Turkcell Iletisim Hizmetleri AS (TKC) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Third Quarter 2013 Results Announcement Conference Call on the 25th of October, 2013. To start today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. We ask that participants limit themselves to two questions.

(Operator Instructions)

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

Thank you, Kevin. This is Koray. I'd like to welcome everyone to our conference call on behalf of the management team here. A quick notice, this presentation you're about to hear 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 is consolidated, whereas non-financial data is unconsolidated unless otherwise specified.

Now we will start with the presentation by Sureyya Ciliv. Please go ahead, sir.

Good morning, good afternoon, and welcome to Turkcell's Third Quarter of 2013 Results Call. We are happy to report another strong quarter where Turkcell Group revenues rose by 8% year-on-year to almost TRY3 billion. Consolidated EBITDA rose by 11% year-over-year to over TRY1 billion, while the EBITDA margin reached 34.1%. This solid operational performance plus the one-off impairments recorded in Q3 2012 resulted in a 22% rise in net income year-on-year.

For the quarter, the recent MTR cuts have impacted our revenues negatively, which I will comment more on the next slides. However, for the full year we maintain our Group guidance. And I may add, we expect to post results around the high end of our revenue and EBITDA ranges if current market conditions continue.

Moving to page five. In the third quarter, all major business lines contributed to overall growth. Growth of our core business, Turkcell Turkey, continued with a 3% year-on-year rise. Please note that excluding the MTR cut impact revenue growth would have been 7%. The EBITDA margin was slightly up year-on-year to 34.5%. Meanwhile, EBITDA rose by 2% year-on-year due to a higher depreciation and amortization expense resulting from increased investments in useful life divisions of the fixed assets in 2012 fourth quarter.

Our fiber broadband business, Turkcell Superonline, posted 27% year-on-year revenue growth. EBITDA climbed 44% on the rising share of the more profitable residential and corporate segments, which now account for 63% of the total. Meanwhile, regarding Astelit, we are delighted with both 23% top-line growth and 31% EBITDA margin through continued value-focused execution.

Moving to page six. In the third quarter, mobile broadband and subsidiaries were the key revenue growth drivers. Turkcell Turkey's mobile broadband revenues rose by 39% year-on-year, which offset the 3% decline in voice revenues due to lower incoming revenues resulting from the MTR cuts.

Meanwhile, the welcomed increased contribution of our subsidiaries to the top-line, which rose by 36%, mostly driven by Turkcell Superonline and Astelit. Overall, subsidiaries now account for 21% of our Group revenues. This is a five percentage point increase on last year.

Now, let's take a closer look at our operational environment, on page seven. The Turkish mobile market has remained highly competitive year-to-date despite some improvements in the pricing environment. As you know, our strategy is to increase customer focus and to offer superior customer experience and value pricing.

As a result of this, and of the seasonality effect, our subscriber base rose by 322,000 for the quarter to 35 million total subscribers. This was mostly driven by the prepaid segment. Meanwhile, ARPU was up by 3.2% and MOU increased 6% year-on-year.

On page eight, our focus on smartphones to enhance customer experience resulted in a net rise of 2.2 million users year-to-date. On the historically highest quarterly net addition of 882,000, we now have 8.4 million smartphones on our network and a penetration rate of 26%.

As part of our vision of widening access to mobile broadband to ensure sustainability of the revenue growth, we aim to provide our customers with affordable smartphones.

Parallel to this, we launched the first domestic model, the T40, in late September. It provides high-tech features at half the average smartphone price in Turkey. Moreover, we launched Tablet Festival to increase the number of 3G-enabled tablets and further promote mobile broadband usage.

Moving to page nine. Our mobile broadband and service revenues rose 19% to TRY701 million. This was achieved on the strength of our network and was in line with our focus on growing the non-voice business through innovation. These revenues account for 30% of Turkcell Turkey on a four percentage point year-on-year rise.

Revenues from mobile broadband and innovative services and applications were the main contributions to this increase. Mobile broadband currently accounts for the bulk of the non-voice business. This was up 39%, reaching 16% of Turkcell Turkey overall. Going forward, Turkcell will continue to lead mobile broadband in Turkey and we expect this strong trend to prevail.

Moving to page 10. Our fiber broadband business, Turkcell Superonline, sustained its growth in the third quarter. We continued to increase our city coverage to approximately 1.6 million homes, the home pass number. Meanwhile, with our focus on improving take-up rate, currently around 33%, we increased our FTTH subscriber number by 147,000 to 521,000.

During the quarter, we continued to focus on more profitable residential and corporate segments. The resident segment grew by 56% on the back of continued subscriber additions. Its share in total rose by seven percentage points to 36%. Meanwhile, the corporate segment successfully grew 37%.

Moving to page 11. In the third quarter, our subsidiary in the Ukraine, Astelit, its strong execution brought sustained operational success. Astelit recorded net subscriber additions of approximately 1.2 million year-on-year and increased its three-month active subscriber base to 9.4 million, while ARPU was at $4.60. With its regional growth strategy and healthy rise in subscriber base, Astelit continued to build on its revenue market share of around 14%, remaining focused on profitability.

Astelit's strong performance also continued on the data front. The share of mobile internet revenues continued to rise to 12% of the total in the first nine months, while smartphone penetration rose to 24%.

Thank you. And now I will hand over to Murat for the financial review.

In the third quarter of 2013, Group revenues rose by 8% year-on-year to TRY3 billion. As highlighted, Turkcell's mobile business in Turkey posted revenue growth of 3% and subsidiaries grew their revenues by 36%. Consolidated EBITDA in nominal terms climbed 11%, mainly on strong top-line growth, while the margin was up by one percentage point.

In nominal terms, TRY228 million increase in revenues was partially offset by TRY45 million rise in direct cost of revenues, TRY23 million increase in G&A expenses, and TRY56 million rise in S&M expenses.

Now, moving on to page 14. Group net income grew by 22% to TRY699 million, while the EBITDA rise was the key driver. Yet, this improvement in EBITDA was partially offset by TRY45 million higher depreciation and amortization expenses.

The improvement in EBIT and greater net impact of Fintur were partially offset by a monetary loss of TRY17 million and TRY31 million higher tax expense. The improvement in other income was mainly attributable to the absence of TRY72 million impairment in A-Tel recorded in the third quarter of last year.

I will now talk about our balance sheet and cash flow items on the following slide. Our financial position remains strong, with TRY7.7 billion cash on our balance sheet and a net cash position of TRY4.5 billion as of the end of September. In addition to a strong rise in EBITDA, increasing interest income due to higher interest rate environment in the third quarter were the main reasons of the rise in our balance sheet -- in our cash balance.

Our consolidated debt was TRY3.2 billion. As of third quarter, the debt balance of our Ukraine operations was at TRY1.3 billion, Belarus at TRY1.1 billion, and the Turkcell Superonline at TRY639 million. In this quarter, CapEx was a major cash flow item.

Of the total CapEx figure of TRY449 million, TRY232 million was related to Turkcell Turkey, TRY95 million to Turkcell Superonline, and TRY122 million to the other subscribers. Thank you.

Thank you, Murat. Kevin, at this time we are ready to open the session for questions, please.

Thank you, sir. (Operator Instructions). The first question comes from San Dhillon. Please go ahead.

Hi, guys. Two question, if I may. Firstly, on postpaid (technical difficulty) net additions in Turkcell Turkey, these seem to have slowed, it's essentially nil in the quarter. Anything in particular that drove this? And do you expect post-paid net additions to return back to more recent positive performance?

And secondly, on Superonline, having reached kind of a 1.6 million home pass footprint, I guess what is your target home pass going forward in the future and how can we expect Superonline CapEx to trend as a percentage of sales going forward? Thank you.

Hi, it's Murat. Regarding post-paid net adds, yes, you're right, we have recorded a lower post-paid net add in Q3 than the earlier quarters. This was mainly due to the decreasing switches from pre-paid to post-paid, and we have taken some actions to increase our post-paid net add again. So, we'll -- in Q4, we are aiming at a better number than Q3.

Okay. On the Superonline side, it is true that our development of our home pass base has slowed down and we are really waiting for certain direction from Minister of Communication about the fiber rollout strategy in Turkey and we will consider and update our rollout plans accordingly. So, at this point, I cannot give you more details on the future home pass plans.

Okay, not a problem. Thank you very much.

The second part of the question was actually CapEx. Let's respond to that quickly. This year, actually, the CapEx investment for Superonline is approximately TRY350 million, and it's safe to assume similar levels going forward and possibly some decline. But, as Mr. Ciliv said, we're going to need some clarifications for that. Thank you.

Thank you. The next question comes from Torsten Achtmann. Please go ahead.

Good afternoon. First, on your EBITDA margin for the Group. The margin has, on the year-on-year basis, nicely been trending up every quarter. Is that sustainable? And is it that the -- and can that continue as the smaller subsidiaries grow in share in that margin growth and Turkey remains stable?

And secondly, on your smartphone customers, on the early ones, do you see them already moving to higher packages so that you have positive trend here in terms of up-selling to higher data packages? Thank you.

Okay. You want to start with the second answer, please?

It's Murat. We are seeing an upward move towards higher packages for our smartphone users, and this is mainly driven by the usage increase of the existing users.

Responding to the first question, about the EBITDA trend, I think it is reasonable to think, as we have given a guidance and we said that we will be at the upper range of the guidance, you more or less can assume the growth rates and the margin for also year-end as well as Q4. I think Q4, for this year, is a low quarter, as you know, and the margin and the growth is going to be, for that reason, lower. It's a seasonably low quarter.

And there's also a fragile environment, as we referred to, this competitive environment continues, but this is what we expect for this year. I think it is little too soon to talk about next year, but we will be updating you on the next year guidance, I think, in the next coming months.

But I would like to add that I think your comments were appropriate, I think. While we continue to grow our business in mobile operations in Turkey and also focus on costs, expenses and efficiency and productivity, we are seeing that our other subsidies and businesses, they have improving EBITDA margins, and that is contributing to the Group's EBITDA margin performance.

Great. Thank you.

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

Hello. This is Dalibor from Citi. Just two questions, if I may. I'm just really interested in this fiber situation, and wonder if there's any way you can elaborate on the government policy and what (technical difficulty) and how that impacts the Company. And I'm just wondering if this is just a policy still that the government may be exercising some influence to the board, or what is the mechanism how the government can determine your [fronts] in fiber?

And my second question is in the mobile market, as you said, the situation of late depending if it's branch out from competitive standpoint?

Okay, first we will take the first fiber question. Basically, [up to date], for the last five years, Turkcell was working with the municipalities. And we were negotiating separately with almost every municipality for rights to dig and lay fiber. And we were negotiating about cost of this construction work and also access rights.

And obviously, there are close to 2,000 municipalities in Turkey, so there are a lot of municipalities, and this was very challenging. And Minister of Communication took action to regulate this and regulate the permitting process and also the pricing process. So, I think I see this as a positive move.

And there are also regulations coming from ICTA about opening up Turkish telecoms, what is the [docks] and what will be the appropriate pricing for the other companies to use those docks. So, this is, I think, an area we think a national policy for increasing the penetration of fiber is very much the right thing to do and it will make it easier for us to invest at appropriate levels.

Okay, thank you very much. I'm sorry I had some problems with my phone. (inaudible)?

Can you repeat the second part of question?

Yes, sure. It's about competition. And you pointed that the market conditions in the mobile market is becoming a little bit more fragile. And I'm just wondering, given all this regulations which are in place, which are constraining Turkcell, what will happen if a scenario of more aggressive competition evolves and would have long terms?

Would you be -- how would you be able to defend your market share or your business or what -- can you just highlight what, in that scenario, what we may expect?

First of all, I want to kind of summarize 2013 a little bit. The year started with really sharp price discounting, but then I think this market became a little bit more rational and we saw some price increases. I think there are three companies, and a lot expected from us for the future of Turkey.

I think internet, mobile internet, fiber internet, and all of the services -- education, health -- and many other really critical business applications that run on this network, and data traffic in Turkey per person increased 54 times since the start of 3G. Per person, the consumption increased 54 times. But also, number of people increased substantially.

So, we are seeing really sharp increase in traffic. And to meet the demand and speed requirements of the future, telecommunication industry will need to invest, and investing is expensive. So, I think to all of the mobile operators it is becoming clear that a rationality is really important for everybody, not only for the companies, but also for the consumers.

And we have seen some in other markets when unlimited packages and not appropriate pricing created chaos in those markets. Customer dissatisfaction rose and then the companies suffered in profitability and that hurt investment. And this is a negative, vicious cycle going in the wrong direction.

So, I hope that now all mobile [3] operators, they have experienced management teams in place. I think we know that for the long-term success we need to be careful about pricing of these services. Otherwise, certain companies may fall into trouble. So, this is why I was encouraged by the rationality in the second half of the year and I expect and I hope that this will continue. It is the rational thing to do.

But if there is, for some unforeseen reason, there is irrational behavior and attack on our customers, we are here in a business customers come first and I will do everything possible and our team will do everything possible to protect our customers. If you don't have customers, you don't have a business. So, it is our attitude.

We, at the same time, are -- and we have significantly increased our focus on customer segmentation. So, we have 35 million customers in Turkey and we have millions of customers in other countries as well. In all of these markets by segment and by locality, we are getting closer to our customers. And through fiber and mobile technologies, through mobile broadband and mobile services, and through new products and services, through innovation, we are focused on delivering solutions, value. And that differentiates Turkcell through its quality and speed.

So, in summary, yes, people may attack, but the intent to defend our customer base with very high intensity, we'll do that through our quality and innovation of our products and services. If it is necessary, it will come to price, we will match the price to the best of our ability. So, I hope you understood -- I hope you got my response. It was a long-winded one, but I think it's an important area.

Thank you very much. I really appreciate it. Thank you.

Thank you. The next question comes from Ivan Kim. Please go ahead.

Yes, good afternoon. Two questions from my side, please. So, one is on the natural (inaudible) by Vodafone, so basically after the group got more cash. Do you think -- do you see them investing more into 3G network or not yet? And generally, what do you think your kind of targets for 2014? Is more on the network investment side or anything else?

And then secondly, you indeed answered -- gave a good, long answer on the competition, but I was just curious whether you see the room for price increases in the market, basically similar to what happened in May and June? So, you think that 2014, for example, will be a good year in terms of pricing? Thank you.

Okay. The first part was about Vodafone and the money (inaudible) from Verizon or they will receive. So, I think, really, I don't want to comment too much on what Vodafone is going to do. They will do what is right for their business. But, we have very, very strong companies like Global Tower and we also have Superonline.

We have invested a lot to these companies. They have great fiber networks that we can offer to whoever wants to invest. I think we can probably offer higher return on investment, building a new fiber network versus sharing our network.

So, if they want to invest, I think, our Global Tower company and Superonline --. By the way, both of these companies are providing services to other operators. So, these companies are run by good leaders and they want to serve not only to Turkcell but fairly objectively open it to all of their customers. So, we will extend this opportunity to them.

The second part of your question was about price increase in the market. Murat, do you want to comment on it?

Yes, sure. We have made price adjustments in Q2 and Q3 [when it will be solid] potential based on the competitive situation and the value that we provide to the customer. So we will continue to do the same in the forthcoming quarters as well. Whenever the competitive situation is appropriate, we will look for opportunities in making price adjustments. But, of course, the competitive situation will be a very important determinant of those moves.

Thank you.

This Koray again. I want to chime on this question as well. I think when we look at the world markets, we are looking at what's happening in the United States, and I think what Verizon and AT&T have done by leading that market, where they are charging a fair price for data, I think, is a very good example.

And that market, about five years ago, was in deep trouble because unlimited offers in data accompanying the voice offers, voice pricing had led to a situation where data traffic demand was increasing so fast and the network was not handling it, so everybody was losing. Customers were really unhappy with the service and also companies were losing money and not having enough money to invest. But they changed that position by being careful and charging a fair price for data.

I think the Turkish market, in my opinion, has significant room to grow in charging a fair price, especially in data. We are still in the market where some of our competition is still offering data, in my opinion, below cost prices. And I think for everybody's benefit I think the market needs to make some moves in improving data pricing.

So, on behalf of Turkcell, we are very careful about doing value pricing, as I mentioned in my opening remarks, and we pay a lot of attention to data traffic growth and pricing and we will make necessary adjustments so that we are getting ready for the future of this business, which is going to be all data, and we need to monetize data appropriately. As I mentioned also, our markets need a lot of investments, so the return on investment projects need to be there to make those investments.

So, we will -- we have been, by the way, we have been careful about data pricing and we will continue to be careful about value pricing for data. Because that is the future of our business and we should not risk the future.

Thank you very much.

Thank you. The next question comes from [Claray Kinent]. Please go ahead.

Thank you for the presentation. A quick question on the 4G license. Do you have an expectation on the timing of the tender? And if you can possibly comment on the potential impact of a possible power-sharing structure. Thank you.

I think right now 2015 seems to me like a reasonable time to expect LTE launches. And our Minister, Binali Yildirim, the Minister of Communications, has already made a comment that towards the end of 2014 they may issue additional frequencies. So, on Turkcell side, we are very anxiously waiting for these developments.

And, as I mentioned, our Global Tower company is very open to sharing sites with other mobile operators and other companies as well. But sharing power is different than sharing network, so I am talking about sharing power at this point.

I know that some people are also talking about more complex sharing arrangements, and we'll see what technology developments bring in that area. But I think whatever the system is, the system, number one, needs to be technically very sound, that is providing mission-critical service to all of the operators. But also, it needs to have the right business model because, as you know, this market -- this business requires a lot of investment. So, it needs to have a business model that encourages investments.

Thank you very much.

Thank you. (Operator Instructions). The next question comes from [Melda Agedas]. Please go ahead.

Hello. Thanks for taking the questions. I've got two, please. First one is regarding the subscriber gain. I see in the third quarter you have recorded a strong sub gain, which surprised the estimates in a strong way. I was wondering what was the key driver for that, other than seasonality?

And also, if it's possible you can share all of breakdown of what portion of this gain comes from mobile phone subscriber and what portion comes from [machines], let's say, (inaudible) corporate.

And my second question is regarding the working capital. I see base trade receivables increase in (inaudible) in the second quarter and in the third quarter as well, and I'm assuming that this is related to the mission sales on contracts. If this is the case, should we expect it to be high like this going forward? Thank you.

Hi. Let me answer the first question. As you mentioned, the seasonality is a very strong driver of the net add in Q3 due to the people coming from abroad for summer to Turkey. But other than that, the more rational competition on the net adds and also some of the actions that we have taken in Q2 to increase customer experience and customer satisfaction as well as the retention activities started to pay out in Q3. So it's the combined effect of these actions as well as the very strong seasonality impact.

I cannot comment on the distribution of the net adds in terms of the corporate and consumers, but the pre-paid and post-paid split is already in the documents.

Hi, Melda. Regarding your second question, on the working capital needs of the Company, we also have the corporate tax payment, so you should consider that one as well. But you are right, the contracted handset sales is the main driver which increases our working capital use. And considering also the mobile smartphone penetration is just at 26% level, there is still room to go.

So we will -- anticipating that we will have accumulation in our receives and increased needs for our working capital needs. Okay?

Okay, thanks a lot.

Thank you. The next question comes from [Kevo Booker]. Please go ahead.

Hi. I had a question on Ukraine. Subscriber growth in the third quarter was phenomenal. If you could just comment what's happening there. And on your data strategy in Ukraine, at what stage your data capacities, we understand that there might be some issues going forward, do you have enough frequencies to run, let's say, advanced technologies like LTE in 1800 or you need to wait for the LTE tender in Ukraine? What is the overall strategy [for late in] Ukraine? Thank you.

On Ukraine, we do have obviously some frequencies on the 900 and 1800 bands. Ukraine still is a 2G market, it doesn't have 3G. So, today we are talking, we are thinking, and we are discussing our strategies for the future, but it is very much a work in progress. So, we are committed to the Ukrainian market and we have strong partners and we hope to improve our partnership and continue to develop our Company in the Ukraine.

And Turkcell has a lot of innovation and a lot of knowledge and experience in the mobile and mobile services. We want to take this experience to the Ukrainian customers, Ukrainian market, and I think having 3G or LTE will be important. So, as I mentioned, it is very much a work in progress, but there is not details I can give you at this time.

But we are committed to the Ukrainian market and we are committed to delivering state-of-the-art, high-technology solutions, mobile services to our customers and we are committed to growing our Company with our partners.

Could you elaborate on the competitive situation in Ukraine a little bit? Thank you.

The Ukrainian market was very heavy price competition and there was a lot of free on-net offers. And actually, our Company was involved in maybe starting some of these price wars. But in the last four years we changed our strategy to be a value Company and we've implemented a strategy called regional strategy.

So, instead of going after all of Ukraine at once, we prioritized regions based on our network quality messaging, our customers, our partners, and this strategy is about focusing on the customers in that region and delivering a quality service to those people.

And we also were willing to say goodbye to customers who were just getting a free ride. And three years ago we even had a drop in our customer base. But we controlled our expenses, and from that point on we have been growing nicely in revenues and also in EBITDA and the Company has turned EBIT positive as well.

So, four years ago, if I remember correctly, we had negative EBITDA margin and now we have reached 31% EBITDA margin and we added 1.2 million new net adds in the last year. So, I am starting to see that competition, which was very involved in this free on-net offers, they are also getting a little bit tired of that strategy and the pain that comes with it. So, that market is also, I think, there are some moves of rationality and improving -- improvement in pricing in the market as well.

So, it's an interesting market. I think how we get 3G or LTE will be interesting.

Thank you.

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

Would you like to raise a point? Okay, at this point, then, we will close the session. However, I'd like to hand it over to Mr. Ciliv for his last comments.

In Turkcell, we try to simplify our business and we think Turkcell is a team, with our board members, with our management team, with our employees, and with our business partners and, most importantly, with our customers on the corporate side and on the consumer side.

We are very much into teaming. We have a long-term view. We have a very -- we are very excited about mobile technologies and other technologies like cloud computing, machine-to-machine, mobile services in education, mobile services in finance, mobile services in health, in all of these areas. How these technologies can have a positive impact on people.

So, we are very excited as a team. And our employees and our partners, they have a lot of passion to use technology to make a positive difference for people that we serve.

And years ago we said we are going to improve our customer focus through the segmentation and also going to regions and having regional focus. And then, we made investments into software, in Turkcell Technology. We invested in fiber-optic Superonline when in the world it was cool to be pure mobile. So then, everybody was only focusing on being pure mobile; we saw that fiber backbone would be very critical to mobile broadband services.

We are more excited than ever about what these technologies can do for people around the world. And as a result of this, the right vision and the willingness to invest, knowledge, experience and, most important, the teamwork, I think Turkcell is being successful over years, quarter-after-quarter. And I am very happy, on behalf of the Turkcell team, that we had a lot of record performances this quarter, record revenues, record EBITDA, our highest in our history.

And I want to thank you guys as well as investors, as analysts, you have been very supportive of us. You have -- we had very nice dialogue with you. We appreciate that.

And I want to thank all of the employees of Turkcell, all of the partners of Turkcell, our board members, past and present, and I think the whole Turkcell team is still focused on improving. We are happy about our success, but I think we also feel that we have a lot of areas we can improve on. So, I want to thank all of you and have a good day.

Okay, thank you again. And please remember that for future review an audio recording of this conference will be available to you. And please call the IR team and myself for any questions you may have in the near future. Thank you. Bye-bye.

Thank you. This concludes the third quarter 2013 results announcement conference call. Thank you for participating. You may now disconnect.