Turkcell Iletisim Hizmetleri AS (TKC) 2014 Q2 法說會逐字稿

Good day and welcome to the second quarter 2014 results announcement. Today's conference is being recorded and at this time, I would like to turn the conference over to Nihat Narin, Director of Investor Relations. Please go ahead sir.

Thank you, Christina. Thank you for your participation. I would like to say welcome to our call on behalf of the management team here. We will start today with the presentation by our CEO, Sureyya Ciliv, and followed by CFO Murat.

Just before we start presentation, I would like to just go over a brief notice we have typically. Please remember that any statements about our future expectations are of course subject to uncertainties. Please also note that all financial data are consolidated whereas, non-financial data are unconsolidated, unless otherwise specified.

Sureyya, please go ahead sir. Thank you.

Good morning, good afternoon, and welcome to Turkcell's second quarter of 2014 results call. In this quarter, Turkcell Group revenues rose by 2% year-on-year. Consolidated EBITDA rose by 4%, while the EBITDA margin reached 31%.

In the quarter, several factors adversely impacted revenue and EBITDA. These included lower MTRs and SMS maximum price reduction compared to a year ago, continued devaluation in Ukraine and a one-off TRY26 million reimbursement.

Our net income was further impacted in both first and second quarter by FX loss, due to devaluation in -- of the Crimea and various one-off items, which our CFO, Murat Dogan Erden, will discuss in detail.

Overall for the first half of the year, Group revenues rose 4% year-on-year. In the second half, we target higher growth rates and expect to post results parallel to our full year guidance.

Moving on to next page, page 5. In the second quarter, mobile broadband in Turkcell's Superonline were the key revenue growth drivers. We saw a 3% decline in Turkcell Turkey's voice revenues, resulting from the MTR cuts and one-off reimbursement. Yet, this was compensated for by the 28% rise in mobile broadband revenues.

Messaging and mobile service revenues decreased 19%. 22% decline in SMS revenues was mainly due to falling SMS volume. It also reflected the ICTA decision to decrease the maximum SMS price by 20%.

Mobile services meanwhile were negatively impacted by several regulatory decisions. Going forward, we expect this business to positively contribute to overall growth. Turkcell Superonline sustained its strong growth momentum, rising 39% year-on-year. For other subsidiaries, the pace of growth decelerated due to the reduced Astelit contribution resulting from the FX impact.

Moving on to page 6. As highlighted, during second quarter, we observed the continued negative impact of regulatory changes on overall growth and operational KPIs. Following the implementation of regulatory changes, for the past four quarters of Turkcell Turkey's pace of growth decelerated.

Revenues declined by almost 1% year-on-year in the second quarter. Without the MTR cut and one-off impact, growth would have been 4.8%. Specifically, the increase in minimum on-net price for Turkcell also impacted competitive dynamics allowing competitors to further reduce prices causing subscriber losses for Turkcell.

In the first half, we lost more than half a million subscribers, of which 157,000 were in the second quarter. However, as always, focused on generating value and providing a differentiating customer experience, we registered 404,000 quarterly net postpaid additions. Blended ARPU slightly decreased year-on-year due to formation impacts, whereas MoU rose 4% due to increased incentives and package utilization.

Moving to page 7. In contrast to competitors' price-based strategies, raising customer focus and offering a differentiated superior experience through our network as well as innovative product and services will remain our strategy.

With the launch of the Connected Car platform, in a first for Turkey, a new application targeting small businesses and parents, we enriched customer experience. These initiatives will increase customer loyalty and are expected to contribute to mobile broadband growth.

Furthermore, to expand access to mobile broadband, we continue to promote our own branded and affordable T-series smartphones. With this vision, we launched Turkey's first operator branded 4G smartphone, the T-50. We also introduced the first operator branded wearable technology, the T-FIT, which allows health tracking.

Moving to page 8. Smartphone penetration on our network maintained its growth pace. In just 5 years since the launch of 3G, the number of smartphones has reached 10.9 million and 35% penetration, welcoming 676,000 new users for the quarter.

Smartphone users on our network tend to consume almost four times more data, generating data ARPU of approximately three times more than regular handset users. Therefore, we have been working to boost smartphone penetration through our own branded devices and contracted bundled offers.

We are pleased to note the contribution of our T-series which has sold 1.5 million units to date, thereby spreading mobile internet usage. Given the exciting untapped potential in our subscriber base, we will continue enhancing our network and differentiating ourselves through our strong distribution channel, broad device portfolio and unique mobile services.

Moving to next page, page 9. Turkcell Superonline, an important component of our business posted 39% revenue growth. EBITDA rose by 30% while the margin declined to 24.4%, due to some initial operational costs related to new long-term projects set to generate revenues in the upcoming quarters.

Turkcell Superonline including its ADSL subscribers has exceeded the 1 million subscriber milestone with the contribution of successful TV bundled campaigns in collaboration with third parties. For the quarter, Turkcell Superonline had 653,000 fiber customers with 39,000 net additions. Meanwhile, continued investment in our fiber network has raised our in-city coverage to 1.9 million homes.

During the quarter, all segments performed well. The residential segment grew by 54% as the major force boosting the topline. Meanwhile, the corporate segment rose 7% and the wholesale segment climbed 26%.

Moving to page 10. In the second quarter, continued political and macro instability and further currency depreciation in Ukraine impacted our financial performance. Revenues in dollar terms saw 26% decline, due to currency depreciation despite 7% topline growth in the local currency with rising voice and data revenues. EBITDA margin decreased to 28.9% due to currency devaluation and increased radio frequency usage fees.

On the operational front, our subscriber base continued to grow with 220,000 quarterly net additions. On the political front, while matters remain unsettled in the Crimea and Eastern Ukraine, we continue to serve our customers in these regions

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

As highlighted, in the second quarter, Group revenues rose to TRY2.9 billion. Turkcell Turkey remained almost flat due to decreased voice, SMS, and service revenues mainly on regulatory decisions and a one-off item broadly compensated by the sustained growth momentum in mobile broadband.

Meanwhile subsidiaries revenues grew by 17%, with almost all growth coming from Turkcell Superonline. Astelit made a negative quarterly contribution due to devaluation in Ukraine.

Consolidated EBITDA in nominal terms rose 4%, mainly on top line growth, while the margin rose 0.6 percentage points compared to last year. In nominal terms, the TRY68 million rise in revenues was partially offset by higher sales and marketing expenses.

Let me move on to page number 12. Group net income fell 12% year-on-year, mainly due to higher translation losses and one-off items recorded during the quarter despite higher EBITDA performance. Excluding one-off items, net income will be TRY612 million. The higher interest income recorded on time deposits and higher monetary gains were netted off by translation losses and other expenses including one-offs.

In the second quarter, TRY165 million translation loss recorded as opposed to the translation gain of TRY12 million in last year, was mainly due to translation losses recorded for Astelit, BeST and Turkcell Turkey.

One-off items included administrative fines imposed by the ministry of industry and trade regarding the service subscriptions and content sales and by the Competition Board concerning the vehicle tracking systems. They also included the reimbursement following the ICTA decision on limited usage services.

Moving on to the next slide. We had a net cash position of TRY4.5 billion as at end of June 2014 which was not changed materially quarter-on-quarter.

Our consolidated debt is at TRY3.5 billion. The debt balance of Ukrainian operations was TRY1.4 billion, and that of Belarus operations was TRY1.3 billion.

Quarterly CapEx and advanced payments for fixed asset purchases were the major cash outflow items. Of the total CapEx of TRY314 million, TRY174 million was related to Turkcell Turkey, TRY103 million to Turkcell Superonline, and TRY37 million to other subsidiaries.

Advanced payments were related to network equipment purchases from vendor for the second half of the year in order to eliminate the FX risk.

This brings our introductory presentation to the end. Let me hand over to Nihat.

Thank you, Murat. Christina, I guess we are ready to go for the Q&A session. Could you just please initiate the Q&A session? Hello, Christina?

(Operator Instructions). Ivan Kim, VTB Capital.

Yes, good afternoon. Two questions from my side please. One on the mobile data growth, you were behind on the growth in the first half of this year versus Avea, and I understand that it's coming from much lower base for them. But is there anything else behind this growth gap that you see?

And then the second thing on mobile service and messaging revenue drop, it has materially accelerated for you in the second quarter versus the first quarter. And obviously there is an impact from the maximum price cut on SMS. But again was there anything else, and do you see the acceleration of cannibalization of SMS and messaging driven by data? Thank you.

Hi this is Murat. Regarding the mobile data growth, there is one important factor maybe you should -- everybody should take into account. A lot -- majority of the market is now being sold by bundled offers. So the allocation of revenue among different types of services like voice, data and other services in these bundled offers makes a lot of impact on the numbers. So this is something that needs to be taken account.

And on the other hand, we are also working very hard on our mobile data plans, and our plans for mobile data business. And we are expecting -- we already have some slight increase in terms of the revenue growth from Q1 to Q2 and we expect this trend to increase, to continue.

On the second question, related to mobile service and messaging revenues, as we mentioned, MTR cuts and the price cap reduction, other important drivers for this revenue decline. And also there is cannibalization by new Internet applications like WhatsApp and other applications like Turkcell BiP. You know we -- they generate data revenue for us versus SMS messaging revenue. So there is nothing more than these.

Okay, thanks for this. And just a quick follow-up on the (inaudible) question. So let's say in the remainder of the year in the second half, you would expect to see similar dynamics compared to the second quarter, right?

For -- are you asking about mobile data or messaging?

Messaging -- messaging.

We don't expect major change. I think the trend will probably continue.

Great, thank you.

Herve Drouet, HSBC Bank.

Yes, good afternoon. Two questions as well from my side. First one is what makes you confident that in the second half you will be in track to reach your guidance? In which segments do you think there is potential good growth to come in second half? And which segment do you think would be more difficult in second half?

And my second question is what type of assumptions are you taking in terms of currency, specially for Ukraine for the guidance compared with the current exchange rate versus the Turkish lira? Thank you.

About the first part, until July 1st or I should say June 30, 2014, for 1 year until that date, our incoming voice revenues had declined because of the 20% MTR cuts. So as of this quarter that we are in, the third quarter, starting July 1st, incoming voice revenue will not be declining. It will be growing because it will be from the same base MTR rate. So that will automatically make a difference.

We do calculate example, in the second quarter if there was no MTR cut, we would have had a faster growth rate. As a result, we expect MTR impact to generate -- to contribute to our faster revenue growth in -- in the future, starting third quarter of 2014.

Murat, what are your guidance for currency in Ukraine?

Related to Ukraine, as we all know, there has been already a 47% devaluation realized in the first half of the year. From now on, we do see some stabilization. With respect to the guidance in our business models, we anticipate that we have room till 12 as a level, hryvnia per dollar, dollar per hryvnia. So that's going to be the level that I can pronounce for the time being.

All right. Okay thank you. And just maybe a follow-up question on the data and mobile data growth and versus potential cannibalization of SMS; the current trend you've seen in Q2, do you think it's sustainable of -- in the coming quarters?

What we have seen is the second quarters, I think our mobile data revenue growth slightly accelerated and we expect this trend to continue in H2.

All right. Thank you very much.

Mehmet Agyuz, Yapi Kredi.

Yes. Hi, good afternoon. Looking at your first half performance, I mean despite competitive situation as well as the regulatory headwinds. From an EBITDA performance wise, you delivered about 48% of your -- mid end of your guidance for the EBITDA. And when I just do a quick math, it seems like your second half, you are assuming slightly lower margins compared to the first half and looking at seasonality trends and et cetera. What makes you give this type of -- take this conservative approach? Do you expect further deterioration in mobile pricing and maybe if you could give some color on the -- since the end of second quarter on how the mobile pricing has evolved?

We expect -- and we are not foreseeing deterioration in our margins, we are not. So we hope, and we will work hard to keep our margins like we have done in the first half. You see, we expect the same trend to continue in the second half, but we keep our guidance, our guidance we gave in December-January timeframe. So we did not have any reasons to change our guidance. So we are keeping our guidance. But we also expect a competitive marketplace and we are prepared for the challenges ahead, if they come.

Okay, maybe a follow-up on that. Looking at your cash flow in terms of net working capital, what we are seeing in the past couple of quarters, increase in the trade receivables. And I suppose this is partly related with the smartphone sales, the financing part of that. At what level of smartphone penetration you think you may change the financing terms for this smartphone sales and we may see less pressure on the cash flow from that side?

Mehmet, this is Murat again. Relating with the outstanding smartphone penetration, and our -- how long we can finance on our balance sheet, I believe we still have a room. I believe we have a competitive edge there, and it is critical for us continue to increase the smartphone penetration in Turkey and which is going to continue to boost our revenues on data and et cetera. So, I believe we still have room considering still reaching 35% on the smartphone penetration.

Thank you.

(Operator Instructions). Ranjan Sharma, JPMorgan.

Good afternoon and thank you for the presentation. Two questions from my side. Firstly, on your data revenues and smartphones, what is the potential you see of data revenues as a percentage of -- as a percentage of mobile revenues? And what is the potential of smartphone penetration in the market in Turkey?

And secondly, on the business and enterprise segments, can you please share your thoughts around how you're planning to tap the potential in this market segment? Thank you.

Okay. The mobile data revenues are about 19% of our revenues. And obviously they are the second largest business for us after voice and also our fastest growing business in the Turkcell Turkey Mobile Company. And our smartphone penetration for Turkcell Network is about 35%, and we expect this to go up by about 5% in the second half.

Okay. Can you share thoughts around how you see the mobile data revenues as a percentage increasing in the next 2 years or so? What do you see the potential in the market as?

There is obviously huge potential. We have, the penetration is today only 35%, one-third of the population and every year it's going up at least 10%. This year, it started slow because there were some limitations on spending, consumer spending in Turkey. But it is not unusual that it will even go more than 10% increments in the next years. And there are more reasonably priced good performance smartphones like T-50 and from other vendors are coming to market. So smartphone -- as smartphone penetration goes up, we have more customers, but we also know in the last 5 years, per user data consumption has increased 79 times. So we have a potential to triple our -- almost triple our smartphone customers and we also expect data consumption to continue to grow.

We see a lot of potential on the consumer side, but we also see a lot of potential on the corporate space. In corporate space, in addition to the mobile revolution, we are also seeing fast growth, more than 30% growth in our fixed line business, and we are a Company that can deliver solutions on both fixed and mobile and also related technologies. So, those are my comments.

Murat, do you want to add anything else?

No, I think this pretty much shows the situation. Just -- maybe just, one information or -- last year, this percentage of revenues at the end of last year was around 16%. As of Q2, we are around 20%, so this might give an idea on the potential, the percentage of data revenues over total revenue.

Okay, thank you so much for that. On the business and enterprise segment, can you share thoughts on how you plan to tap this potential in this market?

We are a major force in the business segment. We have actually higher share in the business segment versus the consumer segment, because businesses are more serious about quality, they are more serious about superior network and in this new world of mobile and cloud, it's the network that connects the terminals for the business users and the cloud or the data centers of the corporations.

So this, the quality of the network has to be mission critical, so that companies can run their enterprise mission critical applications over this network. And as a result, our customers appreciate Turkcell's quality in performance, in reliability and also we have a significant sales force. We had strongest and the largest technology sales force in Turkey. Even for medium businesses, we can establish direct sales channel with our customers.

Our vision in the corporate space is about mobile enterprise, real-time enterprise where we are partnering with companies to build smarter employees, smarter execution on the field, smarter companies, smarter organization, smarter cities, and our -- in the enterprise space we also, for almost now 5 years, we had a very focused approach where we have segmented the enterprise -- segmented the business customers especially in the enterprise and large organizations by their industry.

So we have teams, the solution teams, technology experts, specialists who know the applications for verticals, and as a result Turkcell has become not the GSM leader -- not only the GSM leader in Turkey by far, but Turkcell has become the technology leader in Turkey. And I think we are very, very, very excited about how we can deliver tailored solutions for our customers.

We have the fixed network, we have the 2G network, 3G network, we have Turkcell technology who has software development capabilities, we have direct sales, we have the partner ecosystem. All of this uniquely positions Turkcell as the premier technology partner for all segments of the business segment; enterprise, large companies, medium companies and also small businesses.

So in general, we are growing faster in our corporate business and we still have huge potential in the enterprise in the business segment ahead.

Thank you so much.

Deepak Kumar, Citigroup.

Yes, hi, thank you so much for the opportunity. I have a question on the competitive environment in this quarter. If looking at the mobile revenue growth in this quarter, your revenue was broadly stable versus first quarter year-on-year. However, Avea had shown some improvement in this quarter. So is it getting hard for you to defend your market share because of the regulatory environment or how you're going to defend your market share in second half, if they are going to get more aggressive? Thank you.

First of all, we run a business and we have shareholders, we have customers; our focus is not on the market share. Our focus is -- and nobody pays money for the market share, I think basically you have to earn money. So, we are focused on our customers, how do we deliver the best technology solutions so that they have the highest value, how do we create differentiation for Turkcell.

And we have -- I think the team has been doing this extremely well. I think that's why the regulatory body in Turkey for the last 7 years is always taking some kind of action to [scroll] down Turkcell because in its -- on its own, its core capabilities of the team of the Company, we have the most superior network, we have the best partners ecosystem, we have the best distribution channel, we have the most reliable network, we have the fastest responding maintenance and service and sales teams in the field.

As a result, we have enjoyed about 50% market share for a long time. But we are focused on growing our business. We are focused on growing the profitability and serving our customers in the best way through technology investments, through innovation. I don't -- we don't feel that we are having difficulty in the marketplace. I think sometimes regulation decisions have some impacts for certain period, but we know that Turkcell is a very important asset for Turkey and Turkcell's growth will be very important for Turkey. And we hope that regulation eases off on the tough term sometimes it puts on Turkcell. But otherwise we feel very confident about our ability to compete.

Okay, thank you so much.

Koray Pamir, Deutsche Securities, Istanbul.

Thank you very much for the presentation. Two quick questions. First on the mobile broadband, do you -- given the current pace of growth, would you expect any incremental or additional CapEx that might be needed to prevent any congestion on the data side and could that be a -- could that be a factor that might slowdown more aggressive offers on the mobile data front?

And secondly, regarding the fixed data, would you -- in my understanding, the competitive environment is slightly tough. Would you agree with it and would you expect a structural increase in the competitive environment in the fiber business? Thank you.

About the first -- first part, first question --

Hi Koray, this is Murat again. Regarding the increased trend onto the data usage and whether our network has the -- whether we are investing enough to prevent any congestion, let me remind you what we have done in this year 2014. You remember, last year we have realized a CapEx over sales of 15%, and right now our guidance for this year has been -- already been increased by 200 basis points. So it's going to be on higher level of 17%.

So we have already made our plans, which is reflecting to increase data traffic. So I don't think that is going to be any problem for us. And we're going to continue to differentiate our superior network quality compared to the other operators.

About the second part, the second question, fixed data if I understand you correctly, the question was on the fixed data side, how is the competitive environment and do we expect increased competition in fiber. Yes, I think it is a fact that we had identified fiber strategy ahead of the other mobile operators or operators in Turkey and we have been investing in fibers since 2008 and Turkish Telecom obviously is a fixed line operator. They have an extensive fibers network. But after them we are the second largest fiber network in Turkey. And we are far ahead of the other competitors.

And I do expect that competition will increase in this space as well. But we also feel that our -- the fact that we were early has given us a competitive advantage. And in our Company, Turkcell Superonline has a very relevant seven, eight years of experience taking FT -- fiber-to-the-home, FTTH and also our corporate sales force sales teams, we have one sales team that sells and services both mobile and fiber solutions. And Turkcell Superonline has done a very good job. We added additional 39,000 FTTH customers in Q2. I think this was significantly higher versus competition in the second quarter.

And we are not -- we are not marketing other Internet connections as fiber. When we say fiber, it is fiber-to-the-home and most of our Superonline customers, they get a much faster network connection through fiber versus our competition offers. And as a result, I think we have better customer loyalty and better customer recognition because of Superonline's fiber offerings.

So yes, competition will increase --

Thank you very much.

And I think market will grow and I think we can compete well.

Thank you.

Thank you.

(Operator Instructions). Ivan Kim, VTB capital.

Yes, sorry just couple of follow-ups. First on Superonline, the press release as of the second quarter EBITDA margins has been impacted by the launch of new projects. Could you please elaborate what kind of new projects or products those were?

And then secondly on the regulatory environment, it looks like there are -- like on top of MTR cut and the increase of your full price last year, there is a number of fines coming through lately not necessarily from communications regulator. Do you feel that some intense regulator pressure will continue or it's more of just coincidence and temporary issue? Thank you.

Okay. On the Superonline EBITDA margin, we expect Superonline margin to improve in the future. And in the second quarter, the margin declined. We don't think this is usual, it's because of one-off kind of project items. And we had some big customers and there were some cost upfront, we will get the benefits of these projects in the quarters ahead. But we did make some upfront investments in hardware and in preparation and this was the reason.

But, I do expect Superonline as its business grows, as its customer base grows, we have a focus on improving margins and they have been delivering better margins for quite a few years. And I think in the coming quarters, we will continue to have improving margins.

On the regulatory environment, yes, there were three fines. And one of them was related to 2012 and we had to do a reimbursement. We have taken this to the court, but we made the payment and we also because of conservative accounting, we did recognize this as an expense. But we think this was too heavy on us and we are going to the court.

The second one was from year 2009. It was about mobile services. And again, we were fined for every mobile customer, the maximum fine. And when you have millions of mobile service customers through partners, we again felt that this was a little bit too heavy and --

And the third one was related to competition abroad. And this was between the time 2008 to 2012, related to mobile -- what was it? Mobile vehicle tracking. And so these -- in all of these, we have legal process in motion. It has not been finalized, but for various reasons and to be conservative, we chose to recognize them as expenses in the second quarter.

We do not think that there is any increasing pressure or any reason for fines to increase on us, it just happened to be a bad quarter from this fines point of view. We have also some learning to do from these, maybe we can even improve further in our operations. I also know that probably these are not the last fines Turkcell will ever get, but we will be more careful. And I don't think we are singled out or we are targeted by the authorities. It just happened to be a heavy quarter from fine point of view in the second quarter.

Okay, thank you very much.

As there are no further questions at this time, that will conclude conference or today's Q&A session. I'd like to hand the call back to the speakers for any additional or closing remarks.

Thank you very much, Christina. On behalf of the management team here, I would like to thank you for your participations. And if you do have any follow-up question, please just get in touch with IR team and audio will be also available on IR website. Maybe, I would like to hand over to our CEO for the final remarks. Please sir.

Okay, I just want to make a few final remarks. In Turkcell, we believe that we have the strongest team in technology space in Turkey and we are recognized internationally by our leadership in mobile technologies, mobile services. But we are also a team of innovation, always building, investing on new businesses like we have done in mobile broadband and also with Superonline ahead of competition. And we have some new business areas that we are very excited in the future. So we have a strong team, well experienced in technology and telecommunications, mobile, fiber and mobile services.

On the regulation front, we have had a very tough time for the last 7, 8 years. Mostly because we have such a strong value proposition, I think the regulator feel that they need to protect other operators, so that there is not a monopoly in this market. But at the same time, if you'll look at other countries which has gone ahead in technology innovation like the United States, like Korea, like Japan, you would see that regulators are always promoting technology innovation, fair competition, investments into technology and also how do you create additional value-add and economic drivers through technology.

And on the regulation front, we only want fair competition. And as a result, I think the market -- the regulation in Turkey will also I think change for the better, and it will enable an environment that is also more fair for Turkcell. We do have strong competition on the fixed side and mobile side and we respect our competitors. But we feel that if you continue to focus on our customers, continue to have the right vision and invest for that -- towards that vision and if we continue to deliver the best customer experience, the best value and great customer satisfaction, increase our loyalty, then we'll continue to do well in the consumer space and also in the corporate space.

At the end, we have strong execution, but we are proud of this execution. But at the same time, the Company has great opportunities ahead. Having close to 35 million customers, having a connection with them in education space, in healthcare, in health space, in mobile finance, in entertainment, there are huge opportunities for us. Smartphone penetration is only 35%, so 65% to go, very reasonably priced smartphones are coming to market. This will accelerate the smartphone penetration. LTE will come hopefully to Turkey towards the end of 2015, early 2016. It will open up new business opportunities as well.

And Turkish economy continues to improve. And as the economy improves, I think our customers will be able to afford higher ARPUs and this will also help our business.

So, I thank all of the analysts, all of the investors for their support and I also thank all of the Turkcell team of employees, partners, our Board members and most importantly our customers. Thank you very much and have a great weekend. Bye-bye.

That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.