Turkcell Iletisim Hizmetleri AS (TKC) 2014 Q3 法說會逐字稿

Good day and welcome to the third quarter 2014 results announcement conference call. At this time, I would like to turn the conference over to Nihat Narin, director of Investor Relations. Please go ahead.

Thank you, Sarah. Good morning and good afternoon. 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 followed by presentation by CFO, Murat Erden. And then we will go into a Q&A session.

Just before we start the presentation, I would like to go over the brief notice. Please remember that any statements about our future expectations are subject to uncertainties. Also, all financial data are consolidated whereas non-financial data are unconsolidated unless otherwise specified.

Sureyya, please go ahead.

Good morning and good afternoon and welcome to Turkcell's 2014 third quarter results call. For the quarter, Turkcell Group reached record high revenue and EBITDA. Revenue rose by 6% year-on-year to TRY3.2 billion. EBITDA rose by 3% while EBITDA margin was 33.2%. Overall, the nine month performance was in line with our plans and we maintained our full-year guidance.

Net income in the first nine months was impacted by FX volatility in our countries of operation. We recorded a total FX loss of TRY728 million which was mainly due to the devaluation of the hryvnia.

Moving on to the next page, in the third quarter, mobile and fiber broadband were the main growth drivers. We saw a 1% rise in Turkcell Turkey's voice revenues following negative growth rates in the first half due to the MTR cut impact. Mobile broadband accelerated its growth pace with a 38% year-on-year rise through our actions to increase smartphone penetration and usage of data bundled offers.

Meanwhile, the decline in SMS 7 is mainly due to poor demand for SMS parallel to global industry trends. It also reflected the ICT decision to decrease the maximum SMS price by 20% in January 2014.

Mobile services had been one of Turkcell's key focus areas and have increased 7% year-on-year. In the meantime, Turkcell [broadband] sustained its strong growth momentum, rising 38% year-on-year. On the other hand, the 6% decline in other subsidiaries revenues was mainly due to the local currency depreciation impact of Ukraine.

Moving on to page six, the Turkish mobile market has remained competitive year-to-date. In this environment, our strategy is to increase customer focus and to offer superior customer experience. The result of this and of this is now the effect -- our subscriber base rose by 97,000 for the quarter to 34.7 million. The increase in the subscriber base was driven by the postpaid segment which expanded by 793,000 in the first nine months, mainly due to the pre to post switches. This led to a further improvement in our subscriber mix. Overall, our postpaid base now accounts for 43% of subscribers and 70% of revenues.

Meanwhile, the strong rise in mobile data usage increased both postpaid and prepaid ARPU despite the dilutive impact of switches. This led to 4.8% overall blended growth.

Moving to page seven. We welcome the success of the Turkcell T50, Turkey's first domestic 4G smartphone. Following its launch in July, the T50 became the top-selling smartphone in Turkey through its affordable price and quality.

With the contribution of the T50, the number of smart phones has reached 11.9 million, welcoming 923,000 new users for the quarter. As a result, our smartphone penetration was 37%. We expect to reach 40% by year-end 2014.

Through our smartphone focus, our contracted data bundled offers, mobile broadband revenues now constitute 21% of Turkcell Turkey's total revenues on a 5 percentage point year-on-year rise.

Moving on to page eight, our ultimate goal is to create value for our customer and retention fix that through our knowledge innovation technology investments, hard work and team work. Parallel to this, recently we launched our cutting-edge TV platform Turkcell TV+ which took our Turkcell TV service to the next level.

Our ability to offer this product both on Turkcell's superior 3G technology and Turkcell Superonline fiber network create a group synergy that will create value and differentiation for our mobile and fiber customers. Turkcell TV+ offers seamless multiple screen experience, 12-hour rewinding and cloud recording anytime, anywhere. This platform also enables Turkcell Superonline to offer triple play services.

Moving on to next page, page nine, Turkcell Superonline was one of the key growth engines for the Group, reporting 38% topline and 51% EBITDA growth. Meanwhile, its EBITDA margin improved by 2.5 percentage points year-on-year to 27.8% mainly driven by growth and scale of the business.

On the operational front, Turkcell Superonline reached a total of 1.1 million customers of which 686,000 were fiber users. We continued to increase our in-city coverage to around 2 million homes.

In the third quarter, the residential segment grew by 55% on the back of continued strong subscriber growth and sharing the total reaching 40%. In the meantime, the corporate segment grew 32%.

Moving to page 10, our business remains solid in Ukraine. However, devaluation impacted our year-to-year financial performance. In the third quarter, revenues in local currency terms saw 16% topline growth despite the 21% decline in TL terms due to the currency depreciation.

Meanwhile, the EBITDA margin improved by 0.8 percentage points to 31.6%. On the operational front, our active subscriber base continued to grow the 1.1 million net additions for the quarter.

With regards to Crimea region, which accounts for 3.5% of Astelit's revenues, for nine months our network experience, cutoffs of its fiber optic channels due to circumstances beyond our control. Currently, Astelit has still coverage in the Crimea region and is working hard to restore the network but significant challenges remain. We continue to evaluate our alternatives in this region.

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

Thank you. As highlighted in the third quarter, Group revenues rose by 6% year-on-year to TRY3.2 million with strong growth momentum in mobile and fiber broadband revenues. Subsidiaries revenue grew by 11% mainly due to Turkcell Superonline.

Astelit's contribution to the Group declined due to the devaluation in the country despite the country's and the Company's 16% growth platforms in local currency. The consolidated EBITDA in nominal terms rose 3%, mainly on topline growth. The EBITDA margin is realized at 33.2% in this quarter.

We have witnessed increased sales and marketing expenses due to intense competition in the Turkish mobile market, highly interconnect and network costs of Turkcell Turkey and high operational expenses of certain subsidiaries.

Now moving on to page 12. Group net income increased 8% year-on-year mainly due to high EBITDA, high interest income, the positive impact of Turkish lira depreciation against the dollar and a one-off positive impact of TRY24 million from the A-Tel share sale processed in this quarter back in August.

Meanwhile, the increasing net income was partially netted off by translation losses due to devaluation in Ukraine and Belarus and a decreasing Fintur's contribution due to the write-off of its operational assets.

In this quarter, our sales recorded a translation loss of TRY125 million, debts recorded TRY55 million and Turkcell Superonline recorded TR33 million. On the other hand, Turkcell Turkey recorded a translation gain of TRY167 million due to both an increased share of cash held in hard currency and Turkish lira's depreciation.

Moving on to the final page, our financial position remains strong with TRY5 billion of net cash on our balance sheet. A strong rise in EBITDA and higher interest income are the main reasons for the increase in our cash balance.

Quarterly CapEx and increased trade receivables were the major cash flow items. Of the total CapEx of TRY555 million, TRY364 million was related to Turkcell Turkey, TRY125 million to Turkcell Superonline and TRY66 million to other subsidiaries.

Our consolidated debt is at TRY3.5 billion level. The debt balance of our Ukrainian and Belarusian operations are [TRY1.5 billion] each.

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

Sarah?

Thank you. (Operator Instructions).

We will now take our first question from [Dalibor Vavruska]. Please go ahead. Your line is open.

Oh, hello. Good afternoon, good evening. Just one question. I think the results look generally good from your side and also from your competitor Avea that reported. Can you talk about some hope for market repair here?

Also, the follow-up question is it seems that you have lost some market share to Turk Telekom in mobile. Are you -- do you have some thresholds in terms of where you would like to see your market share, like where some sort of floor where you would like to start fighting again for market share? Or are you generally happy that some kind of market repair may be happening even though you may continue losing market share, let's say, in the next year or two? Thank you.

Murat, do you want to comment on the competitiveness of the market?

All right. Let me make a few comments on the first question. We have seen some positive movements at the end of last quarter and at the beginning of this quarter in terms of some price increases in the [irrational] price levels that we were seeing.

So, these are good but we think it's still very early to talk about overall market repair or [a rationalization] because even with these adjustments still it's a very aggressive market and still the price levels are very competitive at low levels compared with the last year's I'd say. So, we have some good signs but it's too early to say there's a market repair.

About the second part of your question, we run the Company looking at a lot of KPIs. And market share is one of the KPIs but it is not the most important KPI for us.

We focus on, first of all, our focus on customers, keeping our customers and delivering huge value and differentiation for our Company to these customers. So, our focus will continue for our customers. It has been in the best. And delivering high quality services, innovative services, both on mobile and fiber and related areas is our team's goal.

Through our quality of our network, through the power of our network, we have maintained our high market share in Turkey. And we will continue to innovate to deliver more value for our customers. So, although our prices may be more expensive sometimes, we hope that the customers will focus on the net value -- the benefits they get minus the cost they pay. And we believe that customers act rationally this way.

But we also have to remember that starting March 2009, the regulators had introduced price tariffs. Initially in 2009 it was for each tariff so that on net revenue was -- on net revenue per minute higher than the MTR. And then this law changed in April 2012. Campaigns were included.

And then in July 2013, SMS regulation came. And for the voice, the on net revenue per minute new floor was set -- price floor was set 1.7 times MTR. And unfortunately in February 2014, a regulatory body introduced new regulation for each tariff plus campaign. So, on net revenue for Turkcell per minute was to be higher than 1.7 times MTR.

So, these regulatory decisions have impacted the market a little bit. And we will continue to innovate new mobile and fixed solutions services and we will continue to differentiate our network versus competition so that we are the preferred choice.

Thank you very much.

Thank you. We will now take our next question from Ivan Kim from VTB Capital. Please go ahead. Your line is open.

Good evening. Two questions, please. First actually on the regulation, so basically, given that your market share has now declined below 50%, do you see any signs of regulator being more rational? Because indeed, the latest moves have looked to be unwarranted and that's besides the fact that the competition in the market remains very, very tight.

And then secondly on Astelit, the growth and local currency terms on the revenue side was very high -- 16% almost. Can you please elaborate on the reasons for subscriber intake and the revenue growth? Thanks.

On the first question, we cannot comment on the regulatory body's decision in the future. We have not been very successful in making some of these predictions in the past. We believe the technology world is fast-changing and companies should be allowed more freedom to innovate and they should be able to control our consumer end-user pricing. So, I cannot comment on what regulators will do in the future. We think this regulation should have been lifted a long time ago.

On the Astelit side, local currency growth was about 16% and this is higher than, as far as I can remember, versus our competition in Astelit. Although our focus has not been market share -- you know, delivering higher value and increasing our customer base. But obviously the Turkish lira, because of devaluation, is translated to a decrease in revenues.

Murat, can you comment on the subscriber side?

Sure. Well, our subscribe number has increased in Ukraine mostly driven by seasonality. And roaming of course have increased our revenues. But please note that seasonality effect right after the quarters get some normalization level. But we did of course benefit of 16% topline growth and of course maintained our margin quite flat-ish.

Sure. Can I just quickly follow up on that? Because there was a slowdown, which was understandable in the second quarter which seemed to be driven by the economic and political turmoil -- slowed down to like 5% growth. And now the growth shot back to highest level I saw in a while, basically, for Astelit. Is it you're taking customers because people cut down on spending and consider Astelit like obviously the cheapest provider? Or there is anything else behind that?

No, with the devaluation of about 62% and inflation high, so I think all of the operators are behind inflation. So, I think in my opinion, the market needs to catch up to inflation and devaluation.

So, we think we have to adjust our pricing accordingly and we hope that other operators think in a similar way. Because obviously 3G is coming to that market and there needs to be a good return for the investments to come.

Okay, thank you.

Thank you. We will now take our next question from Kari Kumar from Deutsche Bank. Please go ahead. Your line is open.

Thank you very much for the presentation. Two quick questions -- one regarding the net working capital addition. Should -- I mean, it has been understandably increasing regarding smartphone sales. Moving on to 2015, should we expect a change in either direction regarding the net working capital expansion?

And secondly a bit on Superonline -- the operational platform has been improving steadily. Should we expect the EBITDA margin to stabilize on the [third percent] level? Or do you think it's rather open-ended going forward? Thank you.

This is Murat speaking. Regarding the first part of the question, the net working capital usage of the Company depends on two factors. One, the trend in the CapEx investment of the Group. We are right now working on the next year's plan. As you can understand, this year was a heavy investment year for Turkcell Group, including Superonline and Turkcell. Right now we are investigating the trend for the -- or the need for the next year, including the possibilities for the [four-year] readiness of the whole network.

Regarding the trade, we feel both on smartphone penetration and the contracted [sales] -- right now, we've reached the 37% smartphone penetration in our system. We anticipate it's going to be reaching close to 40% and we're going to keep the pace as much as possible and we are still working in the same momentum for smartphone sales. So, the trade receivables and use of working capital are going to continue for next year.

Could I just -- last part that you asked about Superonline. The [30 or plus] margin for Superonline -- of course we are not ready to give you long-term guidance. However, of course in midterm, it is our target.

Thank you.

Thank you. We will now our next question from Herve Drouet from HSBC. Please go ahead. Your line is open.

Yes, hi. Good afternoon. Thank you very much for the presentation. My question is regarding in fact Crimea. I have two questions. The first one is this jump on the revenue in local currency -- have you experienced any extraordinary growth potentially in an area like Crimea where you have been relatively low exposure before [potential] -- I don't know if, you know, with some disruption of [permission] of the other operators, you've seen an impact this quarter that may also benefited in time of, like, in local currency growth.

And the second question is regarding the 3G, as well. In Ukraine, I mean, do you have any thought on how much the cost of the 3G license may come in Ukraine? And depending on that cost, do you think it can play a role in the different options you are looking at in being in Ukraine? Thank you.

Hi, this is Murat again. Regarding the first part of the question, in the Crimea region, you're right. We were one of the only operators still running part of the operation in Crimea. But we have been facing lots of trouble to run the operation there and that operation has been significantly minimal. And I believe we are not anticipating that it's going to be viable for us to continue to operation there and it is interrupted much more frequently. So, the benefit can be eroded in the next quarters regarding the jump in the local currency growth in the Company.

Regarding the second part of the question, I'm going to hand over to Mr. Ciliv.

I think the expectation for 3G licenses has been $200 million to $230 million. Plus I think there is also expectation that it could cost another $40 million or $50 million to clean up these frequencies that are being used by the military today. So, that is the preliminary estimate of these licenses in Ukraine.

And do you think, I mean, your view in Ukraine -- is it your view to stay in Ukraine operationally? Or do you look at different options than even what the costs will be for switching?

We are -- our long-term plan is to stay in Ukraine. We believe in Ukraine and we think, for many reasons, it is a big market close to Turkey where we have been there and we have been more successful every year and we have a strong local team. And we think that through innovation in Turkcell, we can carry a lot of innovation to that market with our experience in 3G and fiber and mobile services.

And the new Ukraine, at least the Western part, will be closer to the [rest]. So, yes, there is -- it's a very challenging time. But you need to have a long-term view with these emerging markets. And we have a long-term view. So, we definitely see that our operations in Ukraine should have mobile broadband and fiber broadband and [related] mobile services that create value for consumers and also corporates.

All right. Thank you very much for your answers.

We will now take our next question. If you'd like to ask a question, please press star one. Please go ahead, Ranjan Sharma from JP Morgan.

Hi, good evening and thank you for the call. Two questions, if I may. Firstly, the domestic business, now that Superonline is getting scale, is there any plan to launch quarterly kind of services in Turkey?

And secondly, on your vote and shareholder side, is there any update or indication when you vote by (inaudible) and what can we have that's sufficient from the events going forward? Thank you.

On the Superonline side, we definitely have triple play and we have just last week announced Turkcell TV+ platform in our IPTV platform. It runs not only on fiber but also runs on all four screens -- TV, PC, tablets and smartphones. And it was very well-received and we are making long-term commitment to Turkcell TV+ platform.

So, our business Superonline is focusing more for the home solutions and services and they will play a key role in growing this TV offer to its customer base. But also, mobile is a very important part of our TV platform.

On the shareholder side, I cannot give you more information. I think our Board is expecting to hear from three strategic shareholders so that when we hold the general assembly, there is majority attending. It's all I can tell you at this point.

Sarah?

Yes, we have no further questions in the queue.

That's very kind of you.

Well, on behalf of the management team here, I would like to thank you for all the participation here. And if you have any follow-up questions, please do call IR team and also our audio recording is available to play at the Turkcell IR website. Have a good weekend. Thank you.

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