way, then, we had no choice but lower our prices to be competitive.

But initially, our thinking was fixed has its own place and value proposition. And mobile, because of its mobility, it could be more expensive. This was our thinking. But our competition on the fixed line when they positioned WiFi as the mobile, as the flying internet, it cut into our mobile space and we had to compete with their version of mobile, which is fixed.

So, because we answered your question in a long way, I have to remember what was the second part of the question.

Oh, the second question was whether you would maybe strike some deal with the regulator and say, okay, we'll change the pricing, the on net, off net pricing, but we'll want something else from you, maybe MTR or something else, whether you would consider some flexibility on that or how --?

I think it is not possible for us to really communicate the insights of our confidential regulation strategy in public market. I think I can say that I think the regulatory body is very concerned about the profitability of the players in this market. So, I think regulatory body probably has a lot of work on its agenda related to the fixed line as well.

And I agree with you, I think in the second half, we expect more stabilization. People tried different things. Competitors, they say, okay, why don't I lower the price and then I'll be the lowest price and then all of the customers will come to me. It's a reasonable way of thinking but the reality is, as I mentioned in our strategy, we are going to fight for our customers and we are going to match those attacks as well.

But I think people learn from these experiences and testing and I think because of the management changes, I think the market has room to be more rational. It's also important -- traffic numbers have come up a lot for our competitors as well with these free offers. And those traffic numbers hit to people's capacity as well. So, I think it is going to be a logical, rational thing to stabilize the market in the voice space as well.

And if competition increases prices, would we follow? We always believe that we are value players, so our strategy's always offering a new quality services, innovative services and differentiating ourselves from the quality of these services. So, the low prices -- or the lowest prices is not the area we want to be differentiating ourselves necessarily. I think we are looking at the total value, can we create the most benefits at a reasonable cost. So, what customers get minus what they pay is the best. We are trying to maximize that delta.

Sure. Well, thank you very much and maybe just one quick follow-up on what you mentioned. I understand obviously Avea made a bit of a mess in the market with this offer and I fully agree with you that they are now feeling the profitability impact. But do you really think that WiFi is making such an impact that it should significantly influence your 3G pricing? Are they that successful with WiFi that you really have to take it in consideration this way?

I think we introduce prices and we did it know where competition was in some of these cases. And we'll make adjustments as necessary as we go forward, right.

Lale, anything else you want to add?

No.

(inaudible - microphone inaccessible)

Okay, thank you.

Thank you. Our last question comes from Can Oztoprak. Please go ahead with your question.

Hi. I'd like to know what sort of incoming traffic trend are you doing, obviously because of the competition's unlimited [all days] --

What kind of incoming traffic trends are you seeing?

In terms of traffic --

I'll just respond while Serkan is looking at the numbers. I think we have seen significant increase in the traffic that comes to us from Avea and Vodafone has increased a lot less. So as a result, as you know, we increased our ports. But I feel that it is also stabilizing.

Can you also give us some guidance on your traffic that is going out of your network?

Generally, we don't give guidance on the traffic patterns, giving competitors solid information. But we have disclosed that in Q2 approximately 10% of our interconnection revenues -- 10% came from interconnection revenues of the total revenue and it was an increase from about 7.5% previous quarter. That gives you some feel for traffic.

Thank you.

I would like to add one more thing. On the internet data prices for 3G, if you look at our offers, they all have limits. One of them has 1 gigabyte and the other one has 4 gigabytes. So, these are not unlimited open end offers. I just wanted to -- everybody to know that we are being careful here and we want to make money in this business.

Thank you. There appear to be no further questions. Are there any further points you wish to raise?

Okay, I think in summary I would like to say obviously, the first half has been a very difficult time for the whole world, for many economies and for Turkey as well. GDP dropped close to 14% in Q1. But you all know very aggressive attack by competition. I think we showed through our technology leadership and marketing leadership that we can maintain our position and our operating results have been very successful.

We wanted to be prudent. We wanted to be conservative related to these two cases. But we believe that we are right. We are right in these cases and we will continue to fight in the legal area in those two cases. I am also very, very, very excited about the second half and beyond. I think world economies improving. Turkey is going to -- Turkey did not have a financial panic or financial crisis. Our -- the source of our economic trouble is from the overseas markets. We are an export oriented economy and when the exports are down, it definitely has an impact on our economy as well.

So, as the global economies recover, Turkish economy is going to recover faster. We see more rational play in the mobile market, in the telecommunications market in Turkey. I think all of the players have tested a lot of different things and now, I think we are going to focus on growing the market and delivering quality and innovative services. And also, we are very excited about 3G and new areas of business it brings to us. And we believe Turkcell is very well positioned to lead in this new space as well.

Thank you very much for your participation to our conference call. Please do notice audio recording of the conference is available to you for next week or two and do call the IR team for follow-up questions, please. Thank you.

Thank you. This does conclude the Turkcell 2Q '09 Results Announcement Conference Call. Thank you for participating. You may now disconnect.