Turkcell Iletisim Hizmetleri AS (TKC) 2013 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Turkcell fourth quarter 2013 results announcement conference call on Thursday, 20th of February, 2014.

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 very much, Kristen. I'd like to say thank you to all participants for participating to our call.

Just like to pass a quick notice. This presentation may contain statements that are forward-looking. These statements are based on current expectations 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 nonfinancial data is unconsolidated unless otherwise specified.

Now, we'd like to start with the presentation with Mr. Ciliv.

Good morning, good afternoon, and welcome to Turkcell's results call for the fourth quarter and full-year 2013.

Our group revenues grew by 9% to TRY11.4 billion, while we recorded EBITDA of TRY3.5 billion on 9% year-on-year growth.

We are pleased to meet our guidance through growth in mobile broadband and our subsidiaries.

2013 was a tough year due to price competition and regulatory changes, which particularly impacted our financial performance in Q4 2013. We saw the lowest growth.

For the full year, excluding the MTR cut and one-off impact of TRY229 million, our revenues again posted double-digit growth, rising 11%.

Our net income rose to TRY2.3 billion on strong operational performance. Net impact was impacted by various one-off items, which Murat will discuss in detail later.

Moving onto page five, our major business lines delivered solid performance in 2013. Our core business Turkcell Turkey continued to perform well with 5% growth in both top line and EBITDA.

Please note that, excluding the MTR cut and one-off impacts, revenue growth would have been 7%.

Our fiber broadband business Turkcell Superonline sustained its performance on 35% year-on-year revenue growth, while the EBITDA margin rose by almost 5 percentage points, and EBIT grew threefold.

Astelit delivered 19% top-line growth and a 30.5% EBITDA margin on a 2.3 percentage points rise. It also registered a positive EBIT for the first time on a full-year basis.

Going forward, I expect Turkcell Turkey to sustain its healthy growth, while Turkcell Superonline and Astelit profitably increase in scale.

Moving to page six, now, I talk about our growth drivers of 2013. Turkcell Turkey's voice revenues were flat year on year, mainly due to mobile termination rate cuts. Excluding this impact, they grew 4% for the year.

Mobile broadband revenues remained a key growth driver, rising 38% year on year to TRY1.4 billion. We welcome the increasing contribution of our subsidiaries to the top line, which rose 28%, mostly driven by Turkcell Superonline and Astelit.

Overall, our performance confirms that our passion for creating value for our customers and efforts to differentiate Turkcell are paying off.

Moving to page seven, as highlighted, 2013 was a tough year in terms of competition and regulation. The mobile markets remained competitive throughout the year. For the fourth quarter, the pricing environment worsened quarter on quarter. And thus far, this trend has intensified.

Despite this challenging environment, we remain the clear market leader through our continued focus on superior customer experience.

On the regulatory front, in 2013, all three operators saw a total negative impact of nearly TRY600 million on revenue growth due to the MTR cuts. Excluding this impact, mobile market growth would have been at least 10% instead of 7% year on year.

Moving to page eight, in this environment, we prioritize customer needs and remain committed to defending our valuable customer base. Our total subscriber base continued to grow during the year to 35.2 million.

We continued to improve our postpaid base with around 849,000 net additions due to increased data subscriptions, switches from prepaid, and our contracting efforts.

Blended ARPU rose by 4% yearly, driven by a positive subscriber mix and continued pickup in data usage despite the MTR cut impact. Meanwhile, MoU posted 7% year-on-year growth.

Page nine, by the end of 2013, the number of smartphones on our network had reached 9.6 million with a record net addition of 3.3 million. Penetration rose a remarkable 11 percentage points to 30%, still underlying great potential.

As part of our vision of spreading mobile broadband usage and providing equal opportunities in information access, we acknowledge the importance of affordable smartphones.

With this in mind, we initiated the T-series smartphones four years ago. And in 2013, we took the further step of launching the first domestically designed and produced model, the T40. It provides high-tech features at half the average price of a smartphone in Turkey.\

The strong rising smartphone penetration is the key factor driving mobile data usage per user, which has risen 65-fold since the launch of 3G in Turkey. We position ourselves to capitalize on this booming demand while aiming to sustain momentum in smartphone penetration.

Moving to page 10, our ultimate goal is to create value for our customers and differentiate Turkcell through our knowledge, innovation, technology investments, hard work, and teamwork.

With our nationwide mobile broadband speed of 43.2 megabits and fiber broadband speed of 1,000 megabits, 1 gigabit, we have eased access to information and been a global pioneer on several fronts. We invested TRY1.8 billion in 2013 to strengthen our position.

Meanwhile, the latest technology products and services for the needs of all segments and the Turkcell-branded smartphones have contributed greater value to both our customers and the economy.

Recently, we took the further step of creating additional Turkcell Academy in collaboration with leading educational institutions. The Turkcell superior network platform is possible to access information from everywhere at any time.

In addition, we've continued our investments in our channel and call center to sustain seamless customer service. We aim to further differentiate ourselves for the benefit of our valuable customers.

Moving to page 11, our mobile broadband and the service revenues reached almost one-third of the total on a 17% rise for the full year and 12% for Q4 2013 year on year.

Of these non-voice revenues, mobile broadband at 54% remained a key growth driver on the strong rise in smartphone penetration. Our mobile broadband business rose 34% in the fourth quarter and 38% for the year. We expect this rising trend to continue in parallel to increase customer demand for data and our efforts to boost smartphone penetration.

Moving to page 12, Turkcell Superonline is an important component of our growth, having exceeded our expectations. In 2013, Turkcell Superonline had 570,000 fiber customers on a net rise of 145,000.

Meanwhile, we continued to increase our in-city coverage to over 1.7 million homes. Parallel to our growth targets, we are set to increase our strategic investments in the fiber business by adding a further two cities, reaching 14 in 2014.

Over the past three years, Turkcell Superonline has doubled its revenue contribution and achieved faster profitability growth.

With each passing day, Turkcell Superonline standalone financial strength is rising. This confirms our profitable business model of niche investments and solid execution that increases its added value to the Group.

Page 13, our Ukraine operations region focused strategy and execution continued to deliver on our targets. We are delighted with our sales performance in both the top line and operational profitability over the past three years.

With its regional growth strategy and a healthy 1.2 million net rise in its active subscriber base, Astelit continued to build on its revenue and subscriber market shares, which have risen by almost 3 percentage points over the past three years.

In 2014, we aim to continue our growth by minimizing the potential negative impact of macroeconomic challenges.

Obviously, we are very concerned about the latest developments in Ukraine, where close to 50 people have died. Our company is a Ukrainian company. And we see our company as a part of the Ukrainian community. And we hope the turbulence stops as soon as possible.

Moving to page 14, looking ahead, we expect to maintain profitable growth. This will stem from our strategic focus on superior customer experience, operational excellence, and productivity, as well as voice and Internet business, new products and services, and our subsidiaries.

For 2014, the macroeconomic challenges may continue in our countries of operation and globally. Meanwhile, we expect aggressive competition to prevail, yet the target group revenues in the range of TRY12 billion to TRY12.2 billion and EBITDA in the range of TRY3.7 billion to TRY3.8 billion.

Parallel to our growth plans, we will increase investments in our mobile and fiber infrastructure, including network modernization for future technologies. Therefore, we expect an operational group CapEx-to-sales ratio around 17% in 2014.

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

Thank you. Good morning and good afternoon to all participants. I will now talk in more detail about our financial results.

As highlighted, Q4 revenues were impacted overall by the MTR cuts and one-off impact of a reimbursement totaling to around TRY128 million.

The decline in voice revenues was offset by 12% growth in mobile broadband and services and 25% rise in subsidiaries contribution.

For the full year, growth in group revenues was attributed to 17% of mobile broadband and services and 28% growth in subsidiaries revenues. As a result, subsidiaries contribution to the top line rose to 20% from 17% a year ago.

Moving onto page 17, in the fourth quarter, EBITDA was at TRY851 million, while the EBITDA margin declined by 0.7 percentage points.

This stems from the higher revenue, which were partially offset by higher G&A and selling and marketing expenses.

I shall note that, excluding the one-off impact of provision for reimbursement to subscribers regarding the regulatory body ICTA's decision on one of our tariffs in the past, the margin was flat year on year.

For the full year, consolidated EBITDA rose by 9% to TRY3.5 billion, while the EBITDA margin was slightly up 0.2 percentage points to 31.1%.

In nominal terms, a TRY901 million rise in revenues was partially offset by a higher direct cost of revenues as well as G&A and S&M expenses.

The increase in direct cost of revenues was mainly due to higher network-related costs and higher treasury share expense, stemming from increasing revenues of the Turkcell Turkey business.

Let me move onto page number 18. In the fourth quarter, group net income grew by 10%, resulting mainly from the higher net finance income and contribution from unconsolidated investees, which was offset by lower EBIT of TRY82 million, including the BeST impairment of TRY61 million.

Net income was additional impacted by several other one-off impacts, including the aforementioned ICTA decision on one of our tariffs, resulting in a penalty plus the reimbursement totaling 400 -- TRY41 million.

Excluding the one-off items, group net income would have been TRY626 million, corresponding to an 11% year-on-year growth.

In year 2013, group net income grew by 12% to TRY2.3 billion on higher EBIT of TRY120 million, higher net finance income, and higher contribution from (inaudible) investees. Without one-off items, group net income would have been TRY2.5 billion.

Moving onto final page, our financial position remains strong with TRY4.8 billion of net cash on our balance sheet, while our consolidated debt rose to TRY3.3 billion due to FX valuation.

For the year, the major cash outflow items were primarily CapEx, corporate tax payments, and debt repayments.

We set a balanced FX, cash, and debt position, which leaves us in general resistant to major economic volatilities. Accordingly, of the total FX debt, 72% belongs to two international operations of the Group.

Meanwhile, in Turkey, our FX cash balance is higher than our FX debt, which covers the currency risk for our local operations.

Please note that, in 2013, operational CapEx as a percentage of revenues was around 15%, and 17% is expected for year 2014.

This brings our introductory presentation to an end. Thank you very much.

Kristen, at this point, we can, please, start the Q&A session.

Thank you, sir. (Operator Instructions). Thank you. Our first question comes from Cesar Tiron from Morgan Stanley. Please go ahead with your question.

Yes, hi. I have two questions, please. First, I'd like to understand, what does your EBITDA guidance implies for mobile pricing in Turkey? So, to be really precise, did you assume that pricing does not deteriorate further from what we are seeing in December and January this year, which is probably still a little bit better than 2Q 2013, or do you think we reach pricing levels seen in April or May 2013 or even go below those levels?

And my second question would be on your CapEx increase. You actually said that this is mainly driven by investment in new generation networks. But, can you a little bit elaborate on that, as I believe there is no plan to award LTE licenses in Turkey before the end of 2015, and maybe also tell us how much of that CapEx will go into Superonline? Thank you so much.

Hi. It's Murat. Just a quick overview on how we see the competitive situation, we see that, especially starting of this year, the market got as aggressive -- at least as aggressive as it was in 2013, Q1 2013.

In our business plan, we had -- we assumed a certain level of aggressiveness. And we are seeing it happening as a -- it is difficult to foresee how it will go further, but our assumption is it will not go further down from the prices we see in Q1 2014. So, we will see aggressive competition in the rest of the year along the price levels of Q1.

But, to -- just to follow up on that, did you -- so, did you -- you did not assume that competition will be worse than in 2013 in your guidance. Is that correct?

2013 was a mixed year. So, in terms of the total year, the answer might not be right.

Q1 -- so, let me rephrase then. Not worse than Q1 and April 2013.

Yes, that's correct.

Okay.

Okay. On the CapEx side, this CapEx investment includes close to TRY440 million for Superonline. We do -- during the year, we sometimes make adjustments to shorten CapEx investments. And we may negotiate better pricing and improve some of these CapEx costs. And we may make some allocations from one business to another. This is our plan.

And it does include modernization of our network to get ready for LTE. It also includes obviously capacity increase. As we have mentioned, in the last four years, data traffic has increased sharply.

Before 3G data -- compared to the quarters before 3G, data traffic has increased 158 times. And per person data consumption has increased 65 times.

As a result, we plan to continue our quality -- high quality of service levels. As a result, we are planning to make the investments. You want to make a comment?

This is Murat speaking. Regarding your question about the Superonline portion on the total CapEx side, the overall 20% can be attributable to the overall and the remaining 20% for the international and other business. And the remaining 60% can be reserved for the mobile operations in Turkey.

And is there any of those items that is increasing more than the others? Are you allocating more to Turkey than last year, for example?

Yes, slightly, especially this year, including the modernization issues. The Turkey is going to be much more accumulating CapEx needs. So, we are accumulating more under the CapEx for Turkey.

Thank you very much.

Thank you. Our next question comes from San Dhillon from Barclays. Please go ahead with your question.

Thank you. Two questions if I may. What are your targets for smartphone penetration in Turkey at the end of 2014? And what percentage of revenues do you think will come from mobile broadband by the end of 2014?

And secondly, if you exclude the impact of one-off and MTRs, the growth in Turkcell Turkey was 3.5% I believe in 4Q, which is quite a little bit lower than you have been doing on an underlying basis. And do you expect trends to recover from these levels? I guess your guidance implies there is some recovery in 2014, or is it very much from subsidiary growth you expect to get the Group growth to 47%? Thank you.

On the smartphone penetration, last year, we grew by 11, 12 percentage points to 30%.

And by the way, our smartphone definition is much tighter than our competition. We are counting real smartphones versus sometimes other competitors are counting all 3G phones, even if they are not smart Internet browser phones, smartphones.

So, ours is a pretty tight definition, where you need to have a good mobile Internet experience. You need to have -- you need to be able to download apps from application stores and also have a QWERTY keyboard. And also, this has to be a 3G phone.

We expect -- we initially planned to be north of 45%. But, due to certain changes in the economic condition and also the credit availability for these phones, installments for these phones, we think it -- we may be down to 43%, 42%. So, I expect minimum a 12% increase in smartphone penetration.

Thank you, sir. Does that answer your question?

That's great. The second question, which was to do with the growth in Turkcell Turkey, think on an underlying basis it's 3.5% in 4Q. And specifically, for that division, do we expect to improve from the 4Q levels throughout 2014 to stay flat? Some color on that would be great.

Okay. For Turkcell Turkey, obviously, we have main components, voice, mobile broadband, and mobile services. We will target to keep our -- to improve on the Q4 performance. And I think we can. Obviously, it depends a little bit on the competition tactics as well.

But, our targets will be to have -- to be close to flat on voice revenue. But, for us, we are long-term players. And we look at customers as our main asset. So, if necessary, we are willing to take whatever competitive action is required to keep our customer base.

So, this may increase our -- this may make us more aggressive in pricing. And as a result, we could see down to Q4 levels for voice.

But, on the mobile broadband side, last year, we had about 38% growth. This year, we think we will be north of for sure 30%. We will try to target to be higher than that. And this will depend obviously on the smartphone penetration. And we are also making a push for the mobile services as well. So, these are the three components.

During the year, market dynamics change. We wanted to put a conservative target guidance. And we will make necessary marketing moves to reach our target.

Okay. Great. Thank you very much.

Thank you. Our next question comes from Herve Drouet from HSBC. Please go ahead with your question.

Yes, good afternoon. My first question is regarding CapEx and increase of CapEx. I was wondering how much of the increase of CapEx could potentially due to currency. I believe a quite significant part of the CapEx is FX. So, I was wondering, out of that, what you have assumed on the currency front.

And the second question is the -- again, you are quite positive on the uptake on mobile broadband, especially in the business segment. What do you think could support that from your perspective? Do you think there is increasingly more demand from this segment, which is currently not served? What is the driver behind it you think that will propel this demand? Thank you.

Okay. On CapEx increase, we gave our guidance for CapEx in Turkish lira. So, this -- we tried to take into account all of the foreign currency changes. So, we'll try to stay under this limit.

And obviously, there's a little bit -- this higher CapEx invest is made with the assumption that our data traffic is increasing. The mobile voice traffic is increasing. And there is need to increase this capacity that is demanded by our customers.

So, we are not planning to have additional increase in CapEx due to foreign currency. Our guidance is in Turkish lira.

Okay. Okay.

And on second part -- do you have a question on the -- about the first?

Yes, it's just -- so, I understand that you control basically the CapEx spending. I was just wondering, out of this increase, as percentage of sales of your CapEx, if maybe a bit of part of it is because of Turkish lira weakness. I understand that you give the -- you give it in Turkish lira. But, I was wondering if you have already factored in some Turkish lira currency weakness already. And that makes playing a part of this increase as CapEx to sales.

Yes, we have already calculated foreign currency exchanges into our calculations.

Okay.

And some of these CapEx investments are also for -- in Turkish lira local servicing for the CapEx installations.

Yes.

Okay. Second question.

Regarding the second question, we are foreseeing mainly three drivers for the mobile broadband business. One is, as we mentioned, we still expect a growth on the smartphone penetration and smartphone base. That's the biggest driver.

And then, from the existing base, we see more demand for people to connect to Internet when they are mobile. So, we see an opportunity to upsell those people for larger consumption.

And the third one is the people who have not used mobile Internet yet. We still have people who have not connected Internet when they're mobile. We will also have programs to drive the first-time users to become mobile Internet users. So, those are the three main drivers we're counting on.

I want to add to that. Also, I don't know if you really caught this. But, last month, we announced Turkcell Academy, which is our digital online learning site where we offer Khan Academy to Turkish people, seven to 70, learning math or other basic science or other educational material on short videos in Turkish. We offer this content.

And we also offer for professionals and also young people, university students, online business educational content. And this is exclusive to Turkcell customers.

So, we are not only laying one of the best network mobile network platforms supported by a fiber backbone, but we are also providing content for people to consume.

And I think, in addition to all this educational content, we have music content, and we have Turkcell TV Plus that is coming. And all of these -- this content, mostly 75%, 80% in video, will drive the consumption of data. And it will fuel our mobile Internet revenues.

Right. And if we can just be maybe a bit more precise, out of those three groups you highlighted, increase of the smartphone base, the upsell, and the new type of usage, which one you think this year in 2014 will be the biggest driver where you think you will get more the growth? Will it be more coming from the smartphone base increasing? Will it be more on the upsell side, or it's just on new usage on the data traffic? I try to get a bit of which part you think is going to be the most important for you, or is it equal, or try to get a bit of a breakdown where you think you know the growth is going to come.

I think number one engine will be smartphone penetration, increase in smartphone penetration. And the prices of smartphones are coming down sharply in Turkey as well. And the screens are getting bigger. So, this is -- I think 2014 will be an important year where we will make significant progress in smartphone penetration.

But, also, we will see I think more upgrades from smaller packages to larger packages as well.

All right. Okay. Okay. Thank you.

Thank you. Our next question comes from Torsten Achtmann from JPMorgan. Please go ahead with your question.

Good afternoon. First of all, could you indicate where you see most of the price aggression so far? Is it voice-only related, or do you see it spilling over in the data side -- on the data side as well, so a bit more color if possible please?

And secondly, on Superonline, I think you mentioned that you are going to invest more into Superonline. And it seemed previously you thought you had built out the network. So, what has changed? Where do you see the big opportunity there? And is it mainly converting customers, or do you also expect to connect more homes [passes]? Thank you.

Regarding the pricing side, we see the most aggressing on the bundled packages, which includes voice, data, and messaging. So, those are the packages that we have seen in Q1 that were subject to the biggest price decreases and price aggression. So, you could say not voice or data standalone, but the bundled packages that include both.

On Superonline CapEx, if you think in terms of dollars, I think the CapEx is not increasing. It's -- in dollar terms, it's flat. And we also plan to use some of this CapEx for customer installations, not necessarily the -- laying the fiber.

Okay. So, just to clarify, though, you're not -- there's not so much expansion of the network. There's much more converting more existing customers on the network and getting them paying.

No, what I was saying is, sometimes, the fiber goes to the building. And then you need to put the [modem] in place and then lay the fiber to the home. So, there is this additional expenses made to activate the subscriber.

Okay. Got it.

And that is part of the CapEx investment as well. And I think close to probably half and half. Half of it is for new home passes. And half of it is for activating customers.

Okay. Perfect. Thank you.

Thank you. (Operator Instructions). Thank you. Our next question comes from Atinc Ozkan from Credit Suisse. Please go ahead with your question.

Yes, thank you. This is Atinc from Credit Suisse. My first question is regarding your operational exposure to a macro downturn and FX devaluation in Ukraine. I know you have some FX debt. But, what's the percentage of your revenues and operating costs in Ukraine that are denominated in FX?

And my second question is actually a follow up on smartphone issue. About the regulation change in installment credit card payments related device sales, have you observed year to date any channels which from consumers, super -- electronic super stores to your own store network where you offer the long-term payment option with a contract? Thank you.

Hi. Regarding the first part, the FX in Ukraine, the 10% is the exposure for the FX-related exposure in Ukraine. And on the OpEx side, our cost base is 25%, is on the FX part. So, in total, when I sum -- need to summarize, on the revenue side, 10% of the revenue is coming from the FX and, on the cost side, 25%. The Company has around $600 million of FX exposure in Ukraine.

Okay. Second part of -- regarding second question, we think it's still early to evaluate the -- what the real impacts in the market will be on the -- regarding the regulation changing credit cards.

But, also, I think we need to stress that the more important thing for us is the total smartphone penetration and total number of smartphones entering our system rather than the channel mix. So, we'll -- it's still yet early to see the real impact on the total penetration of the regulation change.

Okay. Thank you very much. (inaudible). Thank you.

Thank you. Our next question comes from Alper Ozdemir from Oyak Securities. Please go ahead with your question.

Hi. We haven't heard about any news regarding acquisition targets since last year I guess, when you were interested in a Bulgarian company. Is it because of the evident shareholder problems, or is it because you as a management are not so eager about acquisitions? Thank you.

It is because we are not aware of great acquisition candidates. That is, it is a great buy for us.

Okay. Thank you.

Thank you, sir. We appear to have no further questions at this time. Please continue with any further points you wish to raise.

Okay. I think, before we end the call, Sureyya Ciliv will make a few comments. Will you please, sir?

As I mentioned, it was a challenging year for many parts of the world and definitely for Turkey and Ukraine. But, we have a team of our employees and our partners who believes in mobile Internet revolution, who believes in innovation, and who believes in customer segmentation and delivering specific solutions for our customers all segments.

So, I think 2014 has started with a lot of challenges. But, at the same time, we are very excited about the opportunities ahead for our company.

So, I want to thank all of our team members, our employees, our partners, our Board of Directors, our shareholders, and also our customers.

We are very excited about how mobile technologies will improve people's lives for our consumers, how it will create value for our corporate customers in all verticals. And also through machine-to-machine and optimization, it will make the world a better place, smarter homes, smarter cities, smarter everything.

So, we believe that we have the technology assets. We have the right vision and also the investment potential to reach the maximum potential that we have. So, thank you very much.

I'd just like to remind you that the audio recording of the call will be available to you for next two weeks. And please also call the IR team, myself, for follow-up questions. Thank you for participating.

Thank you, ladies and gentlemen. That concludes today's Turkcell fourth quarter 2013 results announcement conference call. Thank you for your participation. You may now disconnect.