Turkcell Iletisim Hizmetleri AS (TKC) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Turkcell 3Q 2010 Result Announcement Conference Call on the 4th of November 2010. 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 will now hand the conference over to Koray Ozturkler. Please go ahead, sir.

Thank you, Christine. I'd like to say hello to everyone on behalf of the management team here. Before I hand it over to Sureyya Ciliv for his presentation, just a quick reminder 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 due to factors discussed in this presentation. Please also note that all financial data are consolidated, where as non-financial data are unconsolidated, unless otherwise specified. Sureyya, please?

Hello, everyone. Welcome to Turkcell's results call for the third quarter of 2010. We are pleased to report strong results for Q3 2010. We recorded Group revenues of TRY2.327 billion, EBITDA of TRY864 million, and net income of TRY556 million. EBITDA margin increased to 37%, up by approximately three percentage points from last year, mainly due to improved cost efficiency in Turkey and growing contributions from our subsidiary.

Meanwhile, the sharp decline in interconnection rate and maximum price gap in Turkey resulted in a decline of Group revenues by 1.7%. We continued to provide our customers with best-in-class quality service and coverage, investing in Turkey's future, while maintaining customer satisfaction through our attractive tariffs.

Moving onto the next slide, on the back of higher acquisitions driven by improved macroeconomic conditions and the declining trend in multiple SIM card usage, we estimated mobile line penetration in Turkey remained flat at 85% during the third quarter. We expect the current competitive dynamics in mobile line penetration in our market to prevail for the remainder of 2010 and 2011. In the third quarter, we maintained our overall subscriber base, while further growing the postpaid share to 29.2% of the total subscriber base. In terms of usage, we have seen blended minutes of use per subscriber increase by 33% to 197 minutes due to the effective communication of our tariffs and campaigns.

As a result, in the third quarter, blended ARPU increased by 4% year-on-year to TRY20.4 despite decreasing interconnection rates. This was mainly due to increasing mobile internet and service revenues, increasing postpaid subscriber base, higher usage.

Moving onto mobile internet and services, slide six, in the year following the launch of 3G in Turkey, we built the highest quality 3G network reaching 80% population coverage in Turkey. We are happy to see the benefits of the business model that we put in place. We have incentivized data usage with terminal bundled offers, keeping a cap where necessary to sustain a profitable business model.

In the third quarter of 2010, our mobile internet revenues increased by 84% compared to a year ago when 3G was launched. Accordingly, mobile internet and service revenues as a share of Turkcell Turkey's total revenues increased by five percentage points to 21%, of which mobile internet constitutes 28%. Going forward, as the macroeconomic picture improves and affordable handsets become widespread, we expect an increase in the penetration of smart phones and 3G enabled handsets, which will also stimulate further data usage.

We are delighted by the rapid uptake in monthly mobile internet usage with 8.1 million users on average. Currently, there are 5.8 million 3G enabled handsets on our network. And we are about to launch a much lower-priced high-tech Turkcell branded smart phone with internet applications to Turkish customers. We expect this to have a positive impact on our mobile internet usage and revenues.

Moving to slide seven, our fixed broadband business, Superonline, further increased its contribution to Turkcell Group's financials this quarter. Superonline recorded 32% revenue growth, registered nearly three times higher EBITDA compared to last year and achieved a 12.3% EBITDA margin in the third quarter of 2010. During the quarter, Superonline extended its fiber optic network to more than 18,400 kilometers. Superonline carried 66% of Turkcell's transmission and accounted for approximately 42% of Turkcell transmission costs, resulting in an improvement in Turkcell Group's operational profitability.

While continuously increasing group synergies, Superonline grew its residential and corporate segment revenues with non-group revenues making up to 59% of total revenues. We expect Superonline's contribution to Turkcell's financials to continue to improve as it continues to offer differentiated integrated telecom solutions.

Slide eight, now looking at our Ukrainian operations, in the third quarter, Astelit improved its operational profitability in a better macroeconomic environment with a continuing focus on its turnaround strategy. Astelit's decision to move out of the non-profitable carrier business line and reductions in interconnect rates during the year resulted in a 9% year-on-year decline in revenues to US$85 million. However, Astelit's EBITDA tripled versus last year and reached 25.3% due to its effective cost control initiatives as well as the improving macroeconomic environment in Ukraine.

We are satisfied with the positive return achieved by our strategy in Ukraine. We expect Astelit to achieve an EBITDA margin of approximately 18% to 19% in 2010 and to continue to increase its contribution to Turkcell profitability in 2011.

Moving onto the next slide, slide nine, as you all know, our market has seen some radical changes over the last couple of years with the competitive landscape becoming more aggressive and interconnection rates and maximum prices decreasing significantly. In the face of these challenges, we have maintained our market leadership. As the market leader with a strong brand, we will continue to capitalize on our strong brand with customers through further segmentation, localization, and maximum utilization of our superior sales channels, which we are developing further to prepare for the new mobile broadband era.

Thanks to efficient project management and a wide range of cutting edge implications in mobile devices offered at most advantageous prices, we are able to provide the best customer and user experience in our market. To build on our technological leadership, we are continuing to develop our superior infrastructure by expanding our 3G coverage and fiber optic network and maintaining the quality of our 3G network. Going forward, we will seek to actively migrate customers from our 2G network to 3G.

We will focus on increasing smart phone penetration and developing our mobile internet and services as well as unique applications that create stickiness. This, we believe, will help us generate revenues from emerging businesses as we sustain the growth and retention of our postpaid subscriber base.

Outside of Turkey, we are always looking at different ways to expand our business into new markets. Our recent agreement with Deutsche Telecom in Germany, which allows us to introduce the Turkcell brand, know-how, and benefits to a new market without investing in infrastructure, is a good example for our ambition. We will continue to ensure that our customers enjoy the best quality (inaudible - microphone inaccessible) most affordable rate through segmented tariffs and campaigns.

There are also opportunities that convergence offers. And we will provide tailored total telecom solutions to corporate customers, further strengthening our mobile internet and fiber broadband offers. We will continue to win the hearts and minds of our customers in the new world. I will now hand over to Serkan to talk you through our financials.

Good morning and good afternoon to all participants. I will now talk about our financial performance in more detail. In the third quarter, year-on-year decline in mobile voice revenues driven by 52% (inaudible) mobile termination rate, which resulted in a 43% decline in Turkcell Turkey's interconnect revenues and also a 38% mobile maximum price cap.

On the other hand, mobile internet and service revenues increased by 28% to TRY425 million. And contribution of subsidiaries, particularly Superonline, improved further. As a result of our consolidated revenues in the third quarter declined by 1.7% compared to the same period last year. Also in the quarter, Turkcell Group revenues grew by approximately 4%, mainly due to seasonally higher usage and larger postpaid subscriber base in Turkey and higher mobile internet and service revenues, which increased by 10%.

Moving onto the next slide, on the third quarter -- our third quarter EBITDA was up by 6% year-on-year and 19% quarter-on-quarter. EBITDA margin at 37.1% increased by 2.7 percentage points year-on-year, mainly due to decline in direct cost of revenue and selling and marketing expenses as a percentage of revenues, which is partially offset by higher general and administrative expenses.

Decline in interconnection cost as a percentage of revenues was main driver of [1.7] percentage points decline in direct cost of revenues. The [accepted] net impact [or the] interconnect on Turkcell Turkey's EBITDA was minus TRY65 million, which is the sum of net year-on-year change in interconnect revenues and interconnect costs.

The decrease in selling our marketing expenses was attributable to lower communication activities and [growth acquisitions]. The increase in general and administrative expenses was mainly due to higher bad debt expenses, which increased as a result of a change in the calculation methodology of bad debt provisions starting from Q2 2010. Driven by higher contribution of Group subsidiaries on (inaudible) selling, marketing, and administrative expenses in Turkey, our EBITDA margin improved by 4.8 percentage points quarter-on-quarter.

I will now talk about our net income on the next slide. Despite higher depreciation and amortization expenses, we are pleased to report a 12% year-on-year increase in our net income, which was mainly driven by higher EBITDA and translation gain of TRY8 million as oppose to TRY70 million translation loss in Q3 last year.

In line with this trend, our net income margin increased by 2.9 percentage points to approximately 24%. Quarter-on-quarter, net income increased by around 32% and net income margin by 5.1 percentage points, again due to higher EBITDA and TRY8 million translation gain, which was partially offset by higher depreciation expenses.

Moving onto the balance sheet and cash flow slide, as can be seen from the solid balance sheet on this slide, our financial position remains strong with approximately TRY4.6 billion of cash on our balance sheet as at the end of September and a debt-to-annual EBITDA ratio of 87.5%. However, consolidated debt, which increased by TRY55 million to TRY2.6 billion, TRY853 million related to Turkcell's Ukrainian operations.

TRY1.8 billion of our total consolidated debt is at a floating rate. And TRY605 million will mature in less than a year. Capital expenditures in Q3 2010 amounted to TRY310 million of which TRY146 million is related to Turkcell Turkey, TRY112 million to Superonline, and TRY28 million to our Belarusian operations. This concludes our presentation today. Thank you.

Christine, at this time, we can proceed with the Q&A session, please.

Thank you, sir. (Operator Instructions). And I would like to remind participants to limit themselves to two questions per person. The first question comes from Alex Wright. Please go ahead.

Yes, thank you and good evening. I have two questions, please, one on the sales and marketing spending, which, as you pointed out, declined quite a lot in this quarter compared to previous quarters. Could you just talk a little bit more about (inaudible - microphone inaccessible) and whether you think that you're able to move this to a sustainably lower level? And what (inaudible - microphone inaccessible) the competition in this area?

And then my second question is regarding Ukraine. A couple of things on that, first of all, could you just explain the change in the subscriber definition? And secondly, could you give us some idea of what you would regard as a normalized level of maintenance CapEx in Ukraine going forward? Thank you.

So, Lale, you and I, let's answer this question. First, if you look at the first quarter, our sales and marketing expenses have been at almost the same level versus Q1. And it was -- and it could be less than in Q2. And I think a major part of this is related to our selling expenses. And we were able to increase some of our prices in the activation as a result that contributed to lower selling expenses for us. Lale, would you like to add?

On top of that, we have made some [option duties] in our marketing expenditures and sales also it's seasonality, of course, in terms of our marketing expenditures (inaudible) Q3 expenses slightly lower than our average expenditures in the year. So you can maintain our guidance, annual guidance for the quarters, for the coming quarters as Q3 is slightly lower than the average.

We'll take the next question.

Regarding Ukraine, as we have mentioned in the press release and our announcement, we are focusing on much more onto profitability and the long-term transferrable to the business in Ukraine. Under this context, the release of our subscriber definition in Ukraine and we describe the definition with a more stricter manner. And as a one-time adjustment, we have churned out our subscribers which are not generating revenues for the Company. So from now on, the subscriber definition of the Company will be a little bit more stricter than before. But there won't be any one-time adjustments moving forward. Regarding to the maintenance CapEx, we haven't finished our next year plan yet. However, I can say that the maintenance CapEx may be less than 10% of the revenues of the Company going forward.

Thank you. The next question comes from William Kirby. Please go ahead.

Thank you. Yes, were there any one offs in this quarter and either in sales and marketing or in the cost of sales, please?

Not really. We think the cost of sales improvement will continue into the other quarters. And on the marketing side, as Lale explained, because of the summer season, television ads does probably lower than what it will be in the fourth quarter. So we do, however, in the fourth quarter -- we're getting ready for the New Year. And people are back from summer vacation. And they're spending more time in front of their TVs. And we'll be -- we expect the increase of marketing spend in Q4.

Okay. Thank you. And then looking into next year at perhaps as a percentage of sales, I mean, do you expect advertising inflation to mean that you'll have to spend more than you have in the first nine months of 2010 into the first nine months of 2011? Or is the current level of spend as a percentage of sales sustainable?

I think we are not -- we are working on our budget for 2011. And we are aware of the fact that the advertising rates may be increasing in Turkey in Q4 and beyond. But at the same time, we are looking at segmenting our customers and what is the most efficient way to reach these customers. And we are also exploring some new alternative methods of reaching to our customers, including our own network. So I will pass to Lale, who is head of our marketing. Maybe she can (inaudible) it.

I think at this stage, we do not yet give a guidance for marketing and sales expenditures for the coming year. As soon as we make the whole plan ready for the year, we will share that.

Okay. Great. Thank you.

I -- this is Koray. Just to bring clarifications to the -- Kirby's question and maybe more forward-looking thinking, we expect to grow our revenues and EBITDA compared to that in 2010 and 2011. And this growth will mainly be driven by growing mobile broadband business and increasing profitability of our subsidiaries. So take this as a general guidance on how we see 2011, which is more positive. But as we get more details through our annual operating planning, we will update you on more specific points.

Thank you. The next question comes from Atinc Ozkan. Please go ahead.

Yes, thank you. This is Atinc from Credit Suisse. I have [two] questions, please. The first one is regarding the regulatory landscape. I believe you had a deadline regarding the new 22nd rule, which possibly has been moved, if you could update us on that front, whether the regulator will be implementing this to amplify the -- a maximum tariff cap reduction. And my second question is regarding the competitive landscape.

Maybe we should answer that question quickly.

Okay.

As to the best of our knowledge, the 22nd ruling has been delayed or postponed and I could say indefinitely. I do not have any timeline if or when it will come back.

Okay. Thank you very much for that. And my second question is regarding competitive landscape. In your press release, you mention that besides some signs of rationalization, we are not still seeing top-down improvement in the markets. If you could add some color on that vis-a-vis what Vodafone has been doing over the third quarter and your expectations regarding next year maybe. Thank you.

I think we would like to say that it is a very competitive market. However, we also can say I think we do not see irrational pricing that we saw in early 2009. So I think we see all operators in a very intense competition, like many other markets. But we do not see irrational pricing that we saw before.

Okay. Thank you very much.

The next question comes from Dalibor Vavruska. Please go ahead.

Hello. Good afternoon. This is Dalibor Vavruska from ING. Just two quick questions, I think in your press release you mentioned that you used some new methodology about bad debt classification. And as a result, you have some additional expense. If you can just talk about it a little bit. And then also obviously your postpaid subscriber base is growing. So I'm just wondering whether this will have an implication on your bad debt expenses going forward.

And the second question is about margins. Obviously, we've seen a very healthy development in profitability for Turkcell and also signs that the whole market is improving finally. I'm wondering and also heard that from one of the earlier answers that you have a plan to increase your profitability in the subsidiaries. I'm wondering whether there is any specific plans in Turkcell Turkey in the core business to improve cost of efficiencies going forward as well. Thank you.

Regarding your first question, we have changed our bad debt classification methodology effective from Q2 this year. Previously, we were taking into consideration the payment performance or collection performance of our company since 2001. But effective from Q2, we just started to pay the collection performance for the last four years, which is obviously down from before. Therefore, that changed increase of our bad debt provision percentage.

And you also mentioned that -- whether the increase in the number of postpaid customers are impacting our bad debt. And the answer's yes. However, we are strictly following update [profitability] of our postpaid consumers. And even taking into consideration the bad debt provision for the postpaid customers, the profitability of them are better than the prepaid customers. Therefore, it's a wise strategy for us to move towards postpaid.

Yes, on the cost efficiency side, Turkcell Turkey, I think we are seeing the results of the cost efficiency programs we established in this quarter. We will continue to work on the cost efficiency programs and why we say plan to see EBITDA improvement next year.

Would it be totally unrealistic to say that you can return back to 40-plus percent margin on the group level?

I think at this time, Dalibor, we'd like to not be [specific] guidance. But we believe that it will be a better year. But we'll have to guide you more specifically when our planning process completed.

Okay. Thank you very much.

(Operator Instructions). The next question comes from Vera Sutedja. Please go ahead.

Yes, good afternoon. Just one question, please, it's about the interview that I saw. Is it correct that there is now a guidance for 2011 that EBITDA margin will be above 33%?

No, we have not given official guidance for 2011 yet. But we think there is potential to improve the EBITDA margin.

And when you just now answered the question of Dalibor about the Turkcell Turkey and you said EBITDA next year will be higher for Turkcell Turkey, you mean an absolute number or the EBITDA margin that you meant?

I was talking about what I just said. Although we have not given firm guidance for 2011 yet, our thinking is our revenues and our EBITDA and possibly EBITDA margin will improve in 2011.

Thank you.

We have a follow-up question from Alex Wright. Please go ahead. Mr. Alex Wright, your line is now open for questions.

Yes, hello. Sorry about that. Just had a problem with my phone. I had a question about Superonline and the fiber optic network build out. You mentioned that you have reached almost 0.5 million homes passed. I wondered if you could talk at all about the future targets in terms of homes that you could target with fiber optic broadband services, whether you could talk about the total potential homes passed that you could look to reach in the market, whether you can talk about the potential penetration targets within that footprint. Just anything qualitative about that would be appreciated.

Alex, I do appreciate your desire to learn more. But at the same time, these are pretty important competitive decisions, moves. And I think at this time we would like to say that we think our Superonline business is very exciting business. Number one, it is very important. It has very important contributions in terms of cost savings and in terms of network reliability to our Turkcell mobile business. And it is very synergetic for these two reasons.

But the second area is we also think fiber optic internet broadband is a very differentiator clearly superior value to our residential and enterprise customers. So we believe that there is huge opportunity. And we are very delighted by the take-up rates in the areas where we have this home pass ability.

Due to the network buildup, the network buildup has accelerated in the last 12 months. And we think that the take-up rates will catch up to it quickly. So we have -- this is one of our focus areas. How do we increase our take-up rate for the home passes?

We also believe that Superonline is strategic to our business because it is time for converged offers special to enterprise. And we think that being a vendor that provides total telecom solutions to our corporate customers will position us stronger versus competition in the future, especially for our corporate customers.

And we have increased our investment into Superonline. And we are investing. But also the EBITDA performance of the Company is improving.

Thank you. (Operator Instructions). There appear to be no further questions. Please continue with any other points you wish to raise.

Christine, thank you very much. I would also like to thank all the investors for participating and analysts to our call. Please be reminded that you'll be accessing the audio recording of the call for the next two weeks. And please do keep in touch with the Investor Relations team and myself for further questions. Thank you very much.

Thank you. This concludes the Turkcell 3Q 2010 results announcement conference call. Thank you for participating. You may now disconnect.