Turkcell Iletisim Hizmetleri AS (TKC) 2011 Q1 法說會逐字稿

Welcome to the Turkcell First Quarter 2011 Financial Results conference call on 28 April 2011. I will now hand the conference over to Koray Ozturkler, Corporate Affairs Officer. Please go ahead.

Thank you, Julie. I'd like to welcome everyone on behalf of the management team here. Before we go on with our presentation, I'd just like to put a 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 (technical difficulty) forward looking statement. Please note that also financial data are consolidated whereas non-financial data are unconsolidated unless otherwise specified.

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

Good morning, good afternoon and welcome to Turkcell's first quarter of 2011 results call. In the first quarter of 2011, Turkcell Group recorded the revenues of TRY2.1 million, EBITDA of TRY626 million and net income of TRY330 million. In line of intensified price competition, the termination rate and maximum price cap were down by 52% and 38% respectively compared to a year ago.

EBITDA margin decreased 2.1% to 29.5% mainly due to the increased advertising expense and [dealer incentives] in Turkey. In line with our strategy, we have taken the longer view for our business to defend our subscriber base and market position.

Group net income was negatively impacted, mainly due to lower EBITDA and an additional provision of TRY55.8 million regarding the tax amnesty application.

Moving on to the next slide, I will now focus on the competitive dynamics in Turkey in the first quarter of 2011. Slide 5 -- in the first quarter aggressive pricing environment continues in our market. Our competitors increased their efforts towards subscriber acquisition with all-time low prices, bundled with [terminal] offers.

This led to approximately 15% decline in average prices in the market compared to a year ago. Furthermore there was emphasis on [porting] offers, increased dealer incentives and advertising expense. As a result we have seen EBITDA decline in the market.

In this competitive environment we have also been investing heavily for the future. We have built one of the most advanced mobile communication networks in the world. We have the best coverage and quality in the country. We have been recognized as the most admired company in Turkey, [fourth] year in a row. In short, we have sharpened our focus on our customers and we are very well-positioned to (inaudible) value propositions as premium brand over competition with a much lower price gap.

Going forward, we are keen to take action that will lead the market towards sustainable profitability levels. (Inaudible) the market opportunity that we need to realize.

Now I will move on with our operations in Turkey. Slide 6 -- in Turkey, mobile line penetration remained flat at [85%] and we expect to see similar levels at the end of the year. In the first quarter we increased our total postpaid subscribers 10.4 million (inaudible) approximately 227,500 net additions. We also grew the number of postpaid contracts by 50% year over year, further strengthening our postpaid subscriber base.

Contraction in the prepaid subscriber base slowed down, resulting in a decrease in the net loss of total subscribers to 417,800 from 1.1 million compared to the same period of last year. In the first quarter, our blended ARPU decreased by approximately 5% to TRY18.4 compared to last year, mainly due to the declining pricing in the market.

The improved consumer sentiment and effective communication of our incentives ensured healthy usage growth in the first quarter of 2011. Our blended MoU increased to 193 minutes, up by approximately 26% compared to last year.

Moving onto the next slide, I would like to elaborate on the mobile data business in Turkey. Slide 7 -- during the first quarter of 2011, we continued our leadership in the smartphone market and mobile internet business. The number of smartphones on our network increased by 108% and reached 2.4 million as a result of our effective offers encouraging [contracted] smartphone sales.

Additionally, the number of monthly average mobile data users increased by 52% to 10.5 million. This has resulted in higher mobile internet and application usage, leading to continuously increasing mobile internet revenues, which rose 64% to TRY151 million year on year.

Secondly, the share of mobile internet and services revenues and Turkcell Turkey revenues increased by 4 percentage points to 23%. Going forward, we are determined to grow our mobile internet business, diversify our data and terminal bundle contract offers, and with emphasis on our innovative mobile services and applications.

Now I will briefly elaborate on the performance of our subsidiary, Superonline. Slide 8 -- in the first quarter of 2011, Superonline continued to significantly grow its contribution to our Group. During the quarter, Superonline's fibre optic network reached 637,000 homes (inaudible) while brand communication in the market continued.

In the first quarter, due to seasonality, top line revenues remained almost level on the previous quarter. However, year on year Superonline grew its revenues by approximately 28% to TRY91 million, while the share of non-Group revenues was 61%, with 36% growth year on year. Meanwhile EBITDA grew 2.5 times to TRY14.5 million, while EBITDA margin reached 16% from 8.3% compared to a year ago.

Consequently, the contribution of Superonline to Turkcell Group's top line and profitability continued while its share in Turkcell's transmission costs (inaudible) 51% in Q1 2011. We expect to see higher benefits and returns on our investments in Turkcell's mobile and Superonline's fixed networks going forward.

I will now talk about our international operations, starting with Ukraine. Slide 9 -- in the first quarter of 2011, Astelit's profitability further improved despite seasonality, whilst strong profitability growth settling in due to management's continued focus on effectiveness. During the quarter, three-month active subscriber base remained flat at 6.1 million. Three-month active ARPU increased by 22.9% year on year. MoU increased by 39.9% to 280.6 minutes. Consequently, revenues declined by approximately 6% to TRY78 million compared to last year, mainly due to the closure of our non-profitable carrier business and lower interconnect revenue because of the decline in MTRs.

Astelit's EBITDA rose threefold to approximately TRY19 million in the first quarter, while its EBITDA margin increased by 17 percentage points to 24%. This was due to lower selling and marketing expenses together with tariff busy times which resulted in slower interconnection costs.

Moving onto the next slide, I will briefly talk about the revision on our guidance for 2011. In late January 2011 - we are now on slide 10 - unforeseen intense price competition started in the mobile market in Turkey. Our competitors increased their attacks for market share at the expense of profitability.

In order to defend our subscriber base and further differentiate Turkcell, we lowered our prices and incurred higher operational expenses in an intensely competitive domestic market. We justify such expenses by (inaudible) of longer term returns. Accordingly, we now expect comparatively lower growth on Group financials mainly due to Turkcell Turkey.

In this context we revised our 2011 target for consolidated revenue to the range of TRY9,300 million to TRY9,600 million, while we aim to achieve EBITDA of TRY2,900 million to TRY3,050 million, depending on the market dynamics.

For the Group CapEx, we now expect to spend less compared to 2010, around TRY1.5 billion. We differentiate ourselves through further shuffling our customer focus, investment in our brand technology and customer satisfaction to provide new technology solutions.

We will strengthen our leadership through our growing mobile internet business, rising Group synergy, particularly through Turkcell Superonline, and the contribution of our other consolidated subsidiaries. We expect to resume growth starting with the second quarter of this year. I will now hand over to Serkan to talk you through our financials.

Thank you, Sureyya. Good morning and good afternoon to all participants. I will now talk in more detail about the financial results. Starting with the revenues, we were able to slightly offset the negative effect of previously reduced interconnect rates and (inaudible) on our voice revenues out of Turkcell Turkey, through 10.5% growth in mobile internet and service revenues.

And also [19.7%] growth in the contribution from subsidiaries. As a result our Group revenues declined by 5.8% year on year to TRY2.1 billion. Compared to the previous quarter, consolidated revenue decreased by 3.1%, mainly due to the declining mobile voice revenues of Turkcell Turkey and an increasing competitive environment.

Moving onto the next slide, in the first quarter Group EBITDA in nominal terms was TRY626 million, while EBITDA margin decreased by 2.1 percentage point, to 29.5%. During the quarter Turkcell Turkey's increasing selling and marketing expenses and higher network related expenses were the main reason for this decline.

As a separate note, EBITDA contribution of Group subsidiaries was improved by 7.6 percentage points to 13.7% as a result of the significant improvement in Superonline's and Astelit's EBITDA performance.

Quarter on quarter EBITDA margins slightly decreased from 29.7% in Q410 to 29.5%. This was mainly due to [lower] bad debt expenses which partially offsets higher interconnect costs for the percentage of revenues.

Moving onto the next slide, slide 14, compared to the previous year, Group net income decreased by 21% to TRY330 million, mainly due to lower EBITDA. Net income during the first quarter was negatively impacted by TRY56 million additional provision regarding a tax amnesty application for the special communication tax imposition pertaining to the years 2005 and 2006.

This was partially offset by the reversal of [20 million] in Q410 to the regulatory authority. Quarter on quarter net income decreased by 10% which mainly stemmed from a [translation] loss of TRY24 million in Q111 as opposed to a [translation] gain TRY24 million in Q410.

I will now talk about our balance sheet on the next slide. In the first quarter of the year we maintained our solid financial position with approximately TRY5 billion of cash on our balance sheet. Our consolidated debt at year end was around TRY2.8 billion. TRY878 million of this amount was related to our operations in Ukraine. During 2010 our debt to annual EBITDA ratio further increased to 97.5%.

Our capital expenditures amounted to [TRY882] million and our CapEx over sales ratio declined from 16.3% to 8.6% year on year. Of the total CapEx figure, TRY94 million was related to Turkcell Turkey and TRY43 million to Superonline.

Furthermore, net free cashflow margin improved by 5.7 percentage points to 21% as a result of the lower CapEx spending in Q111. This brings our introductory presentation to an end. Thank you.

Thank you, Serkan. Julie, at this point we conclude our presentation and we can please take any questions. I'd like to remind the participants to please limit your questions to two, to allow everyone to have a question and then we can come back to you if you have follow-up questions.

Thank you. (Operator Instructions). The first question comes from Will Kirby from Nevsky Capital, please go ahead.

Thank you. Firstly, what are you expectations on the dividend? If the General Assembly remains deadlocked, could there be some kind of penalty from the Capital Markets Board, and then what routes are there to sort of solving the problem?

Then, secondly, on administrative expenses as a percentage of revenues, you mentioned that some of the improvement is due to bad debt. Looking at the balance of the year and in future years, is this likely to head back up towards 6% of revenues, or is the lower level we saw in the first quarter sustainable? Thank you.

Okay about the General Assembly and dividends question, I think - let me remind you our financials had been approved by the Company, by independent auditors, by our Board of Directors, it had been announced. Consequently, 75% of the profits were to be distributed as dividends.

This was recommended by the management and by - it was approved by the Board of Directors. So due to the General Assembly events, we ended up with General Assembly nothing is (inaudible) government or especially auditors. We are not happy about this and I don't think anybody on our Board is happy about this. Initially, we were going to pay this dividend on 16 May, but because of the (inaudible) by the General Assembly, it appears we are not going to be able to pay this dividend.

Our hope is, my hope is, this issue gets resolved quickly and then we pay the dividends as quickly as possible. So I have been working and I will continue to work on this resolution as quickly as possible. Now I will pass to Koray because he wants to take on the (inaudible) by the CMB.

It was a good question, thank you. Just to clarify it, there is [a very ignorable] penalty for not paying the dividends in May by CMB, and that's up to about TRY60,000. There is no issue about being able to pay the dividend after May.

So as soon as the General Assembly [called] and the necessary [decisions] are taken, any time within the year dividend distribution can be made. (Inaudible) I think we have some calls. That point needed to be quite frank on that question, thank you (inaudible). And the general expenses?

The question about the expenses in Q1 was mainly our improved credit contract procedures on specifically some of the handset bundle campaigns, and apart from that our data collection performance in Q1 mainly coming from specific campaigns for our postpaid customers. Therefore we think that the Q1net debt ratio levels can be sustainable for the rest of the year also.

Okay, great, thank you.

Thank you, the next question comes from Erdem Hafizoglu from BGC Partners. Please go ahead.

Hi, thanks for the presentation. I have a question regarding mobile internet. You have investments in the fiber optics ADSL businesses. Can you give us some information about Superonline's subscriber ARPU (technical difficulty) figures and your target in the coming year and the potential you might reach from this segment? Thank you.

I think Superonline, to be precise (inaudible) Superonline is an important company in our Group. It is an important part of our mobile network. We rely on the fibre network throughout Turkey. By the end of the year we plan to have about 28,000 kilometers of fibre internet connection.

This also enables us to save on the transmission costs and as the mobile data traffic is increasing rapidly it still enables us to contain, maintain, our costs. On the residential side, actually (inaudible) it is also very important part of our total telecom solution to our corporate customers.

We have one of the most extensive, disciplined sales forces in Turkey targeting the corporate business. The goal (technical difficulty) direct sales force to enterprise customers, large customers and the high end of the medium business, and we go with our partners to the mid and lower part of the medium business, and also small and home businesses.

We, the Turkcell sales force, starting in 2011 is not only selling our mobile communication offerings but also selling and taking to the customers our Turkcell Superonline fibre optic internet and related services. So we are very excited about this business opportunity ahead in this space and I think it will experience rapid growth.

Our customers, they've been demanding this because Turkish Telekom was mainly the only provider in this market for a long time and the customers are happy to see a reliable second alternate.

On the residential side we expect to reach close to one million (inaudible) by the end of the year. We are around 600,000 (inaudible) now and I don't think we disclose the number of subscribers, but I think we are making good progress.

Thank you very much.

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

Yes, this is (inaudible). I have a question regarding the guidance. On the revenue side first quarter declined by 5.8% by 0.7% and the new guidance imply a revenue growth of 3.3% to 6.6% year over year. How do you reach from minus 5.7% into a plus? What will drive this and when will this happen?

As we mentioned in the press release, the first quarter was a special quarter. Last year on 1 April the regulatory body announced some significant price cuts in mobile termination rates and price cap. When you compare Q1 of 2011 and versus Q1 of 2010, the MTR and the price cap in 2010 was significantly higher than what we had in 2011. So it's a little bit comparing significantly different environments.

Mainly because of this and also increased price competition first quarter 2011 we had a decrease in revenues. But starting 1 April we will compare same MTR and actually slightly improved [price gap] in the second quarters. So we expect to go back to growth of revenues in second quarter and continue the growth for the remaining quarters.

Am I right to understand that the Turkcell Turkey revenue (technical difficulty) already starting from the second quarter 2011?

Yes (technical difficulty) consolidated revenues. We are going to see growth in consolidated revenues starting in second quarter.

Thank you.

(Operator Instructions). We have a question from Altan Dinc from Global Securities. Please go ahead.

Hello, I joined this call a bit late. Sorry if it's repetition but I would like to ask how we should read this statement of the Company we received yesterday saying that an understanding was reached on the need to reopen the discussion to amend the articles of association to increase the number of independent board members? So what is the timeline there and how do you plan to proceed on this one?

Okay, I think it is affected whether there's a kind of deadlock within the Board members about the General Assembly agenda items. I think that actually in the announcement we said that in the Board meeting there was a discussion about increasing the number of independent board members.

As you know, we have six board members - two from each of the three key large strategic shareholders - and we have one independent board member. I think most of the parties, most of the stakeholders, are forming an opinion; there was a discussion about the increase of the independent board members.

When I say independent, the definition of independent can change also. We mean independent of the key stakeholders, key stockholders, three key stockholders. The CMB and the government has presented to us in the past have also advised us and asked the Company to increase the independent board members to be comparable to almost 35% public shares.

So I think I cannot say, there was no decision reached. So there was no announcement about it, but there was a discussion about this. To me it looks like it is the light at the end of the tunnel. I (inaudible) area where I can feel I can see probably an agreement can be reached. This is what we mentioned in the announcement.

The Chairman of the Company and myself, I know I am talking to the individual stockholders and also talking to the Capital Market Board and the government representatives. I think we can find a common solution that will be accepted by most parties with what I can state at this time.

Thank you.

Thank you. The next question comes from Stefan Gauffin from Nordea. Please go ahead.

Yes, hello, Stefan Gauffin from Nordea Bank in Stockholm. I have a follow-up question regarding your revenue guidance. You mentioned two things in your last answer explaining the weakness this quarter, where you mentioned the increased price competition.

In your guidance do you expect the price competition to level off or have you calculated with this intense price competition to follow there too?

Secondly, you also mentioned a changing price cap. Can you give some more information relating to this?

Yes, we might start with the first question first. Basically in various industry meetings, in various meetings with regulators, I think I can see that all of the key stakeholders in the mobile communication market in Turkey realize that mobile internet traffic demand will continue to increase significantly.

Today we have less than 10% of our population with smartphones, and as the price of the smartphones come down the penetration adoption will increase sharply, and that will drive further mobile data traffic. There's just tremendous interest. Also (inaudible) YouTube was closed for a long time until six months ago and obviously it is an important video traffic driver and it is open and I think we have seen its impact on our data network.

So there will be a lot of investment required to continue this. I think some of the operators have not made any net income yet although they have been in this market for almost 10 years. We have seen profitability decrease for most of the companies in the market for the last two quarters.

So all of this together for the sustainability and to make the investments required, you know, the market and for the growth of the market I think eventually people will be more rational is my hope. I sense that other key stakeholders are concerned about the profitability levels as well. Also the penetration rate has been stuck at 85% indirectly and we definitely can see this growing significantly.

We are also contacting the government and we have started dialogue to lower the taxes for data sim cards, so that we can also market and drive the penetration of data sim cards on [machine-to-machine] kind of applications.

So basically I am saying there is general dissatisfaction about the flatness of the market in mobile and also decrease in profitability, and everybody can sense that there will be a lot of investments required for the increasing demand in mobile internet. As a result I hope that all of the players start acting more rationally.

But I also want to say, I mean and again regulation is the reason for lower revenues, I gave increased price competition as an important driver of this. But I also can tell from Turkcell's side, we also look internally how can we better organize, how we can adjust our strategy.

In the last six months we have revised our strategy and our go-to-market tactics and we are trying to roll them out significantly with significant force in the coming months. We also organized our team so that we can focus on our customers better in delivering more positive solutions to them. So we also announced a customer initiative so that it's a premium brand in Turkey, we improve customer satisfaction and customer loyalty and we have launched a marketing campaign on this.

So as Turkcell we are also, as the largest operator and the leader of this market, we have revised our strategy, our organization. We think that this will also help lead the market to more rational play and also growth of the market place.

As for the second question - it was a price cap related question - we can basically state that at this time we don't have any reason to believe that there will be price cap reductions or interconnection rate cuts, MTR cuts, for this year. In fact, price caps recently was increased from 40 to 41 (inaudible).

I want to add to that basically this increase was about 3.8%, 3.9% increase. So as Koray explained, going from 40 (inaudible) to I think 41.5 (inaudible). This increase was based on the inflation of the last six months. It is in our licensing agreement and licensing terms that there can be inflation adjustments to these price caps.

Consequently, I think the inflation in Turkey is about 8% a year. I would think at least we are going to, in our dialogue with the regulators, we are going to ask for further adjustments if the inflation rate continues in Turkey.

Okay, thank you.

Thank you, we have a follow up question from (inaudible). Please go ahead.

Yes just like to ask please about the comparative (inaudible) in the first quarter especially this TRY20 to TRY30 packages. Is this still on offer or is actually the offers have been stopped? If it is still on offer I kind of get really confused on the revenue guidance because I just don't see you reach your numbers.

Hi, there, this is Burak. The offers that you mentioned are still in the market at the moment from both operators. What we say is we cannot really foresee how long they will be on offer. But we will take some steps in the market to improve the market in terms of profitability and (inaudible). We are hoping that the competition will follow on (inaudible) sustainable growth towards the market.

I want to add that I think in our strategy we - our new strategy is clearly going to be driving communication and the value of the quality of our network, speed of our mobile internet offer, our coverage and also our mobile services. We will make adjustments to - we have made some adjustments and we will continue (technical difficulty) so that our customers are less negatively surprised.

But we feel that our customers are willing to pay a premium for quality of using Turkcell. I think it is clearly and widely accepted, well understood by the general public, that Turkcell offers one of the best quality in mobile communication around the world, both from coverage point of view, from quality point of view and also mobile internet speed point of view.

We also have, as you know, in 3G, [A band] which gives us significant competitive advantage in mobile internet speed versus competition. So yes the competition can go lower and lower in price and fill their network and make (inaudible). But I think customers' need is to have a quality, reliable communication. I think Turkcell is better positioned to offer this.

I think it's important for us to communicate the value and the difference and the superiority of our network to our customers. In the last year or two, because of very aggressive advertising by competition, some customers have gone to test different networks, but it is very clear that nobody can match Turkcell's quality and superiority of the network. So we have to drive our quality advantage to the marketplace.

Thank you for the answer.

Thank you. We have no questions. Please continue, Sir.

As we understand, there are no more questions. We at this point would like to thank you for participating to our Q1 2011 financial results call. The next two weeks the audio recording of the call will be available. Please also call the IR team for follow-up questions.

Thank you, this concludes the conference call. Thank you for participating. You may now all disconnect.